Are we a step closer to a ‘water big six’?

Does Business Stream’s purchase of Yorkshire Water’s business customers pave the way for further consolidation in the market? Rachel Willcox investigates.

The prospect of the equivalent of a “big six” in the water retail market took a step closer after Scottish Water subsidiary Business Stream announced it was buying the business customer base of Yorkshire Water Business Services and Three Sixty, both part of Kelda Water Group, for an undisclosed sum.

The deal, which will take effect this summer subject to approval by regulators, marks a significant milestone in Business Stream’s plan to cement its position as one of the largest players in the market and to grow its customer base.

Business Stream is currently the largest operator in the Scottish non-domestic water market, headquartered in Edinburgh with offices in Glasgow and Worthing, and employs more than 370 staff. The acquisition will double its market share by adding around 140,000 customers for water and wastewater services in the Yorkshire area, making it the third-largest operator in the combined Anglo-Scottish market.

Having cut its teeth when the Scottish water market deregulated in 2008, Business Stream acquired Southern Water’s non-domestic business in 2016, adding around 105,000 non-domestic customers across Kent, Sussex, Hampshire and the Isle of Wight, just prior to deregulation of the English non-domestic water market. Business Stream is on an upward trajectory, having more recently won UK-wide contracts with some major names including Greggs, Lloyds Banking Group, Morrisons, and Network Rail.

The retailer’s chief executive, Jo Dow, says the opening of the English retail water market in 2017 had created “huge opportunities” for the business. “As we look ahead to the future, we recognise that scale will be an important factor, enabling us to deliver a more competitive service for our customers across the UK.

“We will use the experience we gained from the Southern acquisition to ensure that the transition is seamless for our existing and future customers, providing them with a market leading customer experience, and access to innovative services that reduce their costs, risks and environmental impact. As a specialist supplier, with over a decade of experience operating in a competitive water market, we know we are ideally placed to deliver these benefits for our customers,” she adds.

Water companies in England and Wales have effectively been regional monopolies since the industry was privatised in 1989. But deregulation of the English non-domestic market in April 2017 meant that 1.2 million businesses and public bodies in England were able to choose their water supplier for the first time, an option previously only available to the largest users. At the time of market opening, Yorkshire Water made no secret of its intention to exit the non-household customer market, which it says wasn’t aligned with its strategic direction.

Liz Barber, Yorkshire Water’s director of finance, regulation and markets says: “Business Stream has a strong track record of delivering excellent customer service and are very experienced in the market. We are confident that they will continue to provide customers with the same high level of service they have had from Yorkshire Water Business Services. We are working closely with Business Stream to deliver a smooth transition process for our customers.

“All affected colleagues have been briefed and we’ll be working with them throughout the transition process. We understand this will be an uncertain time for colleagues, but securing their ongoing employment is of the utmost importance to us and we have strong internal policies which support us in doing this.” A number of key account managers will transfer to Business Stream as part of the deal.

Ben Lind, strategies lead for utilities and energy at consultancy Hedgehog Lab argues it was clear that Kelda Group had been made an offer it couldn’t refuse. “It’s no coincidence that last week we saw Ofwat demand that water firms cut water bills further between 2020-25 and if suppliers on the non-domestic side are under the same pressure, then it could be that Business Stream’s offer came at the perfect time for Yorkshire Water.”

Since the English market opened in April 2017, about 10 per cent of eligible customers have actively made a choice in the market – either by switching supplier, renegotiating with their existing supplier or simply exploring their options, according to a review published by Ofwat last summer. It found that non-household customers had seen about £8 million in bill savings collectively in the first year of the new market, as well as other benefits such as simplified billing and reduced water consumption.

What is also true is that deregulation has been fraught with challenges for retailers, not least billing and metering issues and tight margins. Manbir Thandi, a director and water specialist at law firm DWF, says: “The jury’s still out on what can be made of this market. Business Stream had been on the starting line for some time waiting for competition to open up in the English market. This acquisition gives it a sizeable foothold and it is unlikely customers will switch, because the market is still maturing.”

Lind, meanwhile, says there is every reason to believe we will see more consolidation in the coming months and years. “You need only look at what’s happened in the energy market over the past 12 months to see that more competition does not always equal happier customers. If by way of a consolidation customers can save money, reduce consumption and get better access to more innovative technology, then few will have many complaints,” Lind adds.

Market leader Water Plus – a joint venture between Severn Trent and United Utilities – today boasts over 400,000 business customers. The second-largest player is Scottish new entrant Castle Water, which has a customer base of around 310,000 after snapping up the business bases of exiting Portsmouth Water and Thames Water.

Meanwhile, the merger of Northumbrian and Anglian’s business retail arms to create Wave was cleared by the Competition and Markets Authority in August 2017.

Wave chief executive Lucy Darch tells Utility Week: “Wave benefits from economies of scale and migrating on to Gentrack Velocity, which is a highly automated platform. This means our cost-to-serve is reducing, making us more competitive. I presume Business Stream will also be pursuing benefits of scale. Further consolidation may occur, particularly if other retailers decide to exit the market, however at this stage most retailers are getting to grips with the market challenges and working hard to overcome these and deliver increased customer benefits.”

While consolidation is an inevitable by-product of a maturing market, it would be unlikely to benefit non-domestic water retail customers, Thandi warns. “With larger market share in fewer hands, will those KPIs be passed on to customers? I doubt it.”

An Ofwat spokesperson says: “We welcome continued developments in the business water retail market. The sale of Three Sixty to Business Stream should help to ensure customers continue to see benefits in the market.”