Vital pieces still missing in the water competition jigsaw

The start date for non-domestic retail water competition in England has been set, but vital pieces of the puzzle are still missing. Mathew Beech assesses the state of play.

The puzzle of how to introduce competition to the English non-domestic water supply market continues to bamboozle those in the industry trying to piece it together.

The end picture is known: from 1 April 2017, business customers will be able to choose who supplies their water and wastewater services.

However, with less than 28 months until the non-domestic water retail market in England opens to competition, the best laid plans of the industry have been written and rewritten so many times that the original note must be more correction fluid than paper.

Despite iteration after iteration of plans made and then adapted, there are still many questions and pressing issues that need to be answered. And answered quickly.

Thames Water Commercial Services’ (TWCS) managing director Graham Southall says there is “a lot still to be done” in setting up and building the central systems for the market.

Indeed, even Alan Sutherland, the Scottish water regulator who sits on the board of Open Water and has taken a lead role in transferring the Scottish model of competition to England, admits he is “worried” about some aspects of the programme. He nonetheless professes himself confident that the sector will be able to open the market on time.

Scottish template

The Scottish model is being used as a template for the English retail market, in an attempt to make use of what is already working (and has been since 2008), and as Open Water said in its Market Architecture Plan, “we should not try to reinvent the wheel”.

There are issues around the market design, the appointment of the market operator, and just how many companies will be preparing to enter the market once it has finally been created – particularly since at the 11th hour the government introduced the option of allowing incumbents to exit the market.

And time is running out. The opening of the non-domestic sector may begin publicly in April 2017, but the water companies – as well as Ofwat, Open Water Market Ltd, and the-yet-to-be-appointed market operator – have to finalise the market design and set-up ready for the companies to fully test the structures ahead of the hard launch date. This testing is supposed to be completed by October 2016.

The project has had a difficult birth. Ideally, many of the decisions still outstanding about market structure would have been taken by now, but turmoil at the nascent market operator has held back progress.

Open Water was initially set up as an arm’s length, and private, company by Ofwat to run the process of creating the non-domestic water market in England. It was also expected to potentially go on to become the market operator. Its funding came from voluntary donations from water companies, to pay for the back office services needed to set up the market – such as the market codes.

Public disagreement

In February this year, programme director Keith Fowler stood down from the organisation, and the board spent months looking for a permanent replacement. The post was never filled.

Consultant John Parsonage of PA Consulting was appointed interim chief executive when Fowler stepped down and remains in the role today. But in August Ofwat made the decision to “wind down” Open Water. The decision was prompted by the government’s classification of it as a public body – an unexpected move by the Treasury, which stymied Ofwat’s plans

To the outside observer, the Open Water programme at this stage appeared rudderless and far behind schedule. Yet the industry is united in its insistence that this is not so. Sutherland insists the project is on course. The Open Water Programme has been holding regular workshops with water company chief executives and, says Sutherland, has been “going like the proverbial steam train”.

The water company bosses have been working through the rules and regulations of the Scottish market model “page by page” and translating them into ones that will work for England.

“There’s everything from minor tweaking to some quite major issues that are being addressed and changed,” says Sutherland.

He is in fact complimentary about the work undertaken by water company chief executives, describing them as “fantastic” for the work they have done in directing the programme.

However, despite this “noble” work by water company bosses, the programme is still facing problems – in particular to do with the procurement of the market operator (comparable to market operator Elexon in the electricity sector).

Sutherland raises concerns over the procurement process for the market operator, and how Open Water’s status as a public company will fit in with the “accelerated timeframe” needed to ensure the system is set up and running by 1 October 2015, when the retailers will plug in and test the system.

He says that if public procurement rules are followed – and the longer timeframe this then requires – “it is quite difficult to see how we can procure to that timeline”.

Therefore, Sutherland says the ­“working assumption” is that a private model will be used, allowing the market operator to be put in place, although he thinks it is a “fairly material risk to the whole programme at the moment: that’s the one thing that keeps me worried”.

Back on track?

The radical overhaul required of Ofwat to change Open Water’s status from a private body to a public body has put the design and build phases of the programme on hold. And on hold until the market operator has been appointed – following either public or ­private procurement guidelines.

This concern over potential delays is shared by the water companies.

Southall says they are all reliant on Open Water getting the market operator procurement process completed on time, so that they can get their houses in order and adequately prepare for April 2017 – and indeed 1 October 2016 and the initial linking up to the newly created market system.

“We would hope that the regulator and the programme can get their act together and get things agreed and signed off.”

He adds that Thames, by creating TWCS, has made moves to prepare itself for the retail market, setting up a separate entity with “appropriate Chinese walls in place” and adhering to Ofwat’s “four box model”, whereby the incumbents will structure their businesses with wholesale water and wastewater businesses, and retail household and non-household businesses.

However, this means nothing until the market operator has been put in place because “we can only do what we can do in responding to the central market design”.

Southall adds: “We are dependent on the Open Water programme to define the interfaces and how the market rules work.”

Until that is complete, the water retail market is unlikely to kick off in England until after April 2017, even if that is the date in the Water Act. And in the Water Act there is yet another challenge for the industry.

For almost the entire passage of the Bill, the government repeatedly stated that retail exit would not be allowed.

However, by the time the Water Bill had almost completed its passage through the House of Lords and on to the statue book, the government bowed to industry pressure and incorporated retail exit into the Act.

Yet, even with these continuous changes to the make-up of the market, Open Water interim chief executive Parsonage remains confident that the multitude of issues will be solved, and solved in time.

“There are advantages to having created Open Water in the way that we have,” he says. “It will allow us to put in place a pseudo governance structure for what we may have for the live market itself.”

He adds that the changes that have been made were done for the benefit of the scheme.

Parsonage says: “The programme has done a really excellent job in terms of driving forward the work that needs to be done, having delivered the first of the high level designs at the beginning of the year.

“While that has progressed, at the same time the requirement to provide the additional funding that the programme is going to need to deliver, has been running in parallel.

“It was necessary to create a new entity, so we have actually created it earlier than we would have otherwise done.”

The industry’s confidence is impressive, but as time runs short, there are still many pieces of the puzzle to assemble before the picture is complete.

Open water: who will be contesting the market?

Opening up the market to competition relies on one key ingredient: competitors. Without them, there is no point in the industry going through the arduous and complex process of creating a market.

Utility Week has been told by one industry analyst that there will be limited competition come 2017 because “companies just don’t see enough of a margin in it”.

However, others are more optimistic.

Wics chief executive and Open Water board member Alan Sutherland says some of the major water companies have “been very active” in preparing themselves for competition in England.

United Utilities, Severn Trent, Anglian Water and Thames Water have all been participating in Scotland, while Northumbrian Water has been going through the licence accreditation process.

He says that the water companies as they are will split into three groups: a “handful” that will exit the market permanently; those that “still see the benefits of vertical integration”; and those with “a view to staying in the market and competing hard”.

The experience that can be gained now by competing in Scotland is important and gives those that have done so the advantage of seeing how the market works.

TWCS managing director Graham Southall says the Scottish market, which has been up and running since 2008, is a great testbed for the English market to look to – not only because the English market will be based on the Scottish model, but also because the companies involved there are likely to come south of the border too.

He says there are “three or four” companies that have started from scratch, with no history in the water sector, that have begun trading in Scotland, and they could enter the English market in 2017.

However, Southall does add: “There are no major brands or players from other ­markets that have moved in yet.

“I think some of the energy companies will, but they will probably see what happens and wait before they get involved.”

Indeed, independent generator and supplier Ecotricity says it looked at entering the water sector, but for the foreseeable future at least it has shelved any plans because it currently has its “hands full with the energy market”.

The multi-utility model, something Utility Warehouse has achieved in the energy and telecoms space, is predicted to be the way forward, with non-water companies tapping into the sector and offering customers a one-supplier-fits-all solution.

Ofwat’s senior director for customers and casework, Richard Khaldi, says: “I think it’s likely at some point that we will end up in a world with water, gas and electricity being sold by single retailers.”

Powles bows out

Mark Powles was the poster boy of the retail reforms, the champion of competition. The then-chief executive of Business Stream, the incumbent supplier in Scotland, was pushing for a level playing field for new entrants into the English water market.

He was expected to lead the supplier into the newly opened English market in 2017, ­however, on 6 October 2014, all this came crashing down as Powles unexpectedly announced his decision to step down.

No reason has been offered by Business Stream for his departure, which promptly appointed the company’s finance director, Johanna Dow, as interim chief.

She tells Utility Week the company’s experience in Scotland makes it ideally placed to pursue the market in England, and that is what it will do.

“We continue to focus on our plans to expand in the English water market – we’re already working with several businesses and are having continuing discussions with many others,” she says.

What customers stand to gain

It is all well and good competition being introduced in England, but what do the business customers, who were so keen for it to be introduced, stand to gain?

The Consumer Council for Water (CCWater) says business customers are “quite prolific in their switching behaviour” in non-water markets (such as energy, insurance and mobile telecommunications), because of both price and customer service. The water sector can expect the same.

It is also expected that opening up the water market will make things simpler for businesses, especially those with multiple sites. Currently, each site in each different water company region receives a separate water bill. In the future, they will be able to choose one supplier for all of their sites, and receive a single water bill.

Water retailers should also look at customer service in a new way, entering into partnerships with their customers and addressing issues such as water efficiency, which would not only save customers money, but would also reduce the demands on the networks.