Water retail market still seen as ‘too difficult’

As the non-domestic water retail market approaches its third anniversary, Utility Week sat down with Sarah McMath, chief executive of market operator, MOSL, to discuss the progress so far and the challenges ahead. She talks about building bridges between retailers and wholesalers, tackling data issues and what would happen if a major retailer exited the market.

Sarah McMath was in no doubt about the challenge facing her when she took on the role of MOSL chief executive in June of last year.

At that point the non-domestic water retail market had just passed its second birthday but the phrase that continued to dog it was “friction points”.

At the centre of it all the market operator has struggled to keep everyone – at times it seemed like anyone – happy. It has already seen four chief executives (including one interim) come and go. Meanwhile, a move from the capital to Southampton saw MOSL lose 90 per cent of its staff.

Around it, the newly created sector – the largest competitive water retail market in the world – has been struggling with legacy issues from market opening. These are varied but key themes include a lack of good quality data and an uneasy relationship between retailers and wholesalers. Meanwhile, customer satisfaction has suffered, particularly among SMEs.

To cap it all, MOSL was given a humiliating -52 NPS score by its members when quizzed at a CEO Forum in November.

McMath, who spent 24 years with Thames Water and was tasked with preparing the company for market opening, has worked quickly to reassure the industry that she understands its concerns and is working towards tangible change.

Last week, MOSL launched its business plan for 2020/21, which acknowledges the “healthy impatience” for legacy issues to be resolved once and for all.

This includes work to build bridges between retailers and wholesalers and to tackle one of the thorniest issues between those two pillars of the market – metering.

MOSL has also committed to reduce complexity and worked through concerns about an initial suggestion of a 10 per cent increase in its budget, to settle on a final rise of 4.7 per cent.

The profit motive

McMath says: “The hard truth is that none of the companies in this market are currently turning a profit. We need to move away from the view that the water retail market is just too hard to do business in. We have operators who work across utilities and across nations. We need to move away from being the section of the market they find difficult.

“One of the things that I’ve been surprised about coming into the market is the level of distrust across various parties. I hope that this is the start of us working towards a position of trust and collaboration – and that people trust MOSL in the role that we have undertaken.”

The metering review promises to “facilitate increased senior level strategic engagement” to drive the policy and strategy changes needed to resolve this area of contention.

McMath says: “Metering has emerged clearly as a point of friction in the market. The plan is that the review will start off as broad as possible for a holistic viewpoint – starting with what does a good journey look like. Some of the issues can’t be solved by MOSL alone.

“The meter reading onus was given to the suppliers originally because at market opening it seemed like all the value was with the wholesalers. However, there was the unintended consequence around efficiency. We’ve often got two people, in two vans, driving down the same street to take two sets of meter readings – one household, one non-domestic.

“There is limited value in this market and those kind of inefficiencies eat up that value.”

The future direction for metering became a running theme throughout the CEO Forum, which brought together senior figures from all points of the industry, and included a suggestion that wholesalers should be mandated to provide a reading.

However, McMath says: “Questions about who takes a meter read, when they take it, what the technical spec is, none of that is important if I don’t know where the meter is in the first place. That’s a big challenge, which we’ve yet to crack.

“There’s a hundred reasons why a retailer might not be able to take a read – it could be under six foot of concrete, have a car parked on top, the customer might not allow access or this could be a business that is only open during the day. But at the moment, the incentive framework leads me to penalize retailers if they can’t take a read.

“One thing I’m very keen on is we start from the point of what needs to change, and then we think about how we need to change it. I don’t think at this point in the market, and given the situation in terms of customer benefits and the fact that, as far as I’m aware, there are no retailers currently turning a profit, that we should send ourselves down particular avenues that might not be addressing the fundamental issues at hand.”

Survival of the fittest

Given the challenging business model McMath outlines there is a danger that some companies will ultimately decide it is unsustainable.

So far only one small retailer has exited the market but there are clear concerns about the potential to ever turn a profit, with talk that some new entrants to the market are signing contracts at a margin of just one per cent.

McMath says: “There’s very different value in water. And it’s really hard compared to energy where the returns easier to identify. There are several companies that work across both markets and, of course, they can see where they differ. That sort of balance between value and effort is what we agreed to focus on in the business plan – reducing that effort to maximize the value.”

The non-domestic water market has a supplier of last resort (SOLR) process but what would happen if one of the larger retailers decided to exit the market?

“We are working with Ofwat on scenario-planning around what would happen if a large retailer failed. So, if the fiscal situation overall changes, then there are a number of retailers who are very close to the edge in terms of cashflow. We need to be prepared as a market for a scenario in which a large retailer either chooses to exit or cannot continue trading.

“There is a SOLR framework but so far the only operator we have had exit had 10 customers so it hasn’t been tested on a larger scale.

“At the moment retailers have been very open that they would not be able to cope with that sort of programme on day one, they would have to work up to it. So, we have to think about what our role would be in that scenario.”

Despite the obvious challenges the market has continued to grow, with a 20 per cent increase in the number of trading parties since 2017. This has included a small but growing number of companies opting for self-supply licences. There are currently 12 actively doing this – mainly food and drink manufacturers, including a number of brewers. Last year, John Lewis became the first retailer to sign up. McMath welcomes the fact that these businesses have brought a fresh perspective to the market.

But the key challenge remains that of easing tensions between retailers and wholesalers. A new project team has been established within MOSL to focus on improving bilateral transactions, however this has identified the need for additional data to complete an industry-wide cost benefit analysis. As a result, solution costs have been removed from the current budget.

McMath says: “The fundamental problem is that because of the way wholesalers and retailers interact today, customers are not getting the service they deserve. It is taking too long for their queries to be dealt with because it’s so complex. It’s adding cost into the market because it’s highly manual. That cost ultimately goes to customers.

“It also potentially reduces the choice of customers because I’ve been actively told by some retailers that they will not see customers in a specific wholesaler area because the last thing they want is another wholesaler to learn because that interaction is different. So, potentially it’s also a barrier to entry. If you say that the way in which wholesalers and retailers talk to each other today causes these problems, then our challenge is to work out the best way to improve that.

“Each wholesaler is different and has a different form to fill in – a different set of data they require. One of those forms is apparently 19 pages long.”

Despite all the hurdles to clear, McMath is clearly energised by the task in front of her.

She says: “At the end of the day, everyone involved in this market wants the same thing and most of the tensions are down to the frustration of being able to achieve that goal. It’s my role to declutter that process and empower businesses to do what they set out to do – give customers choice and great service. There are challenges ahead but it feels like I have a lot of support in that vision.”