Water retail watch: fifteen months in

After 15 months of the open water market, market participants continue to grapple with the same issues. Utility Week rounds up what has happened over the last six months.

We are now well into the second year of the open water market, and customers are beginning to benefit from competition. However, many of the challenges which were rife in the first few months remain.

Data – inaccurate or incomplete – remains a major bugbear for water retail executives and other market participants, as it increases costs for those operating in the market and could become a barrier to switching.

The amount to which customers are engaging with the market is another big concern for retailers, and opinions differ on whether levels to date are high enough to be able to call the market competitive.

Another major issue for the market is the interaction between wholesalers and retailers – or lack thereof – which could become a barrier to success if not sorted quickly.

In order that these issues get corrected, Market Operator Services Limited (MOSL) has said collaboration will be key. In its first annual review, published at the end of May, the market operator highlights the “successes and lessons learned” during the past 12 months. It also discusses how the industry can address issues and drive improvements as we head into year two.

Utility Week rounds up some of the key issues and themes which have arisen since our last update in December 2017, and what market players should look out for over the coming months.

Data woes

Data continues to be a thorn in the side of the nascent market.

Last month, Utility Week’s sister title Water.Retail conducted a snap survey, which revealed that data continues to be of greatest concern for retail chief executives in the open water market. 43 per cent of the chief executives and managing directors that responded said quality or completeness of data was their main concern.

Meanwhile, 14 per cent said the lack of a level playing field was the most pressing issue, and 14 per cent specified the complexity of wholesale tariffs. One respondent said the retail margin was too small to allow retailers a return on investment and, resultantly, did not allow significant savings for customers. Another expressed apprehension about the “awful market structure and lack of forethought in almost every area of the market”.

NB: Water.Retail sent the survey to 18 of the most active retailers in the market and received seven responses. Respondents ranged from small start-ups to incumbent retail arms. This does not claim to be an in-depth piece of research but, rather, aims to give a quick snapshot of chief executives’ current views of the market.

Levels of engagement

Market participants are split on whether the levels of customer engagement with the market are high enough to constitute success.

Respondents the Water.Retail’s survey were divided on how successful the market has been. One respondent listed the biggest success as the fact that 4 per cent of customers have switched to another supplier, and other customers will have “negotiated a better deal” from their existing supplier. Another agreed, saying that switching had been the biggest success. In stark contrast, other respondents said there had been very limited numbers of customers switching.

Ofwat estimates that around 120,000 customers had “engaged with the market” at the 12-month mark. Research with customers, conducted by the regulator, found 35,000 have switched, 25,000 customers have “looked at switching” but decided to stay on their current deal, 10,000 have renegotiated a new deal with their current provider, and 15,000 are “actively considering” switching now. A further 35,000 said at the time that they “plan to engage” in the market by April 2018.

Most chief executives in Water.Retail’s survey (71 per cent) said they didn’t feel this number was high enough. One respondent said: “We know that almost all of the switching to date has been focussed in one key segment – large multi-site organisations. We’d like to see engagement and interaction across all segments, particularly SMEs.”

Someone else suggested the switchers have been combining waste and water, or multi-sites, and that they expect switching to “significantly decrease” from this point. However, another suggested early adopters will be “closely followed by the majority”.

A qualitative study by the Consumer Council for Water (CCWater), published last month, found that saving money was the main motivation of many small businesses to switch or renegotiate their water retail contract.

However, smaller businesses said they had been “hampered by a perceived lack of information and interest” from market retailers. SMEs had also expected to find a price comparison website to make it easier for them to shop around.

CCWater deputy chief executive Phil Marshall said at the time: “All of us in the sector need to work harder to change the perception among many small businesses that this market has very little to offer them.

“Retailers and brokers should see this as a golden opportunity to sell the benefits of switching or renegotiating to a group of customers that often don’t have the time or resources to go hunting for information that should be much easier to access.”

Market awareness

Market players blame the lack of engagement in the market, in part, on a lack of awareness that it is open. The aforementioned Ofwat research suggested awareness of the market has risen, with 89 per cent of large businesses and 48 per cent of micro businesses now aware. However, this is a figure which some market players are concerned is not high enough.

CCWater said in February that the water industry needs to “step up” its efforts to engage with customers to ensure awareness among small businesses does not “stagnate”. The call was prompted by the consumer watchdog’s latest research, which found just 38 per cent of small and medium-sized businesses in England know they can switch supplier.

Credit arrangements

In mid-January, Ofwat launched a review of the market codes which set out credit requirements for retailers, after questions were raised about whether the current requirements are “too stringent” and if this could be “dissuading” smaller, new entrants from competing in the market.

As it stands, retailers can choose to pre-pay wholesalers for the water their customers use, or they can choose to post-pay which includes providing a form of credit. This form of credit must cover the cost of supplying their customers for 50 days.

Wholesalers can choose to no longer work with a retailer if they do not have the means to do this. However, a number of wholesalers told Water.Retail they were already in the process of reviewing their credit term arrangements with retailers.

Thames Water became the first, and so far only, wholesaler to announce “new and improved” commercial terms for retailers in December last year. The wholesaler said it would waive collateral cover on the first £1 million of wholesale turnover for retailers across its region.

Northumbrian Water, United Utilities and Severn Trent have all said they plan to offer alternative credit options for retailers.

Meanwhile, Anglian Water said it will not go in the same direction as Thames and is working on a different approach. And Southern Water said it does not believe that waiving collateral is the “right way forward at the moment”. Portsmouth Water said it has been “working with retailers” to ensure that both it and they have the right balance of risk in terms of levels of collateral and exposure to concentrated credit risk. Meanwhile, South East Water head of service management Steve Andrews said this is “not something the company has looked at”.

Wholesaler-retailer interaction

Industry participants have, for some time, been calling for the processes for interaction between wholesalers and retailers to be standardised. As it stands, each wholesaler has its own systems and processes for interaction, which has proven to be both confusing and time-consuming for retailers.

In a column for Water.Retail, which appeared in issue 22, Business Stream chief executive Jo Dow wrote that there are efforts being made to address the “complex and burdensome” process for interaction. For example, the digital strategy committee set up by MOSL has been tasked with reviewing the processes currently in place and assessing the appetite for an industry-wide portal.

In the open water market, most wholesalers have a portal through which they manage service requests from retailers, as well as informing them of planned and unplanned changes to water and wastewater services.

In a wide-ranging survey carried out by Water.Retail in March, there was some confusion amongst retailers about whether Thames Water offered such a portal or not. However, the wholesale company has said it is now in the process of developing a portal, which will deliver “enhanced functionality”.

Retailers’ service to customers

CCWater has warned that a few poor-performing retailers are responsible for driving a precipitous rise in customer complaints, which have more than tripled since the market opened.

The watchdog has released figures in April revealing that it received 972 complaints from non-household customers during the final three months of 2017/18. This brings the overall total for the year to 2,782, compared with 824 in the 12 months leading up to the market opening.

Deputy chief executive Phil Marshall condemned a small number of retailers for driving the rise, which it said was “not a reflection on all suppliers”.

He said that, although the Council had anticipated that complaints would rise as the market “finds it feet”, the increase has been “higher than we expected and that’s largely down to a small number of retailers”.

At Future Retail #1 – a conference hosted by Water.Retail in March – Marshall told delegates that eight out of ten complaints in the new market relate to one of the three biggest companies: Castle Water, Water Plus, or Anglian Water Business (now part of Wave).

CCWater will publish a report in late June, revealing the best- and worst- performing retailers for complaints.

Mergers and acquisitions

During the last six months, Castle Water acquired Invicta Water – which trades as Water Choice – for an undisclosed sum, a move which will see 50,000 business customers in South East Water’s service area transfer to Castle Water in July.

Having started out with a gargantuan customer-base bolstered by acquisitions of Portsmouth and Thames Water’s business customers, Castle Water has struggled to retain its customers since the market opened, resulting in by far the biggest net loss of supply points of any retailer.

A question which remains on the lips of market participants is when Yorkshire Water will announce its plans for the business retail market. Will it sell its customers? And, if so, who will buy them?

The new retailers

The retailers which have been granted licences since our last update are:

Aquaflow Utilities

Aquaflow Utilities received its licence at the beginning of January. Hailing from South Glamorgan, Wales, the retailer claims to be “committed to offering eligible businesses in England and Wales exceptional levels of customer service, a highly competitive pricing strategy and a technology and efficiency-driven approach to reducing their water consumption”.

Smarta Water

Smarta Water is the newest addition to the water market, having been granted its licence in late May. The retailer – part of water and energy consultant Smarta Environment – said it wants to be recognised as “one of the UK’s leading water retailers”.

In its application, it said it is committed to providing a “high-quality consistent level of customer service”, underpinned by a “competitive pricing strategy” with an “innovative approach to increasing efficiency, improving sustainability and reducing the costs to and for customers”.

Coca Cola European Partners

Coca Cola European Partners is the fourth company in England to be granted a self-supply licence by Ofwat, following brewer Greene King, hospitality firm Whitbread and brewery and pub retailer Marston’s.

In its application, the company said having a self-supply licence will give it a chance to “take more control” over its own water use, as well as allowing it to deal directly with the suppliers.

Look out for…

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