The retail water market opens on 1 April 2017 and will arguably mark the biggest change in the water industry since privatisation. We look at what this means for the entities involved.
Non-domestic customers – business, charities, government
From the start of April 2017 all non-domestic customers, including businesses, charities and government, across England and Scotland will find themselves impacted by the creation of the market for the retailing of water and sewerage services.
This will happen whether or not they have actively switched retailer, as many of the incumbent water and sewerage undertakers have opted for ‘retail exit’ and separated off their non-domestic retail activities into a separate entity. These customers will be on ‘deemed’ contracts which may not work for them as well as bespoke arrangements with retailers.
Active participants in the market are far more likely to get the best deals than those who passively accept the default position. With limited retail margins to offer – average 2.5% net margin – (unlike the position in Scotland), retailers in England will need to offer customers value added services to make their offerings attractive.
There is a distinct 'postcode lottery' for wholesale prices across England. This will be apparent to multi-site customers in particular. However, there is not much customers can do to benefit from this as they cannot at the moment switch away from their wholesale supplier – subject to relocating!
Customers can also ‘self-supply' i.e. buy direct from wholesaler. There are regulatory hurdles (and costs – approx. £5,000), but customers who are located within a single undertaker's area, and are large users of water, might well find this an attractive option. The stand out example of this is the brewer Greene King which, with assistance from Waterscan, has set up a direct self-supply relationship with its wholesaler.
Non-domestic customers in Wales (or rather, served by undertakers whose areas are wholly or mainly in Wales – i.e. Welsh Water and Dee Valley Water) are only able to switch water supplies (not sewerage) if they are very large users of water (50 mega litres per year or more). However, for such large users, switching to an independent retailer and away from an incumbent may be more attractive than it has been in the past given changes to the charging rules.
All customers will need to be aware of the possibility of mis-selling (as has taken place in the energy and financial services sectors). While there is a code which seeks to prevent this, the existence of numerous third party intermediaries, as well as many retailers in this area, may make the market one where this will need to be monitored and potentially action taken going forwards.
Finally, customers will want to keep an eye on their data. MOSL has been working hard with the market to ensure that all systems are data protection compliant, but it is a complex area and issues have been raised about the way data is automatically shared between market participants.
Investors
Given that there are currently around 30 licensed retailers, we would expect to see, over a relatively short period of time given the limited margins available for retailing in England, different levels of performance from these retailers and different business models e.g. high volume/low margin/low customer service and low volume/high margin/high customer service.
It remains to be seen which will be the most successful.
We would imagine that not all 30 or so retailers (and any more who commence operations) will be successful so that there will be a degree of consolidation, with a limited number of retailers focusing on different sets of business models. This would reflect what has happened in the energy sector.
Indeed, this is already happening, with Castle Water acquiring Portsmouth and Thames Water’s non-domestic customers, Business Stream acquiring Southern Water's non-domestic customers and the coming together of Severn Trent and United Utilities and of Anglian and Northumbrian Water.
We have also seen multi-utility offerings, such as the combination of Business Stream with Utilitywise and Veolia to offer customers a complete 'end-to-end' solution for all their water, energy and waste needs.
Water and sewerage undertakers
The opening of the non-domestic retail market has forced undertakers to go through the most radical changes since privatisation in a relatively short period of time. From being wholly vertically integrated, they now find themselves operating as wholesalers in regards to non-domestic customers.
On a practical level, undertakers have been working very hard to 'clean' their customer data prior to market opening. This, however, is bound to be a continuing issue.
Undertakers will also need to be very wary of competition law.
The history of market openings in other sectors suggests that it is likely that undertakers may be tempted to favour their related retailer (either in price or service terms) over other retailers, and thus potentially infringe competition law. Ofwat has done its best to ensure that undertakers have set up processes to prevent this kind of behaviour happening, but it remains to be seen whether that will be robust enough to overcome the incentives in what is likely to be a tough market to operate in.
This is only the start of the fragmentation of undertakers, as Ofwat and the government make further changes to:
- price controls, including separate price controls for 'water resources', 'bioresources' and 'network plus’ water and wastewater activities
- the reform of abstraction rights and trading
- the expansion of the retail market to domestic customers
- the development of 'upstream' water and sewerage competition.
All these changes will take place over the next 5 –10 years.
Ofwat expects all of the above to put pressure on the costs of the provision of water and sewerage services to reduce prices and improve quality of service for customers, starting with retail competition and retailers acting as strong advocates for their customers. Whether or not the changes have the impact that is hoped for remains to be seen.
Developers
The provision of new water and sewerage connections services to developers is already a market where there is competition given the insets/new appointments regime and the presence of self-lay organisations.
However, we have also seen retailers teaming up with developers to offer them developer services in relation to new connections work. This may be attractive to developers as it could lighten their administrative burdens as regards obtaining economical water and sewerage services.
How can Burges Salmon help?
We have experience advising a wide range of water market participants, as well as new retailers. Our knowledge and understanding of the water sector helps clients to achieve their commercial objectives. We have built a progressive culture based on collaboration and teamwork that is shaped around the needs of our clients to deliver a fantastic service and experience.
If you have any questions about the scope and impact of the new open water market, please contact Michael Barlow.