A Large Body of Water: The Impact of Deregulation in England

1 April. Synonymous with fools and shenanigans.

This year, however, it also marks a significant shift that will impact utility budgets and spend for companies across England, which is no laughing matter. And that’s the start of water market deregulation.

In 2008, Scotland became the first country in the world to open up water and wastewater services to competition, enabling all business customers, and public sector, charitable and not-for-profit organisations to choose their preferred provider of retail services.

Encouraged by the success north of the border, the water market in England is set to deregulate when the calendar flips to April. Similar to their Scottish brethren, all non-household customers — irrespective of size — will be able to move away from the “one-size-fits-all” approach of the regional water companies and negotiate packages tailored to their unique business needs.

While there is no obligation for customers to contract with a new service provider, due to the retreat of the regional water companies into the wholesale business, every commercial enterprise will technically transfer to a new supplier… which could mean that some businesses only become aware of the changes when they receive their first bill.

How is the water market reacting?

Twenty-two market entrants have already applied for a retail license and Ofwat’s 2015/16 annual report predicted that this number could rise to as many as 40. Ranging from retail arms set up by the regional water companies to independent retailers already operating in the Scottish market and consultancies looking to supplement their existing water management offers, there is no doubt that the consumer will have more choices than ever.

Thames Water, Southern Water and Portsmouth Water, for example, have all already withdrawn from the non-household retail market. Plus, a number of joint ventures have been created in an attempt to deliver a more competitive offering by leveraging scale, including United Utilities and Severn Trent (Water Plus), Pennon and South Staffordshire Group (Pennon Water Services), and Anglian Water and Northumbrian Water (Wave).

Together with rumors circulating that Yorkshire Water and others may yet sell off their business customer base, it would appear that the supplier landscape is far from settled.

As the supplier picture comes into focus, the injection of new offerings and diverse services will ultimately provide customers with the opportunity to select a service that meets their business needs. However, with retailers still very much in the throes of change, the consumer will be faced with a none-too-simple task of identifying the service provider and package that is the most suitable option.

What should companies expect?

While Scotland has witnessed approximately 50 percent its 130,000 businesses customers move away from the market incumbent, the number of transfers in the early days were slow due to gross retail margins of only 9 percent, leaving little room for the retailers to pass on pricing discounts to the customer.

The margins gradually increased to levels that encouraged customers to seek out the best available deal; regardless, despite concerns expressed by customer groups and new entrants alike, Ofwat has only allowed for an average 6 percent gross margin (2.5 percent net) in England.

This means that price discounts will be relatively slim in the initial stages, a scenario that industry experts do not expect to change before the next asset management period in 2020.

That is not to say that customers will not be able to secure cheaper prices. However, businesses are advised to take time to understand not only the potential savings available, but also the additional benefits on offer, such as supplier rationalization, consolidated billing, improved payment plans and water efficiency advice.

To do this requires a degree of utility focus, but harnessing that focus will now enable customers to manage expectations around the market benefits and apply a suitable level of priority to the opportunity — or lack of in some cases.

What are the key considerations?

The market is set to be flooded with new entrants looking to contract with customers unfamiliar with the opportunity and risks. Businesses are therefore strongly urged to acquaint themselves with suppliers and brokers alike in order to ensure they enter contracts only after having considered their options in full, and feel comfortable that they are selecting an optimal deal.

Data integrity is a huge issue as well and some industry experts argue it has the capacity to derail the market on day one. The water companies have invested considerable resource into creating robust and accurate datasets in time for market opening, however, with so many new participants and IT infrastructures entering the market, the prospect of data issues is unavoidable. Customers can mitigate the risks to their business by first understanding their own dataset, taking control rather than simply reacting to issues as they arise.

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