The Wave of Change

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April 1, 2017 was a watershed in the UK water industry.

To industry outsiders an average day, only remarkable if you subscribe to the childish pleasures of “fools’ day,” but for those in the water sector a day that heralded the beginning of the largest change in the industry since privatisation in 1989.

For the last 28 years the UK water industry has been stable, heavily regulated and much loved by investors, with the so called “big ten” enjoying the relative mill pond calm of a monopoly environment.  April 1, 2017 finally saw this period come to an end, not with a mere ripple of change but more with a tidal surge.

Under the aptly named “Open Water” program the regulator Ofwat and the market operator MOSL has orchestrated the creation of a new market for retail water and sewerage services for non-household customers (some 1.2 million of them), effectively echoing the Scottish Water Market which formally opened for competition in 2008.

The stable water sector created by the Tory government in the 1980s was a monopoly with the incumbent water company owning everything from source to tap and sink to sea:

The new market removes business customers from the water business, leaving an asset owning wholesale business and a solely customer focussed retail business (although it should be noted that the domestic market being opened for competition is currently out for consultation by the regulator Ofwat):

A simple diagram to draw, for sure, and a visual that significantly underplays the enormity both of the changes that have affected the industry during the last 18 months of preparation and the scale of the change still to be undertaken.

Time to earn the Water wings?

The size of the challenge to separate the retail arm of the businesses and adhere to Ofwat’s “Level Playing Field” rules has been substantial, with new retail-focused operating models created and new systems and processes put in place to manage data flow between the retailer and the market operator.

But to be compliant with market codes and regulator guidelines will not be sufficient; for while this newly created retailer owns no asset, makes no product and does not safe guard public health, they will instead need to be agile, fleet of foot, responsive to changing customer needs, technologically advanced and savvy marketers.  These retailers are no longer constrained by geographic boundaries and will increasingly have to service customers across a multi-region and multi-wholesaler environment.

Imagine if you can Virgin, Tesco, or Google entering this retail space bringing their superior abilities in marketing, customer retention, digital and channel management.  These new benchmarks present a significant challenge to the retailers who spawn from their wholesale counterparts—skill sets of this nature are alien in a world where a utilities pedigree and strong operational capabilities were previously king.

Tinkering around the edges of metering, billing and debt management with a “get the basics right” approach is applaudable  but one destined to lead to a declining customer base in a new world where a wafer thin margin and high expectations of customer service mean that cost to sell, acquire, and serve will be the key differentiators.  These capabilities will need to come on line within the next 6–12 months and those who put off development of them, waiting for a utopian world of perfect market data and point perfect processes, will ultimately pay the price.

The companies that will thrive in this new world will be those who very swiftly break free from their wholesale counterparts, embracing thinking and technology from way beyond the sector, and moreover, do it now.

Don’t let the mother ship sail

Whilst the separation of the retail arms to serve the business market, has been undoubtedly highly visible and attracting of media attention, it would be a huge mistake to underestimate the impact of the changes on the remaining wholesale business.

For many of the twenty wholesale businesses left, sojourning into the retail arena is not attractive.  For many private equity owners a water company was purchased to be a safe, reliable and relatively risk free investment—attributes which competing in the retail space is somewhat at odds with.  Indeed this conflict has already seen the exits of key players from the market with none more surprising than the exit of Thames water (the largest in terms of customer number) from the retail space following the sale of their customer book to the aggressive but small sized new entrant Castle Water.

For many being an excellent wholesaler is a much more attractive proposition and with the competition commission looking likely to relax what has been an exceedingly tight grip of the previous rules against mergers and acquisitions in the sector, the eventual emergence of a smaller number of larger wholesalers is likely.

Indeed as attention strays to the “sexier” retailers let us not forget that for the wholesalers several key challenges still must be overcome:

  • Every customer facing process in the wholesale business must be changed to reflect the new market code.  Processes must be leaner, more cost effective and, most importantly, factor in the true cost of the product to protect margin.
  • Poor data flows and quality must be corrected as these become not an irritating internal issue but one of contractual importance, while financial reconciliation of meter and usage data becomes less a paper accounting exercise and more the driving force of real bottom line performance.
  • Domestic customer service must not be seen to lag behind the non-domestic market, with Ofwat already signalling a dim view of any fall in standards whilst wholesalers respond to the decidedly more vocal demands of a retail client base.

Remaining focussed on the wholesale business should not be seen as taking the “easy way” out.  Margins will be tight, control over the cost to serve imperative and smooth processes to handle a changing number and style of retailers, vital.

Riding the Wave

In summary are these exciting times in the industry? Sure.  Are there great opportunities for those of you with a thirst for the sector? Undoubtedly.

But we must keep in mind as we gear up to respond to these exciting times of change that to not focus attention on wholesale as well as the more obvious retail arena, would be to miss the boat entirely.


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