The non-household water market in England deregulates in less than a year.

John Reynolds, CEO of Castle Water was asked by OFWAT to discuss how to judge its success.

Surprises

Markets are chaotic. If they are working, they won’t be predictable. Successful suppliers will have both different business models, and also different approaches. This may or may not be about who has the most door-knockers or tele-sales callers, or who has the best website, search engineer optimization. Rather, it is a question of captures customer attention. It may also, and as a pureplay water retailer this isn’t necessarily comfortable, be about who has the most synergies with other products.
New entrants at any time do not have to be clones of existing players, with the same structures, marketing and back office cost bases.

For any company to be a “good” company, it has to both have value and competence. For a retailer, part of the competence is in selling.

Challenging behaviour

If the market is dynamic, there will be suppliers who push the boundaries of regulation, market codes and legislation.
In the early days of electricity deregulation, some of the most significant mainstream news coverage from the ASA banning an advert.

The most successful suppliers in Scotland, the ones customers choose, are not part of existing utilities, but are pure retailers. They outsell incumbent water companies 10 to 1. And the strategies vary: the two most successful retailers are using completely different routes to market, contracts and pricing strategies, although sales literature is surprisingly similar in terms of the headlines that customers see.

Role of MOSL

MOSL, the English market operator, should be largely unnoticed, but with a lot of co-ordinating activity going on directly involving Members. Wholesalers should not be the focus of ongoing activity after market opening, but retailers should be driving the Code and process changes.

As a comparison, Elexon rarely needs to be discussed at Board level by DNOs in the electricity sector.

Disputes and rectification processes should be easily accessed, rapid and effective. The idea of “accurate” data is a bit like the tooth fairy, and can’t really exist. We all know that with data not having been prepared in the expectation of deregulation, and customers not always providing up to date information anyway, that errors will occur.

The development of the market to date has focused on codes, systems and processes, but customers will judge the market by how it works, not how much effort has gone in. The period following market opening, where improvements can be identified, and there will be inevitable trading disputes and errors, is crucial to the success of the market.

Customers

Customers must be able to understand what is being offered and make an informed choice. The market mechanisms should not act as a constraint, or be an available excuse to prevent customers exercising choice.

The relation of suppliers and wholesalers to customers will take longer to settle down, and the correct inter-play will depend on the success of the retail market – there isn’t a single appropriate structure. There has been a noticeable change in the relation of DNOs and suppliers to customers in the electricity market: a significant increase in the role of DNOs in dealing with end customers – there’s been a shift in expectation, and regulatory incentives for Stakeholder Engagement - customer contact and initiatives, especially with vulnerable groups. This suggests that suppliers aren’t relating sufficiently to customers, but also acknowledges that Wholesalers have a permanent connection to end-users.

Pricing

Price changes will happen with much more frequency, driven by comparison sites and technology established in other areas. We will have intra-day automated pricing changes – it happens on Amazon, it happens with electricity and gas, it will in the end work in water if the market is functioning properly, given the technology platforms available.

Regulation

Ofwat will need to be prepared to make interventions with individual players, or competitor behavior isn’t challenging enough. Making en masse interventions, which has effectively been seen in energy supply, would be a sign of market failure. A Code of Conduct is required which has teeth, to restrain short term mis-selling and unethical behaviours, but it must not restrain innovation, customer-focused or simply loss-making strategies. The biggest challenge faced in most sectors is mis-selling, and the Code of Conduct must clearly set the rules and provide scope for enforcement.

What will regulators do that influences the market: there are major decisions coming up on credit terms, which could unbalance the market and give options and costs to either incumbents or new entrants. Creating a genuinely level playing field is vital in a low margin market. In 2020, with new price controls, there will be a regulatory decision on retail margins, even if only by default. This could change the market dramatically.

Profit

If the market is successful, well run businesses with a scale economy or with well defined niche markets will be able to consistently earn a return, and this will apply to both new entrants and incumbents.
Suppliers change and even fail, and some owners sell out on the back of success or a challenge they can’t respond to. Some retailers must be able to lose money some of the time, but if a large group consistently lose money, it will show something is wrong.