Water Competition - the missing link for multi-utility market development?

Thought Leadership Paper

Contents

The evolution of the energy and water markets 4

Background 5

Customers and multi-utility markets 6

Scottish retail water market 10

Development of the English retail water market 11

Role of household market opening 13

Implementing multi-utility in companies - operational challenges 14

Implementing multi-utility in companies - regulatory challenges 14

Risks and opportunities 15

Conclusions and implications 15

Gemserv support for market participants 16

Appendix 1: Market Operations Analysis 17

Appendix 2: Risks and Opportunities Analysis - incumbent companies, challenger / disruptor 18 companies and customers

The evolution of the energy and water markets

2020+: English household market? etailers and generators (examples) etailers and generators ce s etail esour Big 6 energy r Energy transmission / distribution companies Smaller energy r eforms ater r 2020: English r market r Sludge W

1998-9: Full gas and electricity competition Figure 1: The evolution of the energy and water markets 1: The evolution of the energy Figure etail market opens 2017: English non-household r ea s ded eation 2016-17: WSSL licences awar esidential pilot ar 1996-8: Gas r 1997: Demerger of and cr of BG plc. eshold > 5ML England water competition thr educed to ater Act eshold r 1994: Gas competition thr 2,500 therms p.a 1994: Electricity competition > 100kW 2014: W

etail market opens 2008: Scottish non-household r ales) eated 1990: Electricity privatised as: National Grid 12 Public Electricity Suppliers 2 Generators 2 Scottish companies Nuclear Electric 1990: Electricity competition > 1MW ater cr 2002: Scottish W ater supply

2001-2: W licensing > 50ML market opens (England and W 1989: Gas competition above 25,000 therms p.a ales as 10 water ater privatised in 1990: W England and W and sewerage companies: Statutory private water companies Scottish water public sector undertakings 1987: Privatised as integrated gas company

4 Gemserv Water Competition - the missing link for multi-utility market development? BACKGROUND

The water and sewerage market is the last of the UK utilities to It is timely to consider whether similar forces will be unleashed introduce retail competition, and it will take a big step in that by the water and sewerage market opening, leading to further direction when the retail market for non-household customers convergence and restructuring of the utilities markets and in England is fully opened in April 2017. This move follows the the emergence of multi-utility players. These could include opening of the non-household market in in 2008. With established energy companies partnering with water specialists, further competition potentially on the horizon for household water companies partnering with energy companies and the entry water customers in England, many existing and potential market of specialist niche players and large customer centric brands players have started to position themselves for the new and such as Virgin, BT, Tesco, and Sky into the market. This prospect emerging business environment. is of critical importance for existing and new water retailers, but also for retailers in other utilities considering entry into the The opening of the gas and electricity markets, previously water market, or defending themselves against potential moves separate markets, with separate market participants, market by water players into the energy market. The implications of an arrangements and regulators, set off powerful forces of change emergence of a multi-utility market will be just as profound for towards market convergence, including transformational other market actors, policy makers and regulators. mergers and acquisitions, and innovative service and dual fuel propositions for customers. The upshot was the emergence of an energy market, with gas players entering the electricity market and electricity players entering the gas market, and the merger of Offer and Ofgas to create Ofgem.

Figure 1 (page 4) sets out the timeline for the evolution of competition in the energy and water markets. The introduction of competition in energy has led to a separation of functions (e.g. retail and distribution), as well as corporate development and specialisation by companies in parts of the value chain.

The deregulation of telecommunications, and the technological revolution triggered by the internet and mobile technology, has led to similar forces for change in telecoms, with rapid convergence and multi-product bundling in fixed line, broadband services, mobile and TV / broadband / entertainment services.

5 Gemserv Water Competition - the missing link for multi-utility market development? CUSTOMERS AND MULTI-UTILITY MARKETS display some similar purchasing characteristics, there is likely to be some read across. The central driver for the emergence of a multi-utility retail market rests with customers. Are they likely to respond to a The Consumer Council for Water (CCW) has undertaken a water-energy, or telecoms-water multi-utility offering, and if so number of studies regarding the new market. In its latest research in what numbers? Will customers be happy to switch their water report “Testing the Waters: Business customers’ views on their and sewerage services to an energy or telecoms retailer and vice water and sewerage services 2016”, CCW has found: versa? There seems a strong likelihood that they will. -- Overall awareness of market reform is low among business In the energy market, before market opening it was viewed by customers; less than one in ten (8%) business customers many as inconceivable that customers would buy their electricity are aware at a spontaneous level. Once prompted, from a gas supplier or their gas from an electricity supplier. Today awareness increases to 13%, with awareness significantly over 19m (85%) households with access to both fuels buy their greater amongst large businesses with more than 250 gas and electricity on a dual fuel contract. In the business energy employees (51%). market, twenty four companies supply both gas and electricity, -- Around two fifths (39%) of customers say they are likely to although dual fuel contracts are a less prominent feature than in switch once the market opens, with an average saving of the household market. 17% being required to entice them to switch (although this Many companies in energy and water offer additional products varies considerably depending on businesses’ annual bill and services linked to the commodity (e.g. home servicing) to amount). drive additional revenues and meet customer needs. In energy, Whilst this survey did not focus on multi-utility service or cost the roll out of smart metering is bringing new opportunities for saving benefits, once informed of the option to negotiate on price additional product bundles including smart home services. and service, as Figure 2 shows, 75% say they would negotiate Product bundles in the telecoms market have become the new terms and conditions with their supplier. norm, with packages including fixed line and mobile telecoms, % NET likely/aware broadband, TV and entertainment services commonplace. 76 76 73 Experience has shown that drivers to switch to a single energy 69 provider have been a combination of price discounts and service benefits of one stop service provision, which are attractive to customers e.g. convenience in meter reading, billing, payment 49 and energy management. In telecoms, customers have bought 43 43 41 41 bundles for a variety of factors including improved pricing, 35 ease of customer service including online interactions, offers and promotions. A key element in all is the purchase of these

products from a trusted brand. 15 13 10 9 7 Given the water market is not yet open, the availability of 5 evidence to support significant uptake from water-energy offers Likelihood to renegotiate Likelihood to switch Awareness (prompted) Awareness (unprompted) is so far limited. We therefore need to assess the available market research which is in the public domain for any evidence. Some Large Medium Small Micro of this currently relates to the household market, but given that Figure 2: Awareness and likelihood of switching: business market the micro-business and SME segments of the business market Source: CCW

6 Gemserv Water Competition - the missing link for multi-utility market development? ’s most recent research report “Customer Awareness MIN. VALUE ACROSS MAX. VALUE ACROSS ENGLAND REGIONS REGIONS Survey 2016/17 Final Report”, produced by Opinion Research Likely 51% 45% 56% Services in January 2017, finds that around one third (32%) of Unlikely 39% 32% 45% sampled eligible customers had some awareness of forthcoming Don’t know 10% 5% 13% changes to the water market, with the remaining two thirds (68%) Total 100% - - not having heard anything about them. The survey finds that Base 3595 - - just over half (52%) would consider switching their water retail services when the market opens. The most important benefit was ENGLAND seen as potential cost saving, with a variety of service benefits 51% 39% 10% also seen as important. As in CCW’s survey, medium and larger 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% businesses are significantly more likely to switch water and waste Likely Unlikely Don’t know suppliers. In order to make a decision to switch or not, more than 50% of organisations are looking for more information on Figure 3: Likelihood of switching to a single multi-utility supplier: pricing, tariffs and billing, with some looking for a list of available household market Source: CCW suppliers to increase their awareness of available alternatives.

In CCW’s “Floating the idea: Household customer views on water market reform in England” May 2016 report, customers Trust is likely to be an important factor in building a are asked a specific question regarding whether they would multi-utility business; CCW’s business survey indicates that water switch their water and sewerage services to another company companies enjoy a significantly higher level of trust than energy already supplying energy or broadband services. Just over companies, as shown in Figure 4. Trust in the brand may provide 50% indicated that they would be likely to switch to a one opportunities for new entrants in the sector. stop supplier. However, a significant minority (39%) would not consider switching in order to have a ‘one stop retail shop’. The results are contained in Figure 3. Of note is that this was a rather general question without specific details about likely offers. Trust for your water Trust for your energy company company

7.6 6.8 2016 mean score 2016 mean score 7.3 6.5 2014 mean 2014 mean score score

Figure 4: Comparison of Trust in water and energy companies: business market Source: CCW

7 Gemserv Water Competition - the missing link for multi-utility market development? Ofwat has also published some research findings which are of -- Customers believe that the advantages of the multi-utility interest in assessing the potential interest in multi-utility offerings: model are that it offers the convenience of a one stop shop for all utility services, including one bill. Customers also -- In qualitative and quantitative research with household expect that bundled discounts and additional incentives customers, Ofwat tested four different models for a future (e.g. loyalty points) will reduce prices. Respondents refer to household competitive market. One of these was a energy companies’ extensive experience in service provision multi-utility model, which gained relatively strong support. and customer service giving some confidence that service The idea of bundling in the multi-utility model is seen to offer levels will be consistent throughout. some advantages, such as better price discounts as with current bundled product / services, and companies that are -- The disadvantages of the multi-utility model are seen as the more advanced with customer services. apparent lack of regulatory control by Ofwat and the fewer protections that would be in place. Customers also worry -- Whilst multi-utility has some appeal for customers in that utility companies may become a ‘jack of all trades’ with considering the benefits of choice in the water market, it no knowledge on how to deal with specific enquiries. Water is still strongly the prospect of lower prices and improved bills might also go up for loyal customers who choose to customer service which are the leading benefits seen from remain with the incumbent, as well as concerns about being competition in water. tied into bundled packages. -- Ofwat’s research indicates stronger appeal for multi-utility benefits amongst younger customers, with some older customers opposed to the concept.

Lower prices 9 25 62 87%

Improved customer service from 19 39 35 74% water providers

Receiving one bill for both your water 25 35 32 67% and sewerage services

Water companies offering new services, such as 3 24 42 24 66% leak monitoring and water efciency services 5

Loyalty schemes or point collection schemes 628 1 34 28 62%

Incentives to switch, such as vouchers 729 3 33 25 58%

Receiving one bill for water, sewerage 9210 7 29 23 52% and energy services

I could have the same company supplying 10 32 19 51% water and energy services 828

More active promotion of metering 8310 4 27 18 45%

Not at all appealing Not very appealing Neither Quite appealing Very appealing Don’t know

Figure 5: Appeal of benefits of choice in the water market Source: Ofwat “Customer response to competition in the residential water market”, July 2016

8 Gemserv Water Competition - the missing link for multi-utility market development? In terms of other research focussed on the business market, a Given tight retail margins, incumbent companies may be recent survey published by Utilitywise, conducted by Edelman constrained regarding scope for price discounting; in addition research, has found that: to price offers, they may need to have a range of service offers, which could include multi-utility services to defend the market. -- There is relatively low awareness of the opening of the business water market - although a higher proportion than in We conclude that whilst limited, the research available in the other surveys (4 in 10); public domain is positive towards the development of a multi- utility market, and certain customer segments may have a -- Half of businesses say they are likely to switch in April 2017; preference for such offerings. As the market develops, it may -- Price is the main reason to switch, but bundles are also a become essential to have such capability, otherwise segments draw; and of the market may switch from single product providers. It is -- Beyond price, 7 in 10 are interested in a combined utilities expected that any market players considering making such package and 6 in 10 say a single utility bill would be a offers are undertaking product development, brand and product good reason to switch supplier - see Figure 6 (overleaf). proposition research (to assess the likely take-up of such A somewhat surprising finding is that customers would offerings) and developing their business case for extending their be prepared to pay more for a combined package - this products and capabilities into multi-utility provisions. is in contradiction to the general expectation that some discounts will be needed to trigger switching.

Businesses arePer attractedcentage ofby businesses the idea of aattracted combined by utilities multi-utility package bundles

7 in 10 6 in 10 44%

English businesses are English businesses English businesses interested in getting their agree that the offer of a would be willing to pay Gas, Water and Electricity single utilities bill is a more for a combined as part of a combined good reason to switch utilities package utilities package provider

70% 61% 44%

58% 51% 32%

65% 55% 35%

Indicates a signicant difference to the England average

Figure 6: Percentage of businesses attracted by multi-utility bundles Source: Utilitywise / Edelman: “Water deregulation survey results”, October 2016

9 Gemserv Water Competition - the missing link for multi-utility market development? SCOTTISH RETAIL WATER MARKET Whilst there has been relatively limited multi-utility activity to date, the announced move by Business Stream may trigger In considering whether multi-utility markets are likely to emerge, others to consider making multi-utility offerings in the near future. it is instructive to examine the situation in Scotland for any This may include potential counter-offers by the Big Six energy evidence of trends, given the business market has been open retailers, seeking to defend their customer base and expand their since 2008. Analysis indicates that most competition to date has market reach. featured switching to largely water and sewerage only players, either existing or new entrants. No market entry has to date been made by the Big Six energy players; this possibly reflects the limited size of the market and previous uncertainties regarding the extension of competition into England, and/or a view on profitability.

The most significant development regarding the provision of multi-utility offers in Scotland is the announcement in December 2016 by Business Stream (the incumbent retailer and part of the Scottish Water group) that it is forming a partnership with Utilitywise to provide SMEs with a combined deal which incorporates all three major utilities; electricity, gas and water. It is reported that Utillitywise will provide competitive gas and electricity tariffs to businesses and public sector organisations, whilst Business Stream will provide water tariffs to complete the package deal. The details of these offerings are not yet available nor is it clear how interactions with customers will be managed, but it is understood that the multi-utility offerings will be started in Scotland before being extended to England from April 2017.

Amongst other retailers in the Scottish market, a number also provide multi-utility offers, cross sell water-energy, or have the apparent capability to do so. These include:

-- Clear Business Water, who reports that it supplies businesses across the UK with essential business services, including water, energy and telecoms; and

-- Regent Water ( and/or Sewerage Licence (WSSL) pending), who has a sister company, Regent Gas Ltd.

10 Gemserv Water Competition - the missing link for multi-utility market development? DEVELOPMENT OF THE ENGLISH RETAIL WATER MARKET We can categorise the licensees as follows (see Figure 7):

With the decision to open the market in England expected to be -- Existing associated retailer of an incumbent English water taken by the Secretary of State in early 2017, it is useful to review company; the current known market players who have been granted or -- Joint venture (JV) player from existing water retailers; applied to gain retail WSSL licences. It is also useful to assess whether there are any players who have stated they will operate -- New entrant by an existing Scottish water player; and on a multi-utility basis, or are positioning to do so. -- New entrant from another utility market.

JOINT VENTURE - EXISTING NEW ENTRANT - EXISTING NEW ENTRANT INCLUDING EXISTING ASSOCIATED RETAILER WATER RETAILERS SCOTTISH PLAYER FROM OTHER MARKETS

Business Stream (including Business (Anglian Water Plus (JV with Severn takeover of Regent Water (Regent Gas)** Water) Trent and ) non-household customers)

Castle Water (including Three Sixty ( / Kelda Water2Business (Wessex takeover of and Waterscan** Retail) Water and ) non-household customers)

Source for Business (South Wave () West Water, incorporating Everflow** Veolia Water** )

SES Business Water (Sutton and The Water Retail Company East Surrey Water) Invicta Water / Water Choice South Peel Water (Peel Utilities)** East () Business (Affinity Advanced Demand Side Water) Management **

South Staffs Water Business (South Staffordshire Water, incorporating Cambrian Utilities** Cambridge Water)*

* South Staffordshire plc and Pennon Group plc have recently announced a JV that will create the fourth largest non-household water retail business operating as Pennon Water Services (PWS). ** Licence pending

Figure 7: New water market participants (February 2017)

11 Gemserv Water Competition - the missing link for multi-utility market development? The analysis in Figure 7 indicates the fact that, at this stage, of new housing developments across Great Britain. Previously market participants are mainly water players; some, however, RWE owned Thames Water and owned Southern have energy company links, or have announced partnerships Water, although neither successfully pursued multi-utility retailing. to offer multi-utility solutions (e.g. Business Stream). However, British Gas and its owner Centrica showed potential interest the last six months has seen a number of ventures and alliances in water market entry and water ventures at an earlier stage of created and we expect the mergers and acquisitions market to market deregulation, but did not enter at that early stage of the continue to be active in the next few years. market. Key issues which would be critical for any Big Six entry would be strategic fit and creation of a compelling business case. In addition to Regent Gas, recently Peel Water has applied for water supply and sewerage licences. Peel Utilities provides In terms of water companies, a number have ownership links water, electricity and energy services to homes and businesses with energy companies. For example, is owned across a portfolio of mixed-use developments as well as retail by Malaysian power company YTL; Sutton and East Surrey and business parks. Water is jointly owned by Sumitomo and Osaka Gas (Sumisho Osaka Gas Water UK Ltd.) and Mitsubishi owns 25% of South Other energy suppliers have indicated that they are considering Staffordshire Water. Northumbrian Water is owned by Chinese entry into the water market. These include , Corona investor group Cheung Kong Infrastructure Holdings, which Energy and D-Energi. has extensive investments in UK energy distribution companies A number of energy brokers have also entered the water market including , UK Power Networks, and to offer services for business customers. Examples include Wales and West Utilities. It is not clear, however, whether any of Inenco and Utilitywise, but more are expected to enter to these owners is interested in extending its activities into multi- complete their multi-utility offering. utility retailing.

It is also worth noting that business customers can apply for In addition, United Utilities previously had both water and energy a self-supply licence; in effect this means a customer can activities within its group and may have had some ambition for act as its own retailer and negotiate deals for its sites directly multi-utility activities; however, the mismatch in timing of energy with wholesalers. So far, there has been only one applicant and water market opening meant that multi-utility retail initiatives for a self-supply licence, the brewer and bar operator Greene were not possible. United Utilities sold its electricity retail King, with its 1757 sites. An Ofwat consultation document, business in 2000 and distribution business in 2007. following the application, sets out that Greene King intends It is important also to consider the potential role of Third Party to contract Waterscan to perform retailer functions on its Intermediaries (TPIs) in the water market. TPIs consist of a behalf. These include “meter reading, central market operating variety of different companies, including brokers, consultants, system transactions, wholesaler management, paying water purchasing agents, and switching agents. In the energy market, and sewerage charges through the settlement process, and TPIs have become substantial participants and many are already finding further water efficiency savings”. It is reported that other showing active interest in water. Forming a deal with a TPI is business customers will also adopt a similar self-supply model. an option for water retailers wishing to offer their customers an At this stage, no public signs have emerged of potential retail energy offering; there are clear pros and cons of this route into entry by the Big Six energy companies. It is understood, however, the energy market compared with building a company’s own that a number of energy companies have been reviewing capability. The pros include speed, and lower set up cost. The potential entry and have held discussions with water companies cons include risks around deal structures, delivery and customer regarding alliances. Of the Big Six energy retailers, only SSE satisfaction. From a regulatory standpoint, growth in TPIs can has a current active presence in water; SSE has been active in bring challenges as regulators’ powers do not extend to these the “inset” market, and is the licensed appointee in a number entities.

12 Gemserv Water Competition - the missing link for multi-utility market development? ROLE OF HOUSEHOLD MARKET OPENING up approach to energy and water savings, and bring greater awareness that saving water can also save energy and carbon. It is likely that a decision to open the water and sewerage household retail market would accelerate the trend towards The use of new technologies could make switching easier multi-utility markets, allowing energy and water companies to for customers and cheaper for retailers, and promote water fully compete for household customers. Opening up the market efficiency linked to energy efficiency. The roll out of smart would bring a larger potential market for those considering entry metering in energy may trigger a move towards automated and the current uncertainty over whether the market will open meter readers and smarter technologies in water as customers’ may be a barrier for some companies in making the business expectations are raised. case for entry.

The Government published “A Better Deal”, its plan to boost competition in different markets and bring about lower bills for firms and families. Ofwat was asked to provide an assessment by summer 2016 of the costs and benefits of extending retail competition to household customers. Ofwat has delivered its assessment and the decision on whether to extend competition is awaited from the Government.

In its assessment, Ofwat pointed to potential benefits; that half of the customers it surveyed would be interested in switching and just under half would switch for the offer of additional services, including the convenience of a single utility bill for energy and water. However, Ofwat’s analysis also indicated only a relatively modest water discount being available for switchers, in the order of £6 per customer. A number of potential retailers have criticised the margins set for the market in Ofwat’s price controls.

Ofwat has also pointed out that savings are more likely to be achieved if multi-utility retailers enter the market, as they could spread fixed costs over a larger number of customers and pass on the savings. Opening the water household market would be likely to encourage the entry of existing online players and switching sites, and bring wider offerings for customers.

It is likely that even wider opportunities for innovation would exist given the linkages in energy and water savings, especially in relation to hot water in households’ energy usage. Waterwise has pointed to the strong link between the water we use and the energy consumed within our homes. Heating water for showering, baths and cooking accounts for 5.5% of UK greenhouse gas emissions and approximately 30% of an average household gas / electricity bill is accounted by the heating of water. Multi-utility retailing could facilitate a more joined

13 Gemserv Water Competition - the missing link for multi-utility market development? IMPLEMENTING MULTI-UTILITY IN COMPANIES - As a result of the less onerous market obligations placed on OPERATIONAL CHALLENGES water retailers and pre-set tariff structures for wholesale charges, most of the administrative cost in set up and operations is It is informative to review the implementation challenges facing associated with the customer service interface, managing an existing utility company considering entry into another utility bilateral arrangements and in the financial settlement of market. wholesale charges with wholesalers. In water there are fewer In terms of the market operations required by water retailers, supplier agent costs to manage, and the simplicity of most there are many similarities in how this type of market participant settlement configurations for premises makes these more will operate compared with their equivalent in energy. technical areas much less resource intensive.

The design of the water market was in effect based partly on the Customer facing activities in water such as marketing, billing, processes in the electricity market, as Gemserv is both the agent debt recovery and other add-on services are very similar to for the electricity Master Registration Agreement underpinning those undertaken by the energy retailer. Customer needs will be the retail market and was architect of the Scottish water market similar and triple billing of utilities should not need much further on behalf of the Commission for Scotland (WICS). administrative cost. As a result, existing energy suppliers will Many parts of the Scottish arrangements have been replicated need far fewer additional processes to provide these already in the English water market. Appendix 1, Figure 8 provides existing functions of their business. An additional element for a summary comparison of the market operational aspects some customers relates to the existing separate provision of undertaken by retailers in energy and water. water and sewerage customer activities (relating to the existence The concept in the electricity market of the Meter Point of Water Only Companies (WOCs). However, these are very Address / Registration Number is also present in the water similar and integration of these should be relatively low cost. market, but renamed as the Supply Point Identifier (SPID); however, for most premises there are two SPIDs relating to water IMPLEMENTING MULTI-UTILITY IN COMPANIES - in and sewerage out. These are also registerable separately to REGULATORY CHALLENGES allow different suppliers to retail against the two services. The introduction of multi-utility markets brings some additional Sewerage also has more complex arrangements to regulatory challenges. Fundamentally this relates to the accommodate specific processing requirements for so called separate existence of different regulatory obligations and rules trade effluent, which relates to industrial processes at premises. operated by Ofwat and Ofgem (or Ofcom). Clearly, there is a risk The tariff structure and metering associated with trade effluent surrounding overlaps and gaps in ensuring appropriate protection has considerably more data parameters. for customers. Metering and data management in water is considerably less Particularly important challenges exist with regard to cost complex than in electricity, partly reflecting the fact that trading allocation, tariff regulation, financial accounting, and the and settlement arrangements are daily in water, but half hourly application of residual price controls. Similar issues existed when in electricity. Given this, in terms of setting up to operate within the gas and electricity markets were separately regulated before the water and sewerage market, there is far less to do in both IT alignment began with the creation of Ofgem. If trends towards system development and in meeting market obligations than in multi-utility offerings build momentum, it could raise fundamental energy markets. The bilateral transactions required for delivering questions about the creation of a multi-utility regulator. operational requirements (e.g. meter exchange) and interface with the Market Operator (MOSL) can be delivered via web / portal interfaces by the retailer. The only physical operation that is obligated is meter reading.

14 Gemserv Water Competition - the missing link for multi-utility market development? RISKS AND OPPORTUNITIES CONCLUSIONS AND IMPLICATIONS

Finally, we have considered the potential risks and opportunities From the analysis contained in this paper we can draw a number arising from the development of multi-utility markets for of conclusions: customers, incumbent water / energy companies, and -- Research indicates that a potential market exists for disruptor / challenger brands. The full results are set out in multi-utility offers, in both the business and household Appendix 2 (Figures 9, 10 and 11). sectors; many customers perceive benefits from receiving For customers, apart from the benefits of choice, the multi-utility supply; development of a multi-utility market should potentially bring a -- The Scottish water market has, to date, had limited wider product range and innovative offers. In research, some multi-utility marketing, but the decision by Business Stream customers have concerns regarding perceived inappropriate to form a multi-utility venture may prove a turning point; sales and marketing and some loss of regulatory protection. -- Similarly, there are clear signs of multi-utility market For water and energy companies, any development of a development in the English market; any entry by the Big Six multi-utility market would present a risk of revenue and profit energy retailers would be transformational; losses if a do nothing approach was adopted; a decision to enter into a multi-utility position would provide opportunities -- A number of ventures have been formed in advance of both from commodity and value added growth, and also present market opening, but it can be expected that alliances opportunities to drive synergies in operations. between energy and water players are under discussion;

Disruptor companies would be competing with relatively strong -- TPIs are actively moving into the water market to incumbent companies and would face many challenges in complement their existing utility offers; building a multi-utility business; however, they may be able to -- Any decision to open the household market for water exploit the opportunities by moving fast and building a low cost will accelerate the momentum for multi-utility market and customer responsive business. development;

For both types of entrant, decisions on how to enter would -- The operational requirements for moves from the energy need to be carefully weighed up; for example operating alone or market into water are less demanding than those for water in alliance with other players. Also, a choice between building players moving into energy; the opening of the water market a greenfield business and re-engineering existing business presents a clear opportunity for energy players; operations would need to be made. All potential entrants would -- There are substantial risks for incumbents if multi-utility need to develop a carefully considered business case. marketing develops and they are slow to defend against such moves;

-- Opportunities also exist for new disruptor brands to position themselves in the multi-utility space, especially if larger players are slow to move; and

-- Multi-utility market development would give rise to a number of regulatory challenges; these would need to be addressed across regulatory boundaries.

15 Gemserv Water Competition - the missing link for multi-utility market development? GEMSERV SUPPORT FOR MARKET PARTICIPANTS

Gemserv has launched a market wide initiative with a new website service “England on Tap” to facilitate requested provision of information from suppliers for business customers. To find out more visit www.englandontap.co.uk.

Gemserv’s consultants have many years’ experience operating in and advising companies operating in energy and water markets. We can utilise our expertise and experience in competitive utilities markets to provide strategic and practical support for those wishing to develop their utilities activities. Our clients include regulators, retailers, business customers, third party intermediaries and prospective self-supply licensees. For more information on how we can help you, contact us using the details at the end of this document.

16 Gemserv Water Competition - the missing link for multi-utility market development? Appendix 1: Market Operations Analysis

OPERATIONAL AREA ENERGY (ELECTRICITY) WATER

Simple registration process and Change of Supplier erroneous transfer processes via the Analogous processes and data transactions Data Transfer Catalogue (DTC)

Simple registration process involving New Connections and Disconnections Analogous processes and data transactions DTC

Supplier Agent functions are performed Registration and delivery of data to the centrally or by Wholesalers. No requirements Data Collection and Aggregation central settlement systems via Supplier for Change of Agent (CoA) processing. Meter Agents reading and submission only

Appointment and maintenance of Meter Operator functions are performed Meter Operations metering equipment via Supplier Agent by Wholesalers or accredited agents. No processes requirements for CoA processing

Market and bilateral based forward No requirement to provide forward usage. purchasing and usage notifications to Tariffs for customers are published by Wholesale Purchasing central systems. Market based upon half Wholesalers and set for the financial year hourly measurements ahead

Analogous settlement timetable for usage. Timetabled settlement runs for usage Settlements Daily usage centrally calculated. Cost centrally and imbalance cost / payments calculated and no imbalance cost / payments

Use of an analogous data transaction catalogue using XML transactions. These are facilitated via either a high volume machine to Use of the DTC via the Data Transfer Data Transfers machine interface or by web portal. Bilateral Network (DTN) for all regulated activities interactions with Wholesalers for Supplier Agent equivalent operations (e.g. meter operations)

Figure 8: Market operations in energy and water

17 Gemserv Water Competition - the missing link for multi-utility market development? Appendix 2: Risks and Opportunities Analysis - incumbent companies, challenger / disruptor companies and customers

RISKS OPPORTUNITIES

Loyal customers who don’t switch could lose out Choice - ability to switch to multi-utility provider

Perceived loss of regulatory protection Gain discounts from switching - water and energy

Multi-utility service provision - single bill, payment, customer Confusion - myriad of offers and tariffs service

Inappropriate marketing and sales activities Benefit from lower unit cost multi-utility retailers

Unregulated TPIs Improved service

Perception of “Jack of all trades” retailers - service deterioration Wider product range by some customer groups

Vulnerable customers may lose out Benefits from well-known national brand

Figure 9: Risks and Opportunities - Customers

RISKS OPPORTUNITIES

Potential loss of market share to multi-utility players - revenue Build new market and commodity revenue / profit stream by and profit losses multi-utility entry

Entry from lower unit cost players - or entrants operating on a Leverage brand and cross-sell to existing customers marginal cost basis

Larger competitors entering the market with marketing / Build loyalty by new offers and products, and protect good commercial experience, stronger national brands and deeper customers pockets Widen range of added value products and build non regulated Loss of best customers to cherry picking profits

Limited skills and expertise to develop multi-utility position Drive synergies and sweat existing customer infrastructure

No learning for future household market competition on Learn and position for the household market multi-utility

Brand - will it stretch; can it be leveraged outside core market? Leverage trust for water players over energy players

Easier operational entry for energy companies into water Build alliances and ventures to strengthen position

Figure 10: Risks and Opportunities - Incumbent water / energy companies

18 Gemserv Water Competition - the missing link for multi-utility market development? RISKS OPPORTUNITIES

Multi-utility requires significant investment - no base upon Build greenfield low cost business which to build

Competing with monopoly players Leverage technology for low cost operations

Level playing field risks Cherry pick best customers

Nimble and fast: move fast before others recognise the multi- Risk competitors can cross subsidise utility opportunity

Brand awareness may be low - requiring significant marketing Utilise smart marketing techniques against low innovation investment businesses

No loyal customer base upon which to cross-sell

Customer loyalty to incumbents may be high

Limited scope for discounts

Low profitability

Figure 11: Risks and Opportunities - Challenger / disruptor companies

19 Gemserv Water Competition - the missing link for multi-utility market development? If you would like to discuss anything further with us, please contact:

T: +44 (0) 20 7090 1022 E: [email protected] www.gemserv.com

London Office: 8 Fenchurch Place London EC3M 4AJ

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