• Cognizant 20-20 Insights

Open Water: A Path to Success for Incumbents and New Players To succeed in the newly deregulated market, water utilities need to upgrade their IT systems to improve the customer experience, develop differentiated offerings and enable competitive pricing.

Executive Summary ity and gas deregulation. Based on our findings, we make recommendations for water utilities to The England is set for deregu- succeed in a deregulated industry by taking a lation in the downstream value chain starting holistic approach. April 2017 for all non-household customers. The changes stipulated by the UK Open Water Open Water: An Introduction program1 present both challenges and oppor - tunities for market participants. Regulatory Competition is not new to the UK water market. agencies set the ball rolling with the publication Two arrangements are currently available to of the “Water for Life” whitepaper in December non-household customers: “supplying for large 2011.2 Since then, a considerable amount of work users” and “supplying in a defined area.” For has been done to develop the MAP4 (post-ven- large water use (five million liters per year in dor MAP) market architecture plan.3 England and 50 million liters per year in ), customers can choose their However, a recent independent review4 reveals services from over a dozen service providers. further work is needed to open the market as planned. Additionally, market participants must With the defined-area arrangement, providers be ready with their systems and processes can deliver water and sewerage services or before the go-live date of October 2016 for com- water-only services for a particular geography mencement of the pilot period. in which an existing appointed water company already operates. Roughly 14 companies are In this white paper, we analyse similar market registered for this setup. Despite these options, deregulation implementations in the UK, such only one large-use customer has switched from as the Scottish open water market, and electric- its existing supplier to date.

cognizant 20-20 insights | june 2016 Water Value Chains Post Deregulation

Water Water Retail Water Extraction Water Treatment Transmission, Services Distribution

Water Value Chain Waste-Water Value Chain Non-Household Customers Waste Water Waste Water Waste Water Waste Water Collection, Disposal Treatment Retail Services Transmission

Upstream/Wholesale Downstream/Retail

Figure 1

Other global deregulated markets have while both existing and new retailers will provide introduced innovative approaches to managing downstream services. The retail function of resources efficiently and delivering benefits to existing utilities will need to demonstrate an customers, including reduced bills, better services arm’s length relationship with the wholesale and a range of tariff options. For example, services side. claims to have saved more than £72.6 million in water charges, more than £54 In addition to wholesalers and retailers, another million in water efficiency, more than 24 billion participant in the deregulated scenario will be liters of water volume and over 42,000 tonnes in market operators (see Figure 2). Market operators 5 will provide the operational capability needed to CO2 emissions. support the market, such as delivering IT systems The intent of the Open Water program in that enable registration, customer switching and England and Wales was to enable competition settlement between wholesalers and retailers. in the retail segment to supply water and waste- water management services to non-house- , the organisation responsible for economic hold customers. In England, all non-household regulation of the water sector in England and customers will be able to choose their suppliers, Wales, will continue to play an important role in while in Wales, non-household customers who use market governance and will also be responsible more than the current 50 million liter-per-year for maintaining regulations, such as the Market cap will have supplier choice as per the existing Arrangements Code and the Wholesale-Retail arrangement. Code, as well as providing charging rules, water supply and sewerage licenses, instrument of After deregulation, the market will be separated appointments, eligibility guidance, license appli- into upstream and downstream segments (see cation guidance, the interim supply code, the Figure 1). Existing utilities – which will be known retail exit code, transition schemes, etc. as wholesalers – will provide upstream services,

Open Water Market Structure

Wholesalers Use and charge Information Operations & service Information Ofwat Ofwat Money Retailer Market Retailer Operator

Non-Household Customers

Figure 2

Wholesaler cognizant 20-20(Scottish insights Water)2 Water Industry Central Market Agency Commission for (Effective market (Policy & licensing) operation)

Licensed Suppliers/Retailers

Non-Household Customers Wholesalers Use and charge Information Operations & service Information Ofwat Ofwat Money Retailer Market Retailer Operator

Non-Household Scottish Water ImplementationCustomers

Wholesaler (Scottish Water) Water Industry Central Market Agency Commission for Scotland (Effective market (Policy & licensing) operation)

Licensed Suppliers/Retailers

Non-Household Customers

Figure 3 Scottish Water Implementation England and Wales have 32 incumbent service The Scottish water market implementation providers for water and sewerage services. provides a business case for the industry changes This adds to the complexity of managing impending for England and Wales. Retail deregu- transactions among the various wholesalers lation for non-domestic customers in the Scotland and retailers. To this end, the new Wholesale- water market became operational in April 2008 Retail Code and wholesale contract have been and impacted roughly 130,000 non-domestic or included in the new market arrangement. non-household customers. Estimated benefits UK Gas and Electricity Deregulation include about £138 million in 30 years, with £37 million counted up to 2015.6 In comparison, the electricity and gas market is more operationally intensive, given the transac- The Scottish market representatives are playing an tions among market players and the multiple instrumental role in shaping the open water market complexities of the end-to-end implementation. structure, including input on maintaining an arm’s Unlike the retail-only deregulation in the water length relationship between incumbent suppliers market, the gas and electricity markets are open and their retail units; managing the switching to competition for almost the entire value chain element, connections, consumption data and data of wholesale, transmission and distribution, and quality; applying of performance penalties. retail. However, this market provides a good indicator of how robust processes and systems The structure of the open water market in the need to be in order to operate in a deregulated UK is similar to Scotland’s model (see Figure 3). market. The relationships among generation, The major difference is that Scotland has only transmission and distribution companies provide a single wholesaler – Scottish Water – while useful case studies on how business arrange-

UK Electricity Market Structure

GENERATION TRANSMISSION DISTRIBUTION Power Station Transmission Company Distribution Companies Sales System Operator

Balance Responsible Network Access Management Spot Market/ Wholesale Power Exchange Metering

Energy Service Providers Customer Financial Market Aggregator

Energy Ownership Money Product Service

Figure 4

cognizant 20-20 insights 3 UK Gas Market Structure

Upstream Midstream Downstream

Foreign LNG Power Production Plant Imports Entry Sell Spot Market Buy Exit Distribution Metering Plant Points Points Domestic Well Locals Shipper Transmission Trunk Line Shipper Utility Metering Production Head Factory Foreign Well Storage Production Head Imports Stall Retrieve Distribution Metering Residential Exploration/Production Companies Transmission Companies Distribution Companies

Figure 5 Comparative Analysis of Deregulation in Various UK Utilities Parameter Scottish Water Market UK Electricity UK Gas Number of 13 (April 2014) Non-domestic (June 2015): 59 (24 provide both Retailers 18 (March 2015) gas and electricity; 18 provide electricity only, 17 provide gas only). Domestic (June 2015): 31 (26 provide both gas and electricity; 2 provide electricity only, 3 provide gas only). Top Retailers • Business Stream, Scottish Water • British Gas • British Gas • Commercial Services, Thames • E.ON • Total Gas & Power Water • EDF • Carona • • RWE npower • Gazprom • Veolia Water • Scottish Power • SSE • Commercial Water Solutions • SSE • E.ON New Retail 2013-2014: 4 new players Non-domestic Entrants 2014-2015: 5 new players 2005-2010: 8 new players 2012-2015: 18 new players Domestic 2012-2013: 9 new players 2013-2015: 8 new players Cross-Market United Utilities, , Centrica, Scottish Power, E.ON, EDF, RWE, SSE, Entrants , Veolia Water, Gazprom , ,

Customer 5% switched Domestic (2002-2014): 70% switched among Switch Rate 50% renegotiated contracts electricity customers and 82% for gas customers. Switch rate 2014: Approximately 3 million for electricity customers and 2 million for gas customers. Non-domestic (2002-2014): 71% switched. Reason for switch: price (90%); customer service (11%); nearing contract renewable period. Note: Switching rates were in decline from 2008 and spiked in 2013. Post-Reform More than 60% of non-household Prices dropped through 2004 and have increased Pricing customers in Scotland are now ever since for both power(8%) and gas (12%) in Trends paying lower prices, receiving the last 10 years. better service or both in the five years since deregulation.

Source: This table contains data analysed from numerous sources, including “Domestic Retail Market Review Evaluation Survey: 2015,” Ofgem, September 2015 (https://www.ofgem.gov.uk/publications-and-updates/domestic- retail-market-review-evaluation-survey-2015-results), “Water and Sewerage Services in Scotland: An Overview of the Competitive Market,” Water Industry Commission for Scotland, October 2013, (http://www.watercommission.co.uk/ UserFiles/Documents/WICSHouseofCommonsPaper(C).pdf), and the Central Market Agency website. Figure 6

cognizant 20-20 insights 4 ments should be managed between wholesalers arrangement, and confusion persisted following and retailers. deregulation.8 Although communicating the new market arrangement is considered the responsi- • Electricity market: Unlike the big-bang bility of regulatory bodies and the government, approach used for the gas market, deregula- utilities can engage in proactive and multi-chan- tion for the UK electricity market was phased nel marketing to build customer confidence and in, beginning with large customers in 1990, gain business. and followed by medium-use custo mer in 1994 and all customers by 1998 (see Figure 4, New retailers should showcase their capabili- page 3). ties and reliability as a service provider to win customers, and offer them a quick, streamlined The gas market: The UK gas market was • and hassle-free switching process. The CCW deregulated in 1996 for all domestic and survey, however, emphasised the ineffective- non-domestic customers, impacting roughly ness of hard-sell marketing and the need to 874,000 non-domestic customers (see Figure make a positive first impression on customers, 5, previous page). as more than half said they would return to their Lessons Learned from Deregulation incumbent supplier if service levels were not as By analysing deregulation activity in related they expected. markets (see Figure 6, previous page), we can The importance of marketing is also underlined by conclude that many retailers in the UK water research conducted by Social Market Research on market will encounter new market arrangements, small and medium-size customers in the Scottish including incumbent service providers, Scottish water market, which found limited awareness market retailers and perhaps a few cross-market among most respondents about the deregu- players, such as electricity and gas providers that lated water market and their ability to switch could sell packaged utility offerings of electricity, suppliers. When customers were made aware of gas and water services. Almost all the retailers the available service offerings, they were willing from the Scottish market have indicated interest to explore switching options. in the England and Wales market. Though there is no clarity yet on which geographies the new Establish Competitive Pricing retailers will target, incumbent players from Any new market arrangement implementa- England who are currently part of the Scottish tion is expected to provide monetary benefits, market will have an upper hand given their which can take multiple forms, such as efficient experience in both geographies. operations, lower retail prices for customers, Retain and Win Customers with investments, innovation, etc. The Scottish market Differentiated Offerings study shows more than 60% of non-household customers in Scotland now pay lower prices, We estimate that customer switch rates under receive better service or a combination of the the new market arrangement will not be as high two in the five years since the market opened.9 as what was witnessed in the electricity and gas A similar trend is playing out in the electricity and markets, but would be similar to or higher than gas markets following deregulation. that in the Scottish market (almost 5% switched retailers and 50% renegotiated their contracts). Retailers that have already started setting up and aligning their retail operations with the A survey by Consumer Council for Water (CCW), open water initiative will have an upper hand in which included participants from non-household/ planning and setting retail prices. Because Ofwat non-domestic customer segments, shows that will determine wholesale pricing rules, there will low-spend customers might switch suppliers if be little room for negotiation to increase the offered a better price; high-spend customers retail margin. As a result, each retailer must study would also do so if offered better value for the its own customer base and service offerings and money.7 New retailers, therefore, should offer not develop suitable pricing. To do this, utilities need only competitive pricing but also differentiated to gain in-depth knowledge of customers so they service offerings. can customise pricing and service offerings. Market it Right For further optimisation, the operational utilities In other markets, such as in Scotland, many across markets can partner to carry out joint customers were unaware of the new market

cognizant 20-20 insights 5 operations. A good example is Water2busi- retain customers in the deregulated landscape ness, a joint venture between and (see Figure 7). , which will provide retail services to businesses across the UK. • Strategise: Based on its capabilities, each retailer should define its business strategy Ensure Regulatory Compliance and develop a plan as to which geographies Market participants will need to work within the or customers to target and which bottom regulatory framework defined in the new market lines to maintain. Because non-household structure. As mentioned above, incumbent customers’ requirements vary according to retailers will need to maintain an arm’s length their operations, providers need to conduct relationship with their wholesale businesses to customer profiling and segmentation to ensure fair competition. This means setting up understand their needs and map their capabili- completely new facilities, teams, operations, ties accordingly. Capability gaps should be filled processes, IT systems, etc. Scottish Water, for through a mergers and acquisitions strategy or example, separated its retail business by setting through partnerships with trusted third-parties up a new company, Business Stream, in 2006. and other utilities. Invest: The business strategy will determine In Scotland, all retailers use standard forms, • investments to be made in people, processes processed via central e-mail systems, which and technology. Robust IT systems and ensures incumbent retailers’ transactions are processes, as well as skilled talent, will be processed in the same way as any other retailer’s. key to smooth operations. Many utilities have Utilities such as United Utilities, Thames already begun investing heavily to improve Commercial Services, Severn Trent Services, etc. their various lines of business. Wholesalers have already set up separate business units. will need to align their existing processes and Other regulations, such as those related to the systems with the new market scenario. wholesale contract, Wholesale-Retail Code and Defining new processes, such as customer Market Arrangements Code of the new market onboarding, billing, switching, managing arrangement and their ownership, are still being breakdowns, etc., will require investment. The finalised as per the Market Architecture Plan systems impacted most heavily will be the (MAP). In addition, all market participants will need customer information system (CIS), work to conduct operational and regulatory reporting. management and contract management systems. Retailers and the market operator will Looking Ahead: A Plan for Success need to set up all systems and processes for CIS, Providers’ operational and customer service sales and marketing, regulatory compliance, processes will be challenged by the new com- wholesaler management, vendor management, petitive market scenario. Retailers can follow etc. Both wholesalers and retailers will need to a four-step process to ensure they can win and establish a strong communication system to

Open Water Approach

STRATEGISE INVEST PLAN OPERATE & MONITOR

• Market • People • Systems • Systems • Bottom lines • Process • Operations • Processes • Technology • Administration • Operations

• Target market areas • Skilled human • Customer services • Account • Customer profiling resources • Sales planning management and segmentation • Streamlined process • Marketing planning • Customer service • Service offerings • IT systems • Support functions • Communications • Mergers and • Offices and • Operations planning management acquisitions infrastructure • IT planning • Billing and payments • Vendor/utility • Regulatory planning • Work management tie-ups, partnerships

Figure 7

cognizant 20-20 insights 6 interact with each other and with the market daily operations, as well as support functions, operator. such as human resources, finance, administra- Market operator systems and processes are tion, legal, regulatory, etc. As most systems defined in the Open Water market codes. and processes will be IT-intensive, substantial Retailers and wholesalers will need to work IT planning will be necessary. closely with the market operator to understand • Operate and monitor: Once the market goes how access and communications will work. live or utilities are in operation, emphasis needs Another major investment for retailers is to be placed on running operations as planned, related to office space and infrastructure. along with a strong monitoring framework to The decision to establish a single location or track operations against the plan. The most multiple ones will depend on the company’s critical systems and processes will be those with operational model. direct customer touchpoints, such as websites, • Plan: Once the systems and processes are in telephony, customer service, CIS, sales and place, utilities should plan how their systems, marketing. Back-end systems and processes, operations and administration will work to such as account management, communica- meet their targets. These include customer tions management, billing and payments, work service activities, customer queries, mainte- management, etc., should enable the front-end nance work, etc. Operations planning will be systems mentioned above. required for account management and related

Footnotes 1 “Open Water,” UK Government, http://www.open-water.org.uk/.

2 “Water for Life,” Department for Environment Food and Rural Affairs, December 2011, https://www.gov.uk/ government/uploads/system/uploads/attachment_data/file/228861/8230.pdf.

3 “Post Vendor MAP” Open Water, September 2015, http://www.open-water.org.uk/download- documents/?cat=post-vendor-map.

4 “Retail Market Opening Programme Review,” UK Government, May 28, 2015, http://www.ofwat.gov.uk/ wp-content/uploads/2015/11/rpt_com201506baselinereview.pdf.

5 Business Stream website, http://www.business-stream.co.uk/about-us/what-we-do.

6 “Water and Sewerage Services in Scotland: An Overview of the Competitive Market,” Water Industry Commission for Scotland, October 2013, http://www.watercommission.co.uk/UserFiles/Documents/ WICSHouseofCommonsPaper(C).pdf.

7 “Uncharted Waters: Non-Household Customers’ Expectations for Competition in the Water Industry,” Consumer Council for Water, March 2014, http://www.ccwater.org.uk/blog/2014/06/19/uncharted-waters- non-household-customers-expectations-for-competition-in-the-water-industry/.

8 “Navigating Unfamiliar Waters: SMEs’ Awareness and Experience of the Water Market in Scotland,” Social Market Research, March 2013.

9 “Water and Sewerage Services in Scotland: An Overview of the Competitive Market,” Water Industry Commission for Scotland, October 2013, http://www.watercommission.co.uk/UserFiles/Documents/ WICSHouseofCommonsPaper(C).pdf.

cognizant 20-20 insights 7 References • “Market Blueprint,” Open Water, January 2014, http://www.open-water.org.uk/media/1041/market- blueprint.pdf. • Jochen Kreusel, “Entering a New Epoch,” Transmission & Distribution World, April 1, 2015, http:// tdworld.com/sponsored-articles/entering-new-epoch. • “Central Market Agency: Business Review, 2014-2015,” Central Market Agency, 2015, http://www. cmascotland.co.uk/kcfinder/upload/files/Business%20Review/CMA%20Business%20Review-2014- 15(1).pdf. • “Retail Energy Markets in 2015,” Ofgem, September 2015, https://www.ofgem.gov.uk/publications- and-updates/retail-energy-markets-2015. • “Market Operator Target Operating Model,” OpenWater, January 2014, http://www.open-water.org.uk/ media/1042/market-operator-target-operating-model.pdf. • “Water and Sewerage Retail Competition in Scotland,” Water Industry Commission for Scotland, February 2012, http://www.watercommission.co.uk/UserFiles/Documents/Water%20and%20 sewerage%20competition%20in%20Scotland.pdf. • “Comments from Scottish Water on Open Water Market Architecture Plan,” Scottish Water, July 2014, http://www.open-water.org.uk/media/1253/140814-comments-from-scottish-water-on-open- water-market-architecture-plan-final.pdf. • “Wholesale and Retail Charges: A Consultation,” Ofwat, January 2014, http://www.ofwat.gov.uk/con- sultation/wholesale-and-retail-charges-a-consultation/. • “Consultation on Wholesale and Retail Charges for 2015-16 and Charges Scheme Rules,” Ofwat, May 2014, http://www.ofwat.gov.uk/wp-content/uploads/2015/10/pap_con20140530charges.pdf. • “Draft Determination Representation: Annex RNHH02--Additional Costs of Market Opening,” Thames Water, October 2014, http://www.thameswater.co.uk/ofwat/Appendices/Appendix%20E/RNHH02.pdf. • “Ofwat’s Review of Competition in the Water and Sewerage Industries: Part II,” Ofwat, May 2008, http://s3-eu-west-1.amazonaws.com/media.aws.stwater.co.uk/upload/pdf/Competition_consultation_ part_II.pdf. • “Default Tariffs in the Contestable Retail Market for Water and Sewerage Services: The Design and Implementation Issues,” Economic Insight Ltd., August 2012, https://www.thameswater.co.uk/your- business/business-regulatory-safeguards-in-deregulated-markets.pdf. • Ruud Weijermars, “Value Chain Analysis of the Natural Gas Industry,” Journal of Natural Gas Science and Engineering, Vol. 2, May 2010, http://www.alboran.com/files/2013/07/ES-3.pdf. • “Domestic Retail Market Report,” Ofgem, June 2007, https://www.ofgem.gov.uk/ofgem-publica- tions/38491/drmr-march-2007doc-v9-final.pdf.

cognizant 20-20 insights 8 About the Authors Ankit Pande is a Consultant within Cognizant Business Consulting’s Energy and Utilities Practice. He has over five years of experience in the energy & utility and retail domains in the IT services and consulting industry. At Cognizant, Ankit provides consulting and big IT project implementations that include process improve- ments, business analysis and digital transformation. He has strong experience in work management, asset management, customer experience management and operations management in the utilities industry (water, electricity and gas). Ankit holds a PGDISEM from the National Institute of Industrial Engineering (NITIE Mumbai) and a B.TECH in production engineering from the College Of Engineering, Pune. He can be reached at [email protected].

Gaurav Hegishte is a Consultant within Cognizant Business Consulting’s Energy and Utilities Practice. He has over five years of experience in the product and resources industry. At Cognizant, Gaurav provides services to utility clients related to process improvement and digital transformation. He holds a PGDIM in industrial management from the National Institute of Industrial Engineering (NITIE Mumbai). Gaurav can be reached at [email protected].

Puneet Kohli is a Senior Consultant within Cognizant Business Consulting’s Energy and Utilities Practice. He has over eight years of experience in energy and utility consulting, operations and maintenance in the energy industry. At Cognizant, Puneet provides process improvement and digital transformation services to clients. He holds a PGDM from the Indian School of Business. Puneet can be reached at [email protected].

About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process services, dedicated to helping the world’s leading companies build stronger businesses. Head- quartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technol- ogy innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approxi- mately 233,000 employees as of March 31, 2016, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

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