One of the key questions for all participants in the water sector is what the effects of the introduction of competition on their businesses will be. The closest parallels are with the energy sector, and this article examines the key themes of price, customer service and industry changes that occurred in those sectors and how they may be replicated for water.
As with electricity and gas, the core commodity being supplied to customers is essentially the same between all suppliers. This removes the fundamental ability for suppliers to compete on the basis of product quality, which leads to suppliers seeking to differentiate themselves by price and customer service to attract customers.
For energy, in the early years after privatisation, the removal of costs associated with the nationalised industries led to consumers, particularly in the industrial and commercial sectors, becoming accustomed to annual decreases in price. Charges suppliers could levy on domestic customers were subject to specific price controls, which were later removed when it was felt that there were sufficient participants in the market for competition between suppliers to set prices, rather than government regulation. It is ironic that with more suppliers in the market today, the alternative policy agenda is being pursued.
Falling prices initially obscured the reality of open market competition, which is that customers are more open to changes in the core costs of commodity provision than they were under a regulated or nationalised industry. With energy, the extreme volatility in the oil markets between 2002 and 2011 ruthlessly exposed this element of the market structure.
This volatility led to two key developments in pricing. First industrial and commercial customers wished to know that they were purchasing the commodity closer to the wholesale market price. This has led to greater transparency in the commodity cost and management fee elements of those contracts and the development of flexible supply contracts that allow consumers to fix prices at times of their own choosing.
The second key change, in the domestic market, has been the evolution of short to medium term fixed price deals, under which the domestic customer is also invited to set prices at a time of their own choosing for periods of between one and three years.
In essence, both these tools avoid the customer blaming the supplier for changes in wholesale prices by placing the responsibility for making price judgements, a role that the consumer themselves play.
In terms of customer service, it has become common for the media to knock major utilities for the quality of the service they provide. This ignores that any interaction with the customer that is not automated further erodes an already narrow profit margin. Accordingly, efficient processes for customer management, interaction with the industry framework and the billing and debt recovery process are crucial to the success of any major utility.
One of the key drivers of costs to serve have been the implications updating an existing legacy system with new IT systems. There are cases where the evolution of new multi-utility providers has led to decreases in costs to serve simply because these providers can utilise a one stop shop service across a number of utilities based on new IT systems without legacy issues.
Key to the evolution of the electricity and gas sectors has also been the ability to survive supplier insolvencies (which most commonly have been down to managing cash flow issues) and the ability to transfer customers whether as part of a solvent reorganisation or in an insolvency situation.
In both electricity and gas, the supply of last resort provisions do allow Ofgem to force one or more suppliers to take on the customer base of an insolvent supplier. In theory, there is the risk that this transfers problems but, in practice, the existence of those provisions drives suppliers who are in financial difficulty to seek sales of portfolios ahead of the risk of losing their key asset, which is their customer portfolio. Together with industry processes that do allow for transfers of thousands of customers on any particular working day, this has to date maintained confidence in the overall system. However, were there to be an insolvency of a major supplier with four or five million customers, then the existing change of supplier software would not be able to cope.
The themes mentioned above all drive at the key issues of how suppliers in this market can differentiate themselves and maintain confidence in the competitive market. There are numerous lessons that can be adapted from other sectors and may allow the water sector to avoid some of the issues that have led to the current public perception of suppliers in the power and gas sectors.