The opening of the water market to competition could see entry by energy firms and potentially create the need for a multi-utility regulator, according to a major thought leadership paper published by Gemserv.

Gemserv has flagged up the potential for further convergence and restructuring of the utilities markets and the emergence of multi-utility players.

These could include established energy companies partnering with water specialists, water companies partnering with energy companies and the entry of specialist niche players and large customer centric brands such as Virgin, BT, Tesco and Sky into the market.

The research paper says the prospect is of critical importance for existing and new water retailers, but also for retailers in other utilities considering entry into the water market, or defending themselves against potential moves by water players into the energy market.

According to Gemserv, the implications of an emergence of a multi-utility market will be just as profound for other market actors, policy makers and regulators.

The central driver for the emergence of a multi-utility retail market rests with customers and whether they are likely to respond to a water-energy, or telecoms-water multi-utility offering – the paper says there seems a strong likelihood that they will.

Gemserv has assessed the available market research which is in the public domain for any evidence,  some of which currently relates to the household market which is not yet open to competition pending a decision by Government on the issue.

The Consumer Council for Water’s May 2016 report “Floating the idea: Household customer views on water market reform in England” asked customers a specific question regarding whether they would switch their water and sewerage services to another company already supplying energy or broadband services. Just over 50% indicated that they would be likely to switch to a one stop supplier.

A CCW business survey also suggested that trust is likely to be an important factor in building amulti-utility business, and indicated that water companies enjoy a significantly higher level of trust than energy companies.

Gemserv also refers to research findings published by Ofwat, some which are of interest in assessing the potential interest in multi-utility offerings. In qualitative and quantitative research with household customers, Ofwat tested four different models for a future household competitive market. One of these was a multi-utility model, which gained relatively strong support.

The idea of bundling in the multi-utility model is seen to offer some advantages, such as better price discounts as with current bundled product / services, and companies that are more advanced with customer services.

The research suggested that customers believe that the advantages of the multi-utility model are that it offers the convenience of a one stop shop for all utility services, including one bill. Customers also expect that bundled discounts and additional incentives (e.g. loyalty points) will reduce prices.

The disadvantages of the multi-utility model are seen as the apparent lack of regulatory control by Ofwat and the fewer protections that would be in place. Customers also worry that utility companies may become a ‘jack of all trades’ with no knowledge on how to deal with specific enquiries. Water bills might also go up for loyal customers who choose to remain with the incumbent, as well as concerns about beingmtied into bundled packages.

In terms of other research focussed on the business market, Gemserv refers to a recent survey published by Utilitywise which found that:

• half of businesses say they are likely to switch in April 2017;
• price is the main reason to switch, but bundles are also a draw; and
• beyond price, 7 in 10 are interested in a combined utilities package and 6 in 10 say a single utility bill would be a good reason to switch supplier.

Given tight retail margins, incumbent companies may be constrained regarding scope for price discounting; in addition to price offers, they may need to have a range of service offers, which could include multi-utility services to defend the market, Gemserv said.

“It is likely that a decision to open the water and sewerage household retail market would accelerate the trend towards multi-utility markets, allowing energy and water companies to fully compete for household customers. Opening up the market would bring a larger potential market for those considering entry”, the thought paper says.

Multi-utility retailing could facilitate a more joined up approach to energy and water savings, and bring greater awareness that saving water can also save energy and carbon, according to Gemserv. The use of new technologies could make switching easier for customers and cheaper for retailers, and promote water efficiency linked to energy efficiency. The roll out of smart metering in energy could also trigger a move towards automated meter readers and smarter technologies in water as customers’ expectations are raised.

Implementing multi-utility in companies could bring regulatory challenges

However, Gemserv is warning that  the introduction of multi-utility markets could bring regulatory challenges - fundamentally related to the separate existence of different regulatory obligations and rules operated by Ofwat and Ofgem (or Ofcom).

“Clearly, there is a risk surrounding overlaps and gaps in ensuring appropriate protection for customers…..If trends towards multi-utility offerings build momentum, it could raise fundamental questions about the creation of a multi-utility regulator.”

Risks and opportunities for incumbent water companies, new market entrants and customers

The paper has considered the potential risks and opportunities arising from the development of multi-utility markets for customers, incumbent water / energy companies, and disruptor / challenger brands.

For customers, apart from the benefits of choice, the development of a multi-utility market should potentially bring a wider product range and innovative offers. In research, some customers have concerns regarding perceived inappropriate sales and marketing and some loss of regulatory protection.

For water and energy companies, any development of a multi-utility market would present a risk of revenue and profit losses if a do nothing approach was adopted; a decision to enter into a multi-utility position would provide opportunities both from commodity and value added growth, and also present opportunities to drive synergies in operations.

Disruptor companies would be competing with relatively strong incumbent companies and would face many challenges in building a multi-utility business; however, they may be able to exploit the opportunities by moving fast and building a low cost and customer responsive business.

"Any entry by the Big Six energy retailers would be transformational"

One of the key conclusions in the paper is that there are clear signs of multi-utility market development in the English market and that any entry by the Big Six energy retailers would be transformational.

A number of ventures have been formed in advance of market opening, but it can be expected that alliances between energy and water players are under discussion, Gemserv added.

The operational requirements for moves from the energy market into water are less demanding than those for water players moving into energy; the paper describes the opening of the water market as a clear opportunity for energy players.

Finally, Gemserv said that any decision to open the household market for water will accelerate the momentum for multi-utility market development, warning:

“There are substantial risks for incumbents if multi-utility marketing develops and they are slow to defend against such moves”

Gemserv has been working closely with a number of water companies as market opening approaches by offering strategic consultation and assurance services to enable and assist them in preparing for competition, and ensuring compliance.

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

Click here to access Gemserv’s thought leadership paper in full