Deregulation in the Water Industry – time to sink or swim?
A short personal history on how data & insight supported utilities as they move into de-regulated markets.
A little bit of history – The energy sector in the 1990s
British residential energy markets were opened to competition between 1996 and 1999. The gas industry, privatised in 1986, was a vertically integrated company with a monopoly in supply throughout Great Britain. I joined British Gas South West in 1987, and soon found myself heading a project to develop the first integrated single customer view database, with an IT team of business analysts and developers. Fantastic experience. The initial development took 18 months and the resulting platform took nightly feeds of data from retail, service, gas supply systems, overlaid Mosaic and built information against both individual households but also businesses.
As a direct marketing unit, we generated daily direct mail and selective billing campaigns via an ICL mainframe, using Querymaster (essentially green on black SQL coding). This was still the 1980s with no internet, no email, we still had typing pools, but (lucky us) we had pcs with 4 mb of RAM running Amipro and 123 (spreadsheet package), as well as the first databases albeit on mainframe! We started getting into heavier analytics, and were using probit and regression via SPSS-X on mainframe in the OR department, and even got some disks with early CHAID version. I remember presenting the work at a CCN (later Experian) conference in Nottingham, and how the CHAID models were then applied into selection process. We were hugely successful in getting adoption of direct debit for bill payment, selling service contracts, central heating systems, specialist technical services into the commercial base etc. Database marketing, in all its’ power and glory.
So competition in residential markets was introduced for the first consumers in south west England in 1996. Strangely the place in the British Gas network, where there was the greatest depth of information in the database systems had been built up. By then I had left and as a consultant was engaged in developing a national centralised database – consolidating the data from all the old gas regions, with some of the original IT team. So I was also given the job of building the first forecasting and loss model to rollout to the rest of the then centralised database for the “Public Gas Supply” division.
The models were used to extrapolate the amount of revenue loss, and the types of customers who would leave, based on a combination of factors such as annual consumption data, payment method, household size, and Mosaic type. These models were updated as actual data appeared in the form of customers switching. In reality, I had probably under-estimated on the original models– although this is also a question of timing. What emerged was that the customers who switched tended to be the most valuable, “savvy” and essentially the most to gain by switching to lower tariffs. By 2005, British Gas only retained 53% of their original residential monopoly, Powergen had 14%, Southern & Scottish Energy, 10%, both Npower and Scottish Power had 9%, EDF had 5%. The big six suppliers which dominate the sector had emerged. Switching had taken place, and of course it was necessarily the volume but the value of the business that switched (this is even more the case on commercial business than residential).
By the mid- 2000s, the game had changed. It was then about segmentation, tariff proliferation, added value services, cost-efficiencies, risk profiling, retention and acquisition strategies. Consumers were fully aware there was a switching option, even if inertia still existed for a large volume (often the low value). As Talking Numbers we continued to support British Gas with their segmentation, modelling and were linking back attitudinal data through a proprietary system called STARS. We supported and worked with telcos, and Calor Gas (the domestic LPG market also opened up to switching, with rules around tank ownership changed in favour of the consumer); but refrained from working with any of the other big 6. In 2011, we founded Adroit, and have since worked with utilities such as SSE, and a number of the water utilities.
Deregulation in the Water Industry -2008 to 2017
In 2008, Scotland became the first country to deregulate its’ water market. By then we worked as “Tangible Data” with Business Stream to develop their first segmentation and help apply it back to their systems. The segmentation enabled them to achieve a whole raft of improvements and focus on different audiences to cross-sell services, improve water efficiency and help provide a more focused set of services. They estimate that in the first 5 years post deregulation they achieved:
- greater than £35 million in water efficiency savings
- a 26% increase in customer satisfaction
- Making £30m worth of discounts available to customers
- Saved public sector customers more than £20m in three years
The wider benefits to the Scottish market deregulation are explored in the Water Commission’s October 2013 paper http://www.watercommission.co.uk/UserFiles/Documents/WICSHouseofCommonsPaper(C).pdf
Switching for large customers (>5m litres at a single site) became possible in England and Wales. We worked with Thames Water to develop similar segmentation and help them scope the value and actual size of their commercial customer base. Earlier this year, Thames took the decision to divest their commercial base and focus solely on the residential market.
The future – 2017 onwards
So full UK deregulation will happen in 2017, meaning that all businesses in England will get the same power as Scottish businesses to choose who supplies them with water, waste water and drainage services. This will expand the current £540 million-a-year water retail market to one worth £2.5 billion. Ofwat have also mooted that the retail market in England with around 20 million households could also open up to competition too. http://www.bbc.co.uk/news/business-37403368. It is estimated that in England there are around 20 wholesalers (potentially more may enter/consolidate) and around a million customers. Like energy companies before them, the challenge for each of the wholesalers is to decide how to operate in this new marketplace.
So what will deregulation mean in the Commercial Water Sector?
What we know from past experience is that businesses are more aware than general consumers and more prone to switching. In particular, businesses which operate across multiple sites and different regions will have an advantage to deal with just one supplier instead of lots of separate ones. This consolidation of buying power should bring more competitive tariffs and even more focus on service delivery. Of course if customers have a particular problem or disagreement with one supplier, businesses have more power of recourse to switch away.
Generally the experience shows business customers will switch to lower their costs if a better deal exists. This opens the door to some of the smaller suppliers who can often deliver utilities at better rates than larger companies – so regional and vertical sector tariffs could enable targeting of specific audiences or markets.
Whilst the dynamics of this more competitive marketplace has yet to be revealed, planning should be well advanced, as early entrants to the market with new tariffs will tend to steal a march on competitors and will secure the longer term contracts and prize “cherries”. So we can see the need for organisation to prepare and understand the opportunities and risks in the new world. The forward thinking ones have already been doing but as the deadline creeps closer it’s clear that some changes are on the way. Competent wholesalers should emerge and be capable of contracting with retailers quickly, transparently and fairly. If they fail to do this then buyers will look elsewhere.
The phoney war. In some deregulations, the market can be slow to respond. If the majority of suppliers to a market are slow to act or awareness of the changes are slow to trickle out to consumers, then switch rates can be very small. At this point, the regulator will engage in market “prodding” to encourage organisations to be acquisitive and ensure that this rate increases. The Water Commission notes that in the case of Business Stream initial switching rates were very slow – with essentially only 2% of their base switching in the first 4-5 years, but an acceleration coming in the fifth year. Given the precedent has been set, we would anticipate that the English market will have faster rates of switching.
Applying data & insight in the Commercial Water Sector
Water utilities are following some of the energy market experience in understanding both the risks applied to their existing customer base, and developing risks scores for customers. The precursor to this work is often to establish an “overall customer value” for multi-site businesses. Variance in recording organisation names, and the need to link “owned” businesses is tricky at the best of times, so we support customers with their data management and help to cleanse and enhance data. This has a huge impact, actually concentrating the perceived number of customers to a lower number and a much higher value. This needs to be married with operational behaviour. Some organisations will buy services centrally, others at site level. Billing and usage recording is typically at meter level. A large site such as a hospital can have multiple points, relating to different billing points, with differing invoice centres – so it is not surprising that billing address data varies and needs careful consolidation for segmentation.
Typically once an accurate view of the customer base and value is established additional data such as business type, sector, cost to service, customer satisfaction information can be added to develop risk scores and segmentations. Potential acquisition can then be enhanced by identifying out of area sites/HQs that are already serviced, and the water utility has some form of existing relationship, to those other “attractive” businesses which could be a “switch target”. As switching develops spotting those organisations that show interest is key, and we would anticipate the use of conventional sales methods, IP trackers (to identify organisations visiting your website) and CRM platforms to all play their part in identifying and securing switchers.
What is for sure that organisations that want to survive in the new competitive environment will be investing in their systems, data and skills to understand and respond to the dynamics of the new marketplace, and gain their share of the £2.5bn on offer.
 Ofgem Domestic Retail Market Report – September 2005 (London:Ofgem 2006)
 The rate of customer switching has also followed a similar pattern. Business Stream’s market share as at June 2013 was just under 98%. Since June it has fallen by over 2% to just over 95%. This means that over one-third (by wholesale charge volume) of the total switches away from Business Stream since April 2008 took place in the last six months. Source: http://www.watercommission.co.uk/UserFiles/Documents/WICSHouseofCommonsPaper(C).pdf