Cognizant 20-20 Insights

Open Water: A Path to Success for

Incumbents and New Players
To succeed in the newly deregulated England market,
water utilities need to upgrade their IT systems to improve
the customer experience, develop differentiated offerings
and enable competitive pricing.

Executive Summary
The England water industry is set for deregulation in the downstream value chain starting
April 2017 for all non-household customers.
The changes stipulated by the UK Open Water
program1 present both challenges and opportunities for market participants. Regulatory
agencies set the ball rolling with the publication
of the Water for Life whitepaper in December
2011. 2 Since then, a considerable amount of work
has been done to develop the MAP4 (post-vendor MAP) market architecture plan. 3
However, a recent independent review4 reveals
further work is needed to open the market as
planned. Additionally, market participants must
be ready with their systems and processes
before the go-live date of October 2016 for commencement of the pilot period.
In this white paper, we analyse similar market
deregulation implementations in the UK, such
as the Scottish open water market, and electric-

cognizant 20-20 insights | june 2016

ity and gas deregulation. Based on our findings,

we make recommendations for water utilities to
succeed in a deregulated industry by taking a
holistic approach.

Open Water: An Introduction

Competition is not new to the UK water market.
Two arrangements are currently available to
non-household customers: supplying for large
users and supplying in a defined area. For
large water use (five million liters per year in
England and 50 million liters per year in Wales),
customers can choose their water supply
services from over a dozen service providers.
With the defined-area arrangement, providers
can deliver water and sewerage services or
water-only services for a particular geography
in which an existing appointed water company
already operates. Roughly 14 companies are
registered for this setup. Despite these options,
only one large-use customer has switched from
its existing supplier to date.

Water Value Chains Post Deregulation

Water Extraction

Water Treatment

Water
Transmission,
Distribution

Water Retail
Services

Water Value Chain

Waste-Water
Value Chain

Waste Water
Disposal

Waste Water
Treatment

Waste Water
Collection,
Transmission

Upstream/Wholesale

Non-Household
Customers

Waste Water
Retail Services
Downstream/Retail

Figure 1

Other global deregulated markets have

introduced innovative approaches to managing
resources efficiently and delivering benefits to
customers, including reduced bills, better services
and a range of tariff options. For example,
Scottish Water claims to have saved more than
72.6 million in water charges, more than 54
million in water efficiency, more than 24 billion
liters of water volume and over 42,000 tonnes in
CO2 emissions.5
The intent of the Open Water program in
England and Wales was to enable competition
in the retail segment to supply water and wastewater management services to non-household customers. In England, all non-household
customers will be able to choose their suppliers,
while in Wales, non-household customers who use
more than the current 50 million liter-per-year
cap will have supplier choice as per the existing
arrangement.
After deregulation, the market will be separated
into upstream and downstream segments (see
Figure 1). Existing utilities which will be known
as wholesalers will provide upstream services,

while both existing and new retailers will provide

downstream services. The retail function of
existing utilities will need to demonstrate an
arms length relationship with the wholesale
services side.
In addition to wholesalers and retailers, another
participant in the deregulated scenario will be
market operators (see Figure 2). Market operators
will provide the operational capability needed to
support the market, such as delivering IT systems
that enable registration, customer switching and
settlement between wholesalers and retailers.
Ofwat, the organisation responsible for economic
regulation of the water sector in England and
Wales, will continue to play an important role in
market governance and will also be responsible
for maintaining regulations, such as the Market
Arrangements Code and the Wholesale-Retail
Code, as well as providing charging rules, water
supply and sewerage licenses, instrument of
appointments, eligibility guidance, license application guidance, the interim supply code, the
retail exit code, transition schemes, etc.

Open Water Market Structure

Wholesalers
Ofwat

Ofwat

Use and charge

Information

Retailer

Market
Operator

Money

Retailer

Non-Household
Customers
Figure 2

Wholesaler
cognizant 20-20(Scottish
insights Water)2
Water Industry
Commission for Scotland
(Policy & licensing)

Operations &
service Information

Central Market Agency

(Effective market
operation)

Money

Market
Operator

Retailer

Retailer

Non-Household

Customers
Scottish Water Implementation

Wholesaler
(Scottish Water)

Water Industry
Commission for Scotland
(Policy & licensing)

Central Market Agency

(Effective market
operation)

Licensed Suppliers/Retailers

Non-Household Customers

Figure 3

Scottish Water Implementation

The Scottish water market implementation
provides a business case for the industry changes
impending for England and Wales. Retail deregulation for non-domestic customers in the Scotland
water market became operational in April 2008
and impacted roughly 130,000 non-domestic or
non-household customers. Estimated benefits
include about 138 million in 30 years, with 37
million counted up to 2015.6
The Scottish market representatives are playing an
instrumental role in shaping the open water market
structure, including input on maintaining an arms
length relationship between incumbent suppliers
and their retail units; managing the switching
element, connections, consumption data and data
quality; applying of performance penalties.
The structure of the open water market in the
UK is similar to Scotlands model (see Figure 3).
The major difference is that Scotland has only
a single wholesaler Scottish Water while

England and Wales have 32 incumbent service

providers for water and sewerage services.
This adds to the complexity of managing
transactions among the various wholesalers
and retailers. To this end, the new WholesaleRetail Code and wholesale contract have been
included in the new market arrangement.

UK Gas and Electricity Deregulation

In comparison, the electricity and gas market is
more operationally intensive, given the transactions among market players and the multiple
complexities of the end-to-end implementation.
Unlike the retail-only deregulation in the water
market, the gas and electricity markets are open
to competition for almost the entire value chain
of wholesale, transmission and distribution, and
retail. However, this market provides a good
indicator of how robust processes and systems
need to be in order to operate in a deregulated
market. The relationships among generation,
transmission and distribution companies provide
useful case studies on how business arrange-

UK Electricity Market Structure

GENERATION

TRANSMISSION
Transmission Company

Sales

System Operator

Distribution
Companies

Balance Responsible
Wholesale

Financial Market

Spot Market/
Power Exchange

Network Access
Management

DISTRIBUTION

Power Station

Metering
Energy Service
Providers

Customer

Aggregator
Energy

Figure 4

cognizant 20-20 insights

Ownership

Money

Product

Service

UK Gas Market Structure

Upstream

Midstream

Foreign
Production

LNG
Plant

Imports

Domestic
Production

Well
Head

Locals

Foreign
Production

Well
Head

Imports

Entry
Points

Sell

Shipper

Downstream

Spot Market

Buy

Transmission Trunk Line

Stall

Exploration/Production Companies

Storage

Exit
Points

Shipper

Retrieve

Distribution

Utility
Distribution

Transmission Companies

Metering

Power
Plant

Metering

Factory

Metering

Residential

Distribution Companies

Figure 5

Comparative Analysis of Deregulation in Various UK Utilities

Parameter

Scottish Water Market

UK Electricity

Number of
Retailers

13 (April 2014)
18 (March 2015)

Non-domestic (June 2015): 59 (24 provide both

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

Commercial Services, Thames E.ON
Water
EDF
United Utilities
RWE npower
Veolia
Water

Scottish Power
Commercial
Water
Solutions

SSE

New Retail
Entrants

2013-2014: 4 new players

2014-2015: 5 new players

Cross-Market United Utilities, Thames Water,

Severn Trent, Veolia Water,
Entrants
Northumbrian Water, Anglian
Water, South West Water

UK Gas

British Gas
Total Gas & Power
Carona
Gazprom
SSE
E.ON

Non-domestic
2005-2010: 8 new players
2012-2015: 18 new players
Domestic
2012-2013: 9 new players
2013-2015: 8 new players
Centrica, Scottish Power, E.ON, EDF, RWE, SSE,
Gazprom

Customer
Switch Rate

5% switched
50% renegotiated contracts

Domestic (2002-2014): 70% switched among

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
Pricing
Trends

More than 60% of non-household Prices dropped through 2004 and have increased
customers in Scotland are now
ever since for both power(8%) and gas (12%) in
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/domesticretail-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

ments should be managed between wholesalers

and retailers.

Electricity

market: Unlike the big-bang

approach used for the gas market, deregulation for the UK electricity market was phased
in, beginning with large customers in 1990,
and followed by medium-use custo mer in
1994 and all customers by 1998 (see Figure 4,
page 3).

The

gas market: The UK gas market was

deregulated in 1996 for all domestic and
non-domestic customers, impacting roughly
874,000 non-domestic customers (see Figure
5, previous page).

Lessons Learned from Deregulation

By analysing deregulation activity in related
markets (see Figure 6, previous page), we can
conclude that many retailers in the UK water
market will encounter new market arrangements,
including incumbent service providers, Scottish
market retailers and perhaps a few cross-market
players, such as electricity and gas providers that
could sell packaged utility offerings of electricity,
gas and water services. Almost all the retailers
from the Scottish market have indicated interest
in the England and Wales market. Though there
is no clarity yet on which geographies the new
retailers will target, incumbent players from
England who are currently part of the Scottish
market will have an upper hand given their
experience in both geographies.

Retain and Win Customers with

Differentiated Offerings
We estimate that customer switch rates under
the new market arrangement will not be as high
as what was witnessed in the electricity and gas
markets, but would be similar to or higher than
that in the Scottish market (almost 5% switched
retailers and 50% renegotiated their contracts).
A survey by Consumer Council for Water (CCW),
which included participants from non-household/
non-domestic customer segments, shows that
low-spend customers might switch suppliers if
offered a better price; high-spend customers
would also do so if offered better value for the
money.7 New retailers, therefore, should offer not
only competitive pricing but also differentiated
service offerings.
Market it Right
In other markets, such as in Scotland, many
customers were unaware of the new market

cognizant 20-20 insights

arrangement, and confusion persisted following

deregulation.8 Although communicating the new
market arrangement is considered the responsibility of regulatory bodies and the government,
utilities can engage in proactive and multi-channel marketing to build customer confidence and
gain business.
New retailers should showcase their capabilities and reliability as a service provider to win
customers, and offer them a quick, streamlined
and hassle-free switching process. The CCW
survey, however, emphasised the ineffectiveness of hard-sell marketing and the need to
make a positive first impression on customers,
as more than half said they would return to their
incumbent supplier if service levels were not as
they expected.
The importance of marketing is also underlined by
research conducted by Social Market Research on
small and medium-size customers in the Scottish
water market, which found limited awareness
among most respondents about the deregulated water market and their ability to switch
suppliers. When customers were made aware of
the available service offerings, they were willing
to explore switching options.
Establish Competitive Pricing
Any new market arrangement implementation is expected to provide monetary benefits,
which can take multiple forms, such as efficient
operations, lower retail prices for customers,
investments, innovation, etc. The Scottish market
study shows more than 60% of non-household
customers in Scotland now pay lower prices,
receive better service or a combination of the
two in the five years since the market opened.9
A similar trend is playing out in the electricity and
gas markets following deregulation.
Retailers that have already started setting up
and aligning their retail operations with the
open water initiative will have an upper hand in
planning and setting retail prices. Because Ofwat
will determine wholesale pricing rules, there will
be little room for negotiation to increase the
retail margin. As a result, each retailer must study
its own customer base and service offerings and
develop suitable pricing. To do this, utilities need
to gain in-depth knowledge of customers so they
can customise pricing and service offerings.
For further optimisation, the operational utilities
across markets can partner to carry out joint

operations. A good example is Water2business, a joint venture between Bristol Water and
Wessex Water, which will provide retail services to
businesses across the UK.

retain customers in the deregulated landscape

(see Figure 7).

Strategise:

Based on its capabilities, each

retailer should define its business strategy
and develop a plan as to which geographies
or customers to target and which bottom
lines to maintain. Because non-household
customers requirements vary according to
their operations, providers need to conduct
customer profiling and segmentation to
understand their needs and map their capabilities accordingly. Capability gaps should be filled
through a mergers and acquisitions strategy or
through partnerships with trusted third-parties
and other utilities.

Ensure Regulatory Compliance

Market participants will need to work within the
regulatory framework defined in the new market
structure. As mentioned above, incumbent
retailers will need to maintain an arms length
relationship with their wholesale businesses to
ensure fair competition. This means setting up
completely new facilities, teams, operations,
processes, IT systems, etc. Scottish Water, for
example, separated its retail business by setting
up a new company, Business Stream, in 2006.
In Scotland, all retailers use standard forms,
processed via central e-mail systems, which
ensures incumbent retailers transactions are
processed in the same way as any other retailers.
Utilities such as United Utilities, Thames
Commercial Services, Severn Trent Services, etc.
have already set up separate business units.

Invest:

The business strategy will determine

investments to be made in people, processes
and technology. Robust IT systems and
processes, as well as skilled talent, will be
key to smooth operations. Many utilities have
already begun investing heavily to improve
their various lines of business. Wholesalers
will need to align their existing processes and
systems with the new market scenario.

Other regulations, such as those related to the

wholesale contract, Wholesale-Retail Code and
Market Arrangements Code of the new market
arrangement and their ownership, are still being
finalised as per the Market Architecture Plan
(MAP). In addition, all market participants will need
to conduct operational and regulatory reporting.

Defining new processes, such as customer

onboarding, billing, switching, managing
breakdowns, etc., will require investment. The
systems impacted most heavily will be the
customer information system (CIS), work
management and contract management
systems. Retailers and the market operator will
need to set up all systems and processes for CIS,
sales and marketing, regulatory compliance,
wholesaler management, vendor management,
etc. Both wholesalers and retailers will need to
establish a strong communication system to

Looking Ahead: A Plan for Success

Providers operational and customer service
processes will be challenged by the new competitive market scenario. Retailers can follow
a four-step process to ensure they can win and

Open Water Approach

STRATEGISE

Market
Bottom lines

Target market areas

Customer profiling
and segmentation
Service offerings
Mergers and
acquisitions
Vendor/utility
tie-ups, partnerships

PLAN

INVEST

People
Process
Technology

Skilled human
resources
Streamlined process
IT systems
Offices and
infrastructure

Systems
Operations
Administration

Customer services
Sales planning
Marketing planning
Support functions
Operations planning
IT planning
Regulatory planning

Figure 7

cognizant 20-20 insights

OPERATE & MONITOR

Systems
Processes
Operations

Account
management
Customer service
Communications
management
Billing and payments
Work management

interact with each other and with the market

operator.
Market operator systems and processes are
defined in the Open Water market codes.
Retailers and wholesalers will need to work
closely with the market operator to understand
how access and communications will work.
Another major investment for retailers is
related to office space and infrastructure.
The decision to establish a single location or
multiple ones will depend on the companys
operational model.

daily operations, as well as support functions,

such as human resources, finance, administration, legal, regulatory, etc. As most systems
and processes will be IT-intensive, substantial
IT planning will be necessary.

Operate and monitor: Once the market goes

live or utilities are in operation, emphasis needs
to be placed on running operations as planned,
along with a strong monitoring framework to
track operations against the plan. The most
critical systems and processes will be those with
direct customer touchpoints, such as websites,
telephony, customer service, CIS, sales and
marketing. Back-end systems and processes,
such as account management, communications management, billing and payments, work
management, etc., should enable the front-end
systems mentioned above.

Plan: Once the systems and processes are in

place, utilities should plan how their systems,

operations and administration will work to
meet their targets. These include customer
service activities, customer queries, maintenance work, etc. Operations planning will be
required for account management and related

Footnotes
1

Open Water, UK Government, http://www.open-water.org.uk/.

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.

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

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

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

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.

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-watersnon-household-customers-expectations-for-competition-in-the-water-industry/.

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

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

References

Market

Blueprint, Open Water, January 2014, http://www.open-water.org.uk/media/1041/marketblueprint.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-201415(1).pdf.

Retail Energy Markets in 2015, Ofgem, September 2015, https://www.ofgem.gov.uk/publicationsand-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-openwater-market-architecture-plan-final.pdf.

Wholesale and Retail Charges: A Consultation, Ofwat, January 2014, http://www.ofwat.gov.uk/consultation/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.

Ofwats 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/yourbusiness/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-publications/38491/drmr-march-2007doc-v9-final.pdf.

cognizant 20-20 insights

About the Authors

Ankit Pande is a Consultant within Cognizant Business Consultings 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 improvements, 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 Ankit.Pande@Cognizant.com.
Gaurav Hegishte is a Consultant within Cognizant Business Consultings 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 Gauravsadanand.Hegishte@cognizant.com.
Puneet Kohli is a Senior Consultant within Cognizant Business Consultings 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
Puneet.Kohli@cognizant.com.

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business
process services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology 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 approximately 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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