Ofwat has launched a new consultation on licensing and policy issues in relation to the opening of the non-household retail market in 2017. The lengthy and detailed 89 page consultation document, accompanied by a further 42 page document of supporting appendices, underlines the complex issues the regulator now has to reconcile in a relatively short time scale.

Included in the 41 questions where Ofwat is seeking detailed comment is whether respondents agree with the proposal to have separate licences covering water and wastewater retail and if not, how they would envisage that a single licence for water and wastewater would differ. Other key questions include:

• Do you agree that we should retain the three basic elements of financial stability, managerial competency and technical competency in assessing future licence applications?
• Do you agree that gaining a retail future WSSL licence should be conditional on successfully completing market accession testing? Are there any aspects of the licensing process that could be further simplified to avoid duplication/overlap across the two processes?
• Do you consider that implementing an auction style allocation process similar to the one that Ofgem has adopted ahead of a backstop allocation process would be the best approach to protecting customers in the event of the failure of a retailer?
• Do you have any suggestions about the best approach to ensuring that the new market arrangements are proportionate for a) smaller wholesale companies and b) small retailers.

Delivery of the new market “requires a number of substantial programmes of work”

Outlining the background to the consultation, Ofwat said that delivery of the new market “requires a number of substantial programmes of work”, commenting:

“With Market Operator Services Limited now established and gaining visibility and acceptance among market participants, the expedient progression of the procurement of the central systems necessary to support the new market is now underway. Similarly, the publication of MAP 3 signals that the associated market codes are now well developed.”

The consultation document progresses another important piece of the jigsaw, setting out the details of the proposals for the changes to licences and appointments that are required, Ofwat said. Combined with the details of the industry codes this gives a substantively complete picture of how the new retail market framework will look.

Ofwat’s view is that the best way to protect customers in the new retail market is to ensure that the arrangements are effective, with high levels of competition among suppliers.  The regulator has also “been mindful of ensuring that there is sufficient protection for customers when things might go wrong. For example, elements of the proposals cover potential events such as a retailer ceasing to trade, if a company did not have enough resources to deal with a large increase in customer numbers, or when emergency events occur.”

Ofwat said it has also made sure that the existence of the new retail market does not undermine the duties and obligations of the wholesale water and sewerage companies that will continue to play a key role.

Collaboration with Open Water and Defra on “an unavoidably complex set of interactions”

The proposals have been developed by Ofwat in close consultation and co-operation with Open Water and Defra, which the regulator said helps ensure consistency across what is “an unavoidably complex set of interactions between the Government's policy and legislation, licensing arrangements and the new market architecture plan documents.”

The consultation document covers four main areas.

• Ofwat’s proposals for standard conditions for new supply licences and changes to existing licence and appointment conditions that are necessary or expedient to deliver the NHH competitive retail market
• Ofwat’s thoughts on a small number of key issues within the proposed industry codes developed by Open Water.
• A number of issues on the tariff and charging rules that will be required.
• What needs to happen next on the journey to April 2017? 

Two most important issues are payment and credit terms

Ofwat said the two most important issues covered in the document are payment and credit terms, and the arrangements to protect customers where a retail supplier ceases to trade, known as Supplier of the Last Resort.

On payment and credit, the regulator has explained concerns about the proposals that were published in the MAP2 documents in December and why it has sought additional discussion on these via workshops. Ofwat was concerned that the proposals in the Market Architecture Plan could, without further development, create unnecessary costs for all participants in the new market, disadvantage smaller new entrants and prevent possible innovations around credit arrangements.

At an industry workshop on the future credit arrangements held on June 15^th the majority of participants, including retailers and wholesalers and new entrants, expressed a clear preference for an expanded menu of credit arrangements to be codified. This is a different approach to the more restricted one set out in MAP 2.

Ofwat said it is now working with Open Water Market Limited and Market Operator Services Limited to develop the codes to incorporate the various options considered, including suggestions made during the workshop. In developing the detail of this policy, Ofwat now anticipates that it may take some weeks to develop a final position “given the important details to be worked through” and is proposing to hold more workshops on the policy issues identified with the proposed industry codes.

All market participants must be able to comply with new requirements

In parallel with finalising the framework and procuring the central systems, Ofwat has flagged up the need for all market participants – wholesale incumbents in particular –to ensure that they are able to comply with the new market requirements. This will include making sure that:

• their customer data is in a good state for the market;
• their systems can communicate with the central system of the Market Operator; and
• the internal systems and processes in place between wholesalers and retailers can meet the requirements of the codes consistently in a way that supports a level playing field in the market.

Deemed contracts to act as backstop protection

On contracts with customers, Ofwat said that currently almost all customers currently receive water and wastewater services as a statutory right under legislation but without a specific formal contract. In establishing the new market arrangements and facilitating the UK Government’s ‘retail exit’ reforms, the regulator is expecting  to establish ‘deemed contracts’, which would exist between companies and customers in certain specified circumstances – for example, following the exit of an undertaker from the non-household retail market, where terms and conditions have not otherwise been agreed.

The deemed contracts would act as a backstop protection for customers that would not otherwise have a contract in place, and would provide certainty for both parties as to the terms of supply. Ofwat plans to take forward the work on deemed contracts with companies and other stakeholders over the summer.

The regulator also pointed out that as well as the new ‘deemed’ contracts, customers that switch will find themselves on other contracts that they agree with their new suppliers. Ofwat said it will need to consider whether any additional customer protection arrangements are needed here, reflecting the experience in other utilities. It will also consider other possible forms of customer protection in the market, such as a code of conduct on mis-selling and new guaranteed service standards for non-household customers.

Preparations by individual market participants of fundamental importance to ensure market opens in April 2017

Ofwat has also emphasised that preparations by individual market participants will be “of fundamental importance” to market opening, suggesting that  companies will need to carry out a number of different activities to ensure that the market can open in April 2017. The consultation document highlights the importance of the following four areas in particular:

1. Undertakers and existing WSL holders will need to prepare datasets on eligible premises and supply points of the required format and quality in order to allow the relevant data transfers scheduled for April 2016;
2. All companies will need to develop their own systems and processes to interface with the new market systems in order to allow the reliable and timely exchange of data that will be essential for the smooth running of the new market;
3. All companies will need to participate in the testing of the new market arrangements and the initial set-up of the market; and
4. All companies will need to prepare and maintain company specific transition plans and share details of those plans and progress against them, in order to support the market assurance and market readiness assessment activities.

Deadline for responses to the consultation is Monday 20 July.

Ofwat will separately be arranging a number of workshops in July and August on key areas covered in the consultation and is planning to circulate details of the proposed subject and dates shortly.

Click here to download the consultation document in full.

Click here to download the accompanying appendices