Open Water Market Ltd (OWML) has published a stakeholder update highlighting key issues for the water companies ahead of market opening in 2017, including data requirements, payment and credit terms.

OWML has published the paper on behalf of the Open Water programme to expand retail competition for water and wastewater services in England for non-household customers. The programme brings together all of the key organisations to design and deliver the new market, including the Department for Environment, Food and Rural Affairs (Defra), Ofwat and Market Operator Services Ltd (MOSL) – a private company that is owned by market participants. Membership of MOSL now stands at 24 of the 31 companies currently eligible to be members.

The update is the last document for stakeholders that OWML will publish - all of OWML’s activities including its roles, responsibilities and governance of the Open Water programme are now being transitioned to MOSL and Ofwat.  The update says the transition is on track to be completed by 1 August 2015. MOSL then expects to agree and publish a business plan for its work in August.

Defra has separately put in place strong governance arrangements for the new market- the programme is being led by the Retail Market Opening Management Group which retains overall programme governance and leadership, oversight of plans, budgets, risks and policy issues. Defra will also provide advice to the Secretary of State on whether or not the market should ‘go live’. The update says:

“Company readiness is not, however, the only concern. Ultimately a judgement is needed about market readiness, i.e. whether the market as a whole is in a position to open. The decision in relation to market opening is for the Secretary of State. Coming to that decision will involve a judgement on the readiness of all relevant parties, including market participants, MOSL, Ofwat and Defra itself.”

Company boards expected to certify readiness formarket opening

On company and market readiness, the update says that company boards will be expected to be able to “evidence their company’s readiness.” As part of their responsibilities, company boards will be required to certify readiness for market opening.

With only 14 months until ‘shadow operation’ begins in October 2016, the update says that company boards will need to agree a retail strategy, deciding whether the appointed business will continue to provide non-household retail services in-area, or whether they wish to exit this part of the market. They will also need to decide whether they wish to establish a retail licensee as part of the wider group business in order to compete in the national market for these services.

The shadow operation is the period during which market participants will need to be in a position to trial their own systems and practices, as well as their capacity to interact with the market operator.

The update describes it as “a full dress rehearsal “ which means that “although the box office will not be taking money and the critics will not be in the gallery, all of the actors will need to be ready to perform their roles.” It will be essential that all systems for switching and settlement are in place and that all parties have already succeeded in uploading the required data to the central systems.

The focus is likely to be on making sure that there is, and is perceived to be, a level playing field, the update says –likely will centre around whether or not the incumbent company board can demonstrate that:

• their retail activities would represent a viable and sustainable stand-alone business

• the wholesale entities treat their own and other retailers without preference; and

• appropriate governance arrangements have been put in place

According to the update, there are practical lessons to be learned from the introduction of competition in other sectors, including electricity and gas supply, telecoms and the Scottish water industry. “It is also interesting to consider the models that have been adopted in these other sectors,” it says.

Key questions the update says the company boards will need to consider – which are intended to be thought-provoking – include:

• How are you going to ensure that the governance of your wholesale business and of your retail business are independent of each other?
• Do you consider that the wholesale and retail businesses are financially independent?
• How would you evidence to a third party that such independence is real?
• What assurances have you had from your executive that the non-household retail business is a viable and sustainable stand alone business?
• Are you confident that your retail business will have the capability (people, data, processes and systems) to ensure a good end-to-end customer experience?

Ensuring that data is fit for purpose

The update also draws attention to the need for the water companies to ensure that their data is fit for purpose. In recent months inadequacies in existing data have been flagged up in a number of quarters as a key risk to the effective operation of the new marketplace. The update says:

“The requirement to create and repackage data in the required formats is new and may require considerable resources. However, the ability to upload complete and accurate information satisfactorily, in the correct format, will be essential to a company’s capacity to transact successfully in the market.”

“Not only will it ensure the correct settlement, but it will also help companies avoid the costs (financial, time and reputational) of not being able to upload all of the data as required.”

“It is likely that ensuring that data is complete and accurate will present a particular challenge for some companies and the resources required could be substantial.”

Tariffs to be re-examined in 2016

In the final PR14 determinations, Ofwat set maximum limits on the revenues that companies can collect from their non-household customers for the retail services they provide.  At the final determination, Ofwat also changed the proposed control period to two years.  As a result the price controls will now be reopened in 2016 when the companies will be able to propose new cost and margin allocations to further ensure that they are ready for market opening.

The update says this will provide the opportunity for companies to consider their non-household retail tariffs and associated revenue limits, including their potential compliance with competition law ahead of that review. Ofwat will consult formally on the potential form and approach of the review by November.

Programme budget likely to reduce by up to £7m

Ofwat published a detailed revised budget in June of £41.8 million for 2014-15 to 2016-17 based on a complete bottom-up cost assessment - a £16.5 million increase from the mid-level estimate of £25.3 million that was provided in 2013. The change was largely attributable to the fact that the design stage is nearly complete and the programme is now moving into the implementation stage. However, successful VAT registration for MOSL is likely to see the overall budget to April 2017 now reduce by around £5-7 million.

The update says:

“It is obviously critical that companies have a clear understanding of the cost of the Open Water programme and can have confidence that arrangements are in place to maintain strong control over costs.”

Wholesalers’ costs are expected to be between £250k and £8.4 million over three years, depending on the size of their non-household customer base.

Ofwat is planning to commission an independent assessment of the budget estimates shortly in order to provide greater assurance of the estimates and expects to re-issue the budget following agreement of the MOSL business plan for its work in August and once the preferred systems vendor has been selected.

MOSL also expects to appoint the vendor in early August. Following submission of solutions in mid-July by four companies,  a panel of wholesale and retail representatives recommended taking two companies forward into a final offer process.

The update says that Open Water – and individual organisations – are aiming to deliver the market on or under budget.

OWML has now published a “substantially complete” set of the codes, agreements and processes (the MAP Pre-Vendor Recommendations) which will govern how the competitive market operates - final drafts of the market documentation will be published in late September 2015.

Programme emphasis  is now on market and company readiness – including the financial, cultural and organisational changes necessary within the incumbent companies, in addition to IT, data and information issues.

New market will be the largest retail water market in the word

When the retail market for non-household water and sewerage services opens for business  in April 2017, it will be the largest retail water market in the world. The update says it will deliver around £200 million of overall benefit to the UK economy.

Retailers will be able to differentiate themselves by offering cheaper prices and/or lower bills, or by providing enhancements to the service that a non-household customer may require – for example, working with the customer to reduce the impact of that customer’s business on the environment.

Non-household customers will be able to buy water and wastewater services from either the retail arms of existing incumbent companies or from new separate entities that will hold a licence to provide retail services.

The market design assumes that non-household premises have two elements, known as supply points - one for water and one for wastewater. Customers will be able to switch each element separately – so they could choose to switch each supply point to a different retail service provider or they could opt to switch both water and wastewater to the same retailer.

Multi-site customers will also be able to receive a combined bill across all of their sites, which could mean substantial reductions in administrative costs, as well as allowing water usage across a company’s whole estate to be benchmarked.

Commenting on credit requirements for the new market, the update says payment and credit terms have the potential to impact significantly on the effectiveness of the new market. The arrangements impact directly on the working capital costs for all retailers and wholesalers, and could also risk creating barriers for entry arising from either the costs or the ease with which the required arrangements can be implemented. 

Retailers will be the prime contact point for non-household customers for all matters except unplanned changes to water or sewerage services of an urgent nature. For example if there is no water or a potential water quality matter, the customer will be asked to contact the relevant wholesaler directly.

The update points out that one of the success criteria for market opening was that the market should deliver “a seamless customer experience in England and Scotland”, commenting that “this remains an important test” and that “it should be noted that the reference is to a seamless customer experience, which is not the same as ensuring that market arrangements are seamless from the perspective of a retailer.”

Alongside the report Open Water has also published a separate document setting out the requirements for the initial data upload to the Market Operator system.

The draft is intended to provide Trading Parties with sufficient detail to understand the data that they will be required to provide to the Market Operator as part of the preparations for market opening. As such, it provides guidance in terms of the data that Trading Parties will need to ensure they have available and in the correct format in time for data upload activities.

Click here to download the stakeholder update

Click here to access the draft Initial Data Upload Requirements