Ofwat has said it is important that the same regulatory framework in the new retail market should apply to all appointed companies, including small companies, "otherwise the market arrangements will not work effectively for customers and other market participants."

However, the water industry regulator said it will work with MOSL to consider possible derogations for new appointees, small companies and appointees whose systems are wholly or mainly in Wales, so that the obligations on them are proportionate to the limited number of eligible customers supplied by them.

The comments come in a new consultation on proposed changes to the instrument of appointments of water and wastewater companies to prepare for the opening of the retail market for business, charity and public sector organisations.

Introducing the detailed and lengthy consultation paper, Ofwat said it needs to make the changes ahead of market opening in April 2017, although in most cases, the changes would only take effect at market opening.

The instrument of appointments(IoAs) are the regulatory instruments of appointed water and wastewater companies which contain a number of conditions covering both retail and wholesale activities of the appointed company.

The UK Government (Defra), Ofwat and the developer of the core systems and processes that will enable customers to switch between suppliers, Market Operator Services Limited (MOSL), are working together closely to deliver the Open Water programme of work to open the market.

The aim of the proposed changes to the IoAs of monopoly water only and water and sewerage companies in England and Wales is to ensure that all appointees are required to comply with key aspects of the new market framework. This includes the draft market codes that will provide the detailed rules for the retail market developed by Open Water - the statutory Wholesale Retail Code (WRC), the non-statutory  Market Arrangements Code(MAC) and the Customer Protection Code of Practice (CPCoP).

The draft MAC is a multi-lateral code applying to all market participants and helping to establish the Market Operator. It contains provisions that set out how the parties will work together to govern the market and is an essential part of the new market legal framework.

Proposed MAC and WRC are central to new market arrangements - new conditions should apply to all appointees

Ofwat is proposing that all the changes to the IoAs set out in the consultation would also apply to small companies, commenting:

“… it is important that the same regulatory framework applies to all appointed companies. The proposed MAC and WRC are central to the new market arrangements, and so the new conditions requiring appointees to comply with them should apply to all appointees. Otherwise the market arrangements will not work effectively for customers and other market participants.”

“Similarly, the protection for customers provided by the proposed CPCoP is essential to make sure the market works in the best interests of customers.”

One of the key questions the regulator is seeking responses to is whether derogations may be required for small companies and/or companies whose supply systems are wholly or mainly in Wales, due to their limited number of eligible customers.

Ofwat has already taken steps to explore the issue, saying:

“We have recently consulted new appointees, small companies and appointees based wholly or mainly in Wales, to better understand the issues and concerns affecting them due to their size and more limited capacity to interact with the central market systems.”

“We will work with MOSL to consider possible derogations for these new appointees, small companies, and appointees whose systems are wholly or mainly in Wales, so that the obligations on them are proportionate to the limited number of eligible customers supplied by them.”

At a workshop for small companies which took place in March, one of the issues covered was the extent to which broader licence changes, including the changes proposed in the consultation, are relevant to smaller companies, given their lower volume of eligible customers.

The paper states:

“We have considered whether the burden on smaller companies is proportionate to what we are trying to achieve by proposing these changes for all companies, and consider that it is, subject to some further consideration about the interaction with the central market systems, and possible derogations to the codes.”

“In particular, we need to consider how to make the interactions between the small companies and the central market systems proportionate.”

The consultation paper explains what the changes are intended to achieve, including helping to establish the new market framework by requiring all appointees to comply with the provisions of the proposed MAC, the WRC and the proposed CPCoP.

It also says the changes will introduce a new requirement for a separate Certificate of Adequacy for all appointees’ non-household retail businesses, so that all appointees face similar obligations to licensed retailers.

Ofwat: operating to a tight timetable

The consultation paper says that opening the new market is a complex challenge but it is on track to open in April 2017. The design is almost complete, and work is now being carried out to deliver the technical systems, checks and ways of working that are needed to get the market right for customers.

The paper says Ofwat has also considered the interaction between the proposed changes and Defra’s retail exit timetable, as some of the proposed changes would be affected by that decision as they might not be required or might needed to be amended if companies exit the retail market.

“As decisions by the Secretary of State on retail exit are only expected to be confirmed in January 2017, we cannot wait until after the retail exit decisions to make these proposed changes, as there would be very little time to carry out the necessary consultations before the market opens in April 2017.”

The regulator is proposing the following two options, with a preference for the second:

• Producing two separate versions of the IoA (one for non-exited appointees, and another for exited appointees) and ask companies to agree the relevant changes in principle ahead of the formal decisions on exit; or
• Making the changes for all appointees, but use a combination of ‘sunset’ and ‘sunrise’ clauses to give effect to the relevant provisions in each case.

The consultation forms the first of a two stage consultation – Ofwat is also planning to offer workshops and/or bilateral meetings expected to take place in May 2016 with companies and other stakeholders to help identify and address any possible queries or areas of concern.

Subject to responses, Ofwat then plans to confirm the resulting changes to the IoA by the end of August 2016, ahead of the shadow operation phase of market preparations.

Deadline for stakeholders to comment on Ofwat’s intended modifications is 31 May 2016 – click here to access the consultation paper.