Market Operator Services Ltd (MOSL) is calling on Ofwat to give retailers in the new non-household water market a greater say in the upcoming 2019 Price Review (PR19) for the 2020-25 AMP7 investment programme.

The comments come in the response to the water regulator’s consultation on its proposed methodology for PR19 which the market operator has now published.

While MOSL broadly supports the proposals, it has suggested that Ofwat should consider a number of issues surrounding the price review process and its interdependencies with the NHH market, including:

• clarifying the role of retailers in PR19 in terms of customer engagement and the assessment of the water companies’ AMP7  plans
• seek greater alignment between customer and developer services experience incentives, WaterworCX, and the Market Performance Framework (MPF)
• consider the interdependencies between developer services and D-mex
• ensure there is an integrated and holistic strategy for the recently opened NHH market and upstream markets to ensure they function in a complementary manner to realise the intended benefits for customers.

PR19 process should include mechanism for retailers “to provide assurance to Ofwat and challenge to business plans”

On clarifying the role of retailers in PR19, MOSL has recommended that retailers should be included as a named stakeholder with a role in the methodology and the expectation for wholesalers to engage with retailers to be made explicit.

The methodology currently groups retailers as “other stakeholders” but MOSL said there is “a strong case” to expand the role of retailers in relation to customer engagement.

The response says retailers could play “ a similar and supplementary role” to Customer Challenge Groups and provide Ofwat with feedback on the level of engagement from different water companies. They could also offer “an independent perspective as to how the engagement with retailers and customers has been reflected in the development of business plans.”

In MOSL’s view “high quality business plans” will include engaging with retailers – but clarifying their role in the process would “ensure this happens across the industry and help facilitate a more robust process”.

The market operator has called on Ofwat to include a specified mechanism in the methodology which “engages retailers in the process of initial assessment and final determinations” – similar to the independent assurance provided by CCWater and CCGs.

 “We believe that there is an opportunity for Ofwat to utilise the new unique position of retailers as part of the PR19 process to provide assurance to Ofwat and challenge to the business plans”, MOSL said.

Risk of “service incentive gap” could create perverse incentives to provide greater levels of service to domestic customers over retailers and NHH customers

The market operator has also expressed concern about what it describes as an “incentive gap” for incumbent companies between the market arrangements and the proposed methodology for PR19.

Ofwat is proposing to replace the existing Service Incentive Mechanism (SIM) in PR19 with WaterworCX – made up of 2 new common performance commitments to incentivise a better experience for residential customers and developer service customers.

According to MOSL, there is currently no incentive mechanism to provide greater levels of service to retailers beyond ensuring they are compliant with the Market Performance Standards (MPS) which form part of the Market Performance Framework (MPF) which incentivises wholesale service in the NHH market.

“There is a risk that this gap may promote perverse incentives to provide greater levels of service to domestic customers over retailers and NHH customers”, the response says.

MOSL said there should be a plan to consider incentives for wholesaler service to NHH retailers which should aim to review whether this would be best addressed under the market governance or the Price Review.

Introduction of upstream competition could potentially affect wholesale revenues and introduce volume risk

MOSL also wants to see greater recognition of the interdependencies between the NHH market and proposed upstream competition, coupled with an integrated and holistic strategy for different markets to ensure that they are functioning in a “complementary manner and not limiting or preventing the benefits realised by customers”.

While the bi-lateral market which would introduce upstream competition is not expected to open in the AMP7 investment period, the market operator is concerned that it could have implications for access pricing and settlement in the NHH market.

The bi-lateral market will potentially allow retailers to procure water resources directly from third parties to meet customer demand. According to MOSL, a new upstream entrant with the appropriate “authorisation” to provide water to a retailer could affect wholesale revenues and potentially introduce volume risk.

MOSL is proposing that Ofwat should use NHH market industry forums as a means to communicate with wholesalers and retailers to get “meaningful feedback” on the introduction of upstream competition.

The water industry regulator is planning to publish an upstream wholesale market architecture discussion paper which will include a number of issues in relation to access pricing and water resource yileld adjustments.

Ofwat's consultation on its proposed PR19 methodology formally closed on 30th August last week.