In the face of ongoing concerns that the retail water market is not functioning as efficiently and effectively as it should, Ofwat has said it wants to avoid a situation where the opening of the market has caused “a divergence of basic service standards provided by wholesalers between domestic and business customers.”

The comment comes in a new report published by Ofwat aimed at strengthening wholesaler performance and service in the business retail market.

The water sector regulator’s Call for Inputs (CFI) outcomes report follows on from its 2018 state of the market report, Open for Business, which identified a number of market frictions which need to be addressed as a priority if the business retail market in England is to reach its full potential for customers.

Ofwat’s Call for Inputs (CFI) issued in November 2018 considered some of the potential drivers behind the frictions, which included poor aggregate wholesaler performance and interactions between wholesalers and retailers.

The CFI identified the following key issues:

• Wide variance in policy approaches: Retailers had mentioned the problems and associated cost impact they experienced from dealing with a wide variety of wholesaler policy approaches.
• Inadequate metrics to measure wholesaler performance and service: The Market Performance Framework (MPF) includes two sets of metrics – Market Performance Standards (MPS) and Operational Performance Standards (OPS).
• Weak reputational incentives: While some wholesaler performance data is published, in Ofwat’s view a lot more could be done to sharpen reputational incentives
• Weak financial incentives: Several retailers thought that the penalties associated with MPF underperformance were insufficient and argued the case for strengthening the financial incentives for wholesalers to improve performance.

The outputs report reflects on evidence received from the CFI and sets out the regulator’s expectations on what more needs be done to improve wholesaler performance.

“Addressing these market frictions should lead to a better functioning market and deliver improved outcomes for customers”, the report says.

According to Ofwat positive progress has been made in some areas since the CFI was published in November 2018. “For example, the Market Operator (MOSL) has stepped up its scrutiny of trading party performance and is shining a light on good and bad performance, both of which will sharpen incentives on trading parties.”

Essential that much faster progress is now made

However, the regulator believes more needs to be done to address all of the issues identified in the CFI and resolve the associated market frictions. Ofwat commented:

“We believe that industry has the tools and processes necessary to address market frictions arising from wholesaler performance. But it’s essential that much faster progress is now made.”

Key measures Ofwat says will strengthen performance include:

• The incentive framework should be improved to provide a more holistic and customer-focussed assessment of trading party performance, which would incentivise wholesalers to improve levels of service where this benefits customers
• Wholesalers should review the service that they provide and look to improve the way they communicate with retailers, particularly in relation to ongoing, completed and rejected tasks.
• Wholesalers should consider if their policies, such as leakage allowance, are appropriate for the business retail market and focus on delivering good outcomes for customers.

Earlier this week Ofwat’s Chief Executive Rachel Fletcher wrote an open letter to wholesalers noting that their overall level of support for the development of effective markets is unacceptable. The letter said Ofwat expects to see a significant improvement in coming months and that progress will be reviewed in the autumn.

The CFI outcomes report indicates a notable divergence of views between wholesaler and retailers on whether improvements to the Market Performance Framework have been made at a sufficient pace. The report says:

“Most wholesalers think good progress has been made so far, while most retailers disagreed and thought that the pace of progress has been too slow.”

Many retailers have also expressed concern about the data quality challenge that they face, although it was acknowledged that the Data Improvement Plans (DIPs) which MOSL has initiated will help to address some issues. However, several retailers thought that "a fundamental change in approach is required to address this challenge sooner rather than later.”

Ofwat said that retailers have also raised concern that wholesalers take an inconsistent approach in applying policy and have become less customer focussed, commenting:

“We understand that in some cases, such as when assessing claims for leakage allowances, this has resulted in customers experiencing a lesser service than they received prior to market opening. Ultimately, we want to avoid a situation where the opening of the market has caused a divergence of basic service standards provided by wholesalers between domestic and business customers.”

Click here to download Call for Inputs (CFI) outcomes report