Specialist market design, governance and assurance service provider Gemserv has flagged up potential new options for the competitive retail market for business customers in 2017 currently being developed by the Open Water Programme .

In an interesting thought leadership paper - Effective Governance of the Retail Water Market -  Germserv has set out its views exploring possible new approaches which it believes would help to secure the successful implementation of the proposed new market mechanisms.

The Open Water Programme which is charged with developing the high level design of the competitive retail market for business customers in England set out its proposals in January 2014, including the establishment of a Market Operator (MO). The MO would provide a range of market facilitation services to support the competitive retail market, including registration and switching, financial settlement, data exchange and governance.

Gemserv says the challenge for industry will be in the next phase of the Programme - developing appropriate governance arrangements that balance the tension between accountability and responsibility whileplacing the correct incentives on parties to deliver the benefits of water competition.

The paper summarises the general principles of good governance as:

• Promote inclusive, accessible and effective consultation;
• Be governed by processes that are transparent and easily understood;
• Be administered in an independent and objective manner;
• Provide rigorous, high quality analysis of any case for change;
• Deliver effective arrangements that foster benefits for end customers;•
• Be cost effective;
• Contain rules and processes that are sufficiently flexible to allow for efficient change management;
• Be delivered in a manner that results in a proportionate regulatory burden, taking into account the needs for incumbents and new entrants; and
• Ease of participation.

Gemserv makes the key point that market governance arrangements must be specific and proportionate to the market need and importantly, that one size does not fit all. The paper warns that if the new market arrangements fail to satisfy principles of good governance and provide appropriate representation and protections for all stakeholders, at best market costs will increase, and at worst, lead to market failure.

While the paper welcomes the Market Blueprint and supports the proposals to establish an MO, it also says that careful consideration must be given to the MO ownership, commercial and governance models for 2017 in order to facilitate the Government’s wider aims for upstream competition.

Breadth of stakeholders for wholesale and retail could be “a step too far”

The paper draws particular attention to the fact that the Blueprint features a breadth of stakeholders “like no other” , namely:

• Wholesalers
• Retailers
• inset providers
• new entrants
• network providers
• abstractors/resource providers.

NotIng that retail competition followed by wholesale market competition, potentially only two years later, will give rise to a much wider and broader group of stakeholders, the paper warns:

“The breadth of the reforms and the mix of stakeholders mean that trying to govern both the retail and wholesale markets under one roof could be unmanageable and possibly a step too far.”

Blueprint could be improved by separation of governance and delivery

Gemserv also suggests in the paper that the current market arrangement proposals could be further improved by providing for clear separation and that the correct incentives need to be placed on all the parties to ensure that benefits are delivered, commenting:

”Gemserv questions whether an MO, as outlined in the Blueprint, that oversees large central IT systems is best placed to promote inclusive, accessible and effective consultation and administer arrangements in an objective, transparent and cost effective manner.”

Making an interesting comparison, the paper points out that there is currently an ongoing review of central IT facilitation arrangements in the electricity and gas markets to examine whether integrated business mode provide industry with the necessary confidence in arrangements.

It also argues that further separation (including a physical split between the governance arrangement and the MO operations and systems) could facilitate a “robust independent challenge” of the Market Operator’s ongoing IT systems, costs and operations and avoid any potential conflicts of interest, real or perceived.

In Gemserv’s view, while system integration and ongoing IT service delivery are set to be integral functions of the MO, “the skills and expertise of IT management do not sit well with the unique skill sets of code management and secretariat services” needed for market governance arrangements.

Drawing on experiences of other governance models, the paper says there is a case for further separation of governance from delivery i.e. for the MO to be focused on securing integrity of the central market systems and delivery of data services to the industry.

The paper’s alternative model explores a number of interesting options , including the establishment of a new retail governing body from 2017 that separates the retail governance arrangements from the procurement and operation of the IT systems.

In Gemserv’s view, there are a number of options to allow a seamless evolution into the arrangements for upstream wholesale competition which would still support the timescales of the Open Water Programme. Key benefits would include progressive further alignment between the English and Scottish market arrangements and the facilitation of any future decision of the Welsh government to adopt retail and/ or wholesale market competition.

The paper concludes:

 “History has proven in many markets that the overriding theme is the absolute requirement for good governance. Get it wrong and the Open Water Programme will fail to deliver the desired end customer benefits. Get it right and the key decisions will be informed, engender stakeholder buy-in and will deliver the desired outcomes.”

Gemserv is currently working with a number of clients across the industry in preparation for the challenges and opportunities arising from the opening up of the business retail market in England to full competition in 2017. The consultancy helped to develop the world’s first competitive water market in Scotland.

Gemserv is planning to publish further discussion papers on the issues later this year.

Click here to download Effective Governance of the Retail Water Market