Water industry regulator Ofwat, alongside its other programme partners, has taken further steps to ensure the timetable for market opening stays on track for April 2017, in response to an independent review.

Ofwat commissioned an independent baseline review of the Retail Market Opening (Open Water) programme in April which took place between 13 May 2015 to 27 May 2015.

Work to open the new market is being delivered by a number of organisations through an overall programme called 'Open Water' This includes Ofwat, the UK Government and Market Operator Services Limited - a private company run by market partipants - and Open Water Markets Limited. The Retail Market Opening Management Group - senior executives from key organisations, including Ofwat - has overall responsibility for the programme.

Adam Green, Managing Director of Carillion Construction Services led the review -  Jon Carlton Director Guille Carlton Solutions Ltd and Bob Irvine Deputy Director Scottish Government were the other members of the independent review Panel. The CEOs of Business Stream, United Utilities, Northumbrian Water, Surrey and East Sussex Water, Thames Water and the Water Industry Commissioner for Scotland, the Deputy Director of DEFRA and Cathryn Ross CEO of Ofwat were among a number of people interviewed by the Panel.

While the review concluded that successful delivery of the Open Water programme was achievable within the timescale, it also identified a number of significant issues which needed to be addressed. Out of a total of 18 recommendations, 9 were categorised as Critical – to increase the likelihood of a successful outcome it is of the greatest importance that the programme/project should take action immediately. The remaining 9 were classed as Essential  – to increase the likelihood of a successful outcome the programme/ project should take action in the near future or by the identified date.

Open Water has accepted all of the review's findings and agreed a package of work to address the issues raised. Alongside the review Ofwat has published Open Water's response setting out how the issues are being addressed.

Costs increase from £25.3m to £41.8m

Ofwat has also published a separate update on the cost for opening the new market – the regulator said that with legislation now passed and the design phase of the programme almost complete, there is far greater clarity around scope and costs. The estimated set up cost is £41.8 million for the three years from 2014-15 to 2016-17- a £16.5 million increase from the 2013 mid-level estimate of £25.3 million. Work to design, build and implement the systems necessary for the new market is the single biggest cost in the budget, accounting for £14.2 million or 34% of the total budgeted costs for the programme

The majority of the programme work and associated costs (about £26.2 million of the revised budget estimate plus contingencies) are likely to sit with Market Operator Services Ltd (MOSL), the private company run by market participants. Ofwat said that assuming that the costs are shared across the regulated water companies, each could expect to incur costs of between 0.6% and 20% of this or between £250k and £8.4 million over three years.

Open Water’s current estimates for the anticipated running costs after the market opens are £5.6 million a year (2014 prices).

Ofwat: "we remain confident the market will open for business from April 2017"

Adam Cooper, Ofwat's Director for Retail Market Opening said:

"Everyone has already begun to implement many of the review's recommendations. The updated costs for opening the market also reflects the fact we now have more detailed information on how the market will work compared to two years ago. By building on the progress made so far, we remain confident that the market will be open for business from April 2017."

MOSL is still being established and expects to agree and publish a business plan for its work in August once its new Board has been appointed, following which Ofwat  expects to reissue the budget.

However, the regulator cautioned that risks and opportunities associated with the budget estimate still remained, meaning that the overall budget could change further. Ofwat is separately commissioning an independent assessment of the budget estimates to provide greater assurance of those estimates.

The main elements of cost associated with the implementation of the new retail market arrangements are split as follows:

Set up costs, including:

• costs associated with running the Open Water programme, including the development of codes, licences, contracts and other market architecture by all the parties within it.
• costs of setting up the Market Operator (MO) – the body that will operate the new market. This includes the costs of building, testing and implementing the central IT systems.
• costs incurred by market participants in preparing themselves for market opening.

Running costs include:

• the running costs of the MO in the future, once it has been set up; and
• the additional work that Ofwat must carry out to regulate the new market. For example, dealing with disputes and casework associated with the new arrangements

The estimates exclude the following costs.

• The costs that the regulated water companies could incur in preparing their systems and introducing organisational change to be ready for the new market. The companies were able to include these in their AMP6 business plan submissions.
• The costs incurred by the UK Government in preparing for the opening of the new market. This includes implementing new legislation and setting out the arrangements for retail exits

On future management of costs within the programme, Ofwat’s response says it is critical that budgets continue to be carefully controlled. In future the Programme Director will be responsible for making sure that the programme remains within budget.

The response, in the form of a letter from Adam Cooper, Director of Retail Market Opening at Ofwat to the Review Panel, said that all of the organisations involved in Open Water agreed that the Panel had raised important issues that needed  addressing, and accepted the broad intent and direction of the recommendations, commenting:

 “We are all working towards addressing them. This includes putting in place clearer governance, accountability and effective programme management to ensure delivery of the new market. Overall, I consider that the broad thrust of the recommendations can be addressed. The programme continues to work towards the delivery date of April 2017 for opening the new market.

Ofwat and MOSL act to strengthen organisational capabilities

In response to the Panel’s recommendations both Ofwat and MOSL have had to improve their respective organisational capabilities.

Ofwat has appointed PA Consulting as a Delivery Partner to help deliver a number of work streams and recruited staff to support the development of the customer protection work. The regulator is also in the process of recruiting programme management functions -until then programme management will be handled by interim resources.

MOSL has appointed Ben Jeffs as their Chief Executive, together with the appointment of a Communications Manager to lead the development and delivery of a communications strategy. MOSL has also identified key staff and suppliers to OWML and work is progressing to secure their services for MOSL going forwards, with no loss of continuity.

 In addition, MOSL is developing the organisation’s structure to identify capability gaps and has also identified individuals to support/ build the necessary human resources capability to meet the needs of MOSL and the programme. It is also in the process of securing a programme management capability to drive, track and report progress.

The Independent Panel’s Baseline Review had found that successful delivery of the programme by the target date appeared feasible but that significant issues already existed which required urgent management attention.

“Urgent attention to the detailed issues considered are required if the programme is to be successfully delivered. Beyond that successful delivery will require a resolute focus by all parties on the key deliverables”, the Review stated. It also made the interesting point that  “Concerns have been expressed that the process is unduly influenced by the views and interests of the incumbent companies.”

The Review had said it would be necessary to ensure:

• That all parties are fully committed to the target date
• That the revised roles and responsibilities are clearly and consistently articulated and understood
• Ofwat and MOSL are adequately resourced for the roles they are assuming
• Consistent support to companies on their transition to the new market arrangements – this must cover behavioural, organisational, financial, compliance, operational and systems and prepares the ground for the assurance tests
• That the design of the central systems will deliver in a timely fashion the processes required by the codes and other market rules
• The creation of a robust design authority for the codes and rules
• A clear focus on developing the MO to be ready on time for systems testing with industry participants, data upload, shadow operation and go live in 2017

The next independent review of the programme's progress is due to take place in the first quarter of 2016.

Click here to download the Independent Panel Baseline Review

Click here to download Open Water's Response to the recommendations of the Baseline Review

Click here to download Open Water's Revised Budget for implementing the new market