Simplifying the water retail market

Code changes in the water retail market previously took months to implement but during lockdown were rushed through in days. The extraordinary circumstances meant urgent changes were required to protect customers - all of which will now need to be gradually unpicked. In the second part of our focus on the water retail market, Utility Week speaks to Sarah McMath, chief executive of market operator MOSL, about reacting to Covid, increasing collaboration and tackling water efficiency.

McMath says that despite 25 years working in the water industry she made an effort not to learn the jargon and acronyms in the non-household sector. She explains the system may seem complicated because, quite simply, it is.

“I encourage my team not to talk in codes because it depersonalises it and means we forget it relates to customers,” McMath says. “For the size of the market it is horribly complicated, so we need to make sure customers can understand the structure.”

MOSL is now on a simplifying mission to get to the crux of the “persistent frictions” and put them right. Although meter reading and updating customer and billing information appear fairly routine workstreams, the interplay between retailers and wholesalers, the CMOS system itself and the laborious process for making changes to market codes have made some tasks needlessly intricate.

Improving how trading parties send and receive messages and instructions is being tackled in the Bilateral Transactions Programme, something McMath believes should have been addressed before the market opened but pressures to remain on schedule put this on a back burner.

Transactions can be processed differently by each of the 15 wholesalers, instead of having a standardised system, resulting in around 70 processes, some of which are rejected by CMOS.

McMath herself delayed its progression further because she felt it wasn’t being approached in the right way. “In the past it was seen as an IT project, but really it’s a customer project that technology is a big part of.”

Overhauling it involves broad industry-wide engagement to ensure MOSL gets it right and is the number one priority in the three-year business plan.

“It had a chequered past because it focused on the technology, but if the format is complicated and wrong, then we would have just been digitising an overly complex system without improving it.”

The delivery of the bilaterals solution is expected to bring improvements to customer service, consistency, and efficiency across the market.

Many of the frictions identified in Ofwat’s State of the Market report and the Review of Incumbent company support for effective markets (RISE) boil down to improving these interactions.

McMath says the response from all trading parties to coronavirus and lockdown has been massively encouraging. “We saw some amazing examples of trading parties coming up with solutions that prove we can compromise and collaborate. With a diverse member base there will always be a degree of compromise.”

An unexpected positive during lockdown and subsequent working from home has been greater engagement from smaller trading parties. McMath says holding meetings virtually allowed smaller retailers to be more involved that might not have large enough teams to attend in person.

Certain code changes, which pre-lockdown took between six and nine months to make, were completed in 48 to 72 hours. These were brought in to reflect the significant changes being felt by customers because of the lockdown and to protect both billpayers and trading parties alike. Although McMath says this pace is also not ideal, she recognises the need to speed the process up.

Another efficiency brought by the lockdown was a move from paper voting to digital in July to allow votes to go ahead remotely and Panel decisions that previously required unanimous votes now need majority.

Another priority of MOSL’s three-year plan requires compromise: making code changes based on value-based decisions. McMath explains the bottom line must be whether the value outweighs the cost. Code changes will consider what value for money does a change bring, how many people benefit and ultimately what is in it for customers.

Bigger better data

A data project to better understand consumption is being used to identify customer groups that have been disproportionately affected by lockdown restrictions. By segmenting businesses MOSL can look for patterns to find which sectors might struggle financially and in turn which retailers may be worst hit.

To date only two retailers have exited the market, but McMath said during a global economic crisis “it would be naïve to think” the sector would be immune. The temporary measures introduced by Ofwat and MOSL in response to Covid-19 including the deferral of payments are being unwound between now and March so the extend of bad debt and financial difficulties may not be clear until then.

McMath said MOSL’s board and panel are working closely with Ofwat to look at what may happen in the future and plan for scenarios such as what could happen when furlough schemes stop and businesses that have stayed afloat could face bankruptcy and what that means for retailers.

“One of the base principals of the market is the retailer pays the wholesaler before they get the money from the customer so if that money is gone, what does that mean for the retailer? The changes in place give a level of protection til the end of March but the question is will that be enough?”

That depends on the broader economic landscape, so MOSL is looking to enhance its own expertise by recruiting a board director with such knowledge and experience in relation to regulated competitive markets to build the skills and capabilities within MOSL.

“It would be doing a disservice to trading parties if we didn’t plan for a range of scenarios that will impact the market,” McMath explains and added that the work on data and insight into segmentation is essential.

The visual picture of where water is being used and by what types of businesses are using it, or not, can offer insight to the economic state of the country and that of the non-household market.

“It’s our duty as market operator jointly with Ofwat to minimise the impacts of any supplier failures to customers, a number of code changes and changes to our processes and procedures aim to do that,” McMath says.

“I genuinely hope we can provide enough protection to weather this storm but retailers fail all the time across different sectors, so we need to hope for the best and prepare for the worst.”

Water efficiency

The work on segmentation was begun as part of a water efficiency project to gain a truer picture of what consumer needs are. This alongside geo-mapping of consumption against the supply and demand patterns within customers’ regions.

Almost one third of the water supplied each day is used by the non-household market and efficiency was one of the drivers behind opening the market but efficiency offers remain limited. Only six per cent of users who switched retailer in 2019/20 reported receiving water efficiency or leak detection devices because of switching.

MOSL is working with Defra and Waterwise to manage water consumption in a targeted way rather than to report efficiency uptake by number of connection points (SPIDs).

“You could have every single customer that uses less than a thousand litres per day reduce their consumption by 50 per cent and it would have almost no impact because it’s still under five per cent of the water used by the sector. Whereas a brewery reducing its consumption by 1 per cent would have a significant impact.”

She adds MOSL provides the data and insight to give retailers the information they need to drive innovation in efficiency but admits there are barriers. Together with Ofwat these are explored including the regulatory construct that retailers earn money as a proportion of what they sell.

However, McMath says she is optimistic that innovative tariff structures and incentives from new entrants as well as wholesalers are moving in the right direction.

“There are regulatory barriers but there are innovators working within those. There’s still more to be done but, with business customers using 30 per cent of all water consumed, we must prioritise water efficiency.”

Find out how water retailers view the non-domestic market in the first part of this feature.