Business retail water sector operator MOSL has flagged up gaps in Ofwat’s draft methodology for the the upcoming Price Review in 2024 – MOSL described the current regulatory framework as “weighted heavily towards households.”

MOSL has published its response to the PR24 methodology which will inform the funding and incentives for wholesalers during the 2025-30 period.

According to MOSL, due to the timing of the opening of the non-household (NHH) water market in 2017, PR24 is effectively the first price review that can consider what is needed to ensure a sustainable, flourishing market that delivers for trading parties, customers and the environment.

MOSL CEO Sarah McMath said:

“While there are a number of positives for the NHH market in the draft methodology, we remain concerned that the PR24 process is not yet giving sufficient priority to increasing wholesalers’ focus on the NHH market and improving outcomes for its customers.”

The market operator takes the view that the current regulatory framework is weighted heavily towards households - MOSL sees PR24 as an opportunity to address this imbalance and put in place the right incentives at the right scale to ensure the needs of the NHH market are considered in wholesalers’ business plans and Board rooms.

MOSL calls for enhanced metering strategy that encompasses both household and NHH customers

The three key messages to Ofwat are:

• MOSL believes more work is needed to establish the business case for the proposed BR-MeX (business customer and retailer measure of experience) incentive, and the value it could deliver to the market compared to using separate metrics
• MOSL recommends developing an enhanced metering strategy that encompasses both household and NHH customers and takes into account the benefits from a national, rather than regional, perspective (e.g., improvements in data quality, the benefits of a more detailed picture of customers’ water consumption, identification of leakage)
• We welcome the proposal to include business demand reductions in the proposed performance commitments for the first time. The final methodology must ensure an appropriate focus on reducing both non-household and household demand. If the largest non-household customers are excluded from this metric (as proposed), it must still include a targeted incentive for customers to reduce their demand or move to more sustainable water usage.

Ofwat’s focus has been on three key market frictions to date:

• the quality of market data
• the management of retailer-wholesaler (bilateral) transactions
• wholesaler performance

Sarah McMath added:

“We have been pleased to work with Ofwat on these issues and to have made considerable progress. However, our view, which is supported by the market health report last year, is that the market still has fundamental issues which won’t be solved by tackling market frictions alone, for example, retailer margins.”

MOSL’s understanding is that retailer margins will be addressed as part of the Retail Exit Code (REC) review. If this is not the case, MOSL said Ofwat will need to consider how PR24 could be used to provide the financial headroom retailers need to ensure they can continue to deliver for NHH customers and the environment.

Strategic Panel “disappointed that PR24 is largely silent on the importance of metering”

In its separate response to Ofwat, the Strategic Panel, MOSL’s most senior industry group, expressed its disappointment that Ofwat’s PR24 mthodology is “largely silent on the importance of metering”, particularly in the context of the role metering can play in driving water efficiency and ensuring all customers receive accurate bills based on actual consumption.

The Strategic Panel – which is meeting for the seventh time in London – has said that setting appropriate wholesale revenues, to fund the outcomes the non-household (NHH) market needs, and setting appropriate incentives to drive delivery were essential outcomes of PR24.

The response highlighted there are positives for the NHH market in the draft methodology in terms of delivering against the Strategic Panel’s priority market outcomes – like the proposal for more high-powered incentives (BR-MeX) on wholesalers to support retailers and NHH customers and the inclusion of NHH demand reductions in a performance commitment for the first time.

Metering and data quality remain fundamental issues

However, the Strategic Panel also highlighted concerns there is insufficient focus on the NHH market in PR24, including the cost and complexity of operating within it and the structural changes that may be required to fix it in areas such as metering and data quality – which remain fundamental issues.

Independent Chair Trisha McAuley said:

“We look forward to working with Ofwat as we look to deliver the market outcomes set out in our priorities document published last week and as we seek to enable a flourishing competitive market for current and future customers.”

The Panel highlighted in the response that it is crucial to consider how the different mechanisms (PR24, Retail Exit Code (REC) review and the Market Performance Framework (MPF) reform) will work together to drive improved market outcomes.

The Strategic Panel was clear that it will be for the REC review, rather than PR24 to address areas relating to retailer margins going forward.

The Strategic Panel, which is focussed on providing strategic direction and overseeing programmes of work to improve non-household customer outcomes, is also currently working on a response to Ofwat’s consultation on the review of the REC ahead of the 14 October submission deadline.

The Panel has the following voting members:

• Independent Chair
• Wholesaler members (x2)
• Retailer members (x2)
• Independent members (x3)
• Customer Representative

Representatives from Ofwat and Defra are non-voting affiliate members, together with MOSL CEO Sarah McMath.

Click here to download MOSL’s response in full 

Click here to download the Strategic Panel's full response