25 August 2020

Empowering a market - effective and efficient self governance

By Adam Richardson

The introduction of the water retail market just over three years ago fundamentally changed the way the industry served business customers. 

With the launch of the market came the creation of a framework of market codes, with new obligations, new processes and a new emphasis on industry self-governance. 

Like other utilities, industry self-governance allows wholesalers and retailers to drive amendments to the market rules. And, through the Market Codes Panel and its committees and sub-groups, industry expertise is a cornerstone of decision-making. 

Overall, the water industry invests considerable time and resources into the governance of the market. This is significant. Robust, efficient and effective governance sets the tone and environment for a well-functioning market. It enables all interested parties to have a voice, whether they’re a majority or a minority, making it easy to engage to ensure the best possible decision-making. 

As it moves through its fourth year, the market faces many challenges.

 Ofwat’s State of the Market report highlight ongoing market frictions including poor data quality and inefficient wholesaler-retailer interactions. At our annual CEO Forum in November 2019, the primary issue of concern raised by attendees related to metering. The market rules (and associated code documents) are often cited as being too complex. And these concerns are set against wider matters such as the need for greater water efficiency, and the clear and significant challenges created by COVID-19.

 

Governance is important

Reflecting on my time at ELEXON, the electricity market operator for the balancing and settlement code, I have been involved in utility market governance in one way or another for the past 20 years. In that time, working with various market code panels and committees, I have recognised the significant impact governance arrangements can have on markets.

Effective governance is fundamental in enabling the change and innovation that is needed to tackle wide-ranging, strategic challenges and deliver a successful market.

Common features of effective and efficient governance include active participation, equitable and inclusive engagement, clear accountability, transparency, responsiveness, and consideration of strategic vision.

Poor governance can exclude stakeholders (or disincentivise their participation) and may lead to inefficiency or duplication of effort.

Resolution of market frictions can be inhibited by ineffective or inefficient governance. Conversely, efficient and effective governance can facilitate earlier resolution of market pain-points with associated benefits for customers.

 

Governance considerations in other utilities 

Extensive work in other industries (notably by Ofgem, BEIS and the Competition and Markets Authority) has indicated that effective governance is a pre-requisite for an effective market. The energy market investigation conducted by the CMA in 2016 concluded that issues with code governance and the influence of incumbents in this governance was a key inhibitor in the development of the gas and electricity markets. Subsequently, Ofgem and BEIS have been considering the future direction of market governance. In summer 2019, they noted that: 

“The rules governing the energy system need to adapt much more rapidly to enable the transition towards a more flexible energy system with net zero emissions, while minimising costs and protecting consumers. Reforming the code governance framework could, therefore better facilitate strategic changes in the sector, unlocking innovation and significant benefits to consumers.”

In order to deliver the strategic outcomes for effective code governance, Ofgem and BEIS outlined four areas of reform: 

  1. Strategic direction: ensuring the regulatory framework is forward looking and is informed by the Government's vision. 
  2. Empowered and accountable code management: ensuring the strategic direction is delivered through appropriate changes to codes that are progressed in a clear and logical manner. 
  3. Independent decision-making: re-balancing decision-making towards arrangements that are agile and responsive to change and work in the interests of existing and future customers, where the right incentives drive the design of rules and systems, while continuing to draw on industry input and expertise. 
  4. Code simplification: simplifying codes, removing unnecessary content, to improve accessibility and ensuring they are suitably adaptive to a changing industry to enable innovation and lower barriers to entry (by making codes clearer, more transparent, and accessible). 

 

Recent Governance Improvements 

Over the last twelve months, MOSL has worked with the market codes Panel to streamline and improve aspects of governance in the non-household water market: For example;

  • There is now a customer representative with voting rights on the Panel to increase the voice of the customer in decision-making. 
  • The Panel voting rules have been simplified, with a simple majority plus one now required to pass votes. This has replaced the previous high bar which required almost unanimous (or in certain circumstances unanimous) support for a vote to pass and has encouraged more active debate and participation, enabling more decisions to be passed.

A new ‘Urgent Change’ mechanism has been introduced to enable urgent matters to be dealt with appropriately and changes to be prioritised against documented criteria.

 This summer we also appointed two governance experts to deliver the dedicated secretariat service to the Panel and its committees as outlined in our 2020/21 business plan and consistent with the Governance theme of the plan, we have proposed changes to improve clarity and accountability across the governance of the market and MOSL:

  • We have separated the roles of the chair of the MOSL Board and the chair of the market codes Panel. This creates a clear distinction between the two, formally combined, roles with the Panel now being responsible for the appointment of its own chair. 
  • At our recent AGM, members supported resolutions to update and modernise our governance under MOSL’s Articles of Association. This included streamlined member voting proceduresprovision for the appointment of a senior independent director and amendments to provide continuity and good practice in relation to the composition of the MOSL Board.

 

Reviewing Market Governance

As outlined in our current business plan and our recently published strategic architecture, we are now taking forward a wider review of market governance. This work will take account of feedback we have received regarding various aspects of governance. It includes consideration of:

  1. whether existing market governance can adequately address strategic issues;
  2. whether governance and decision-making is sufficiently focused on customer impacts; 
  3. whether assessment and implementation of tactical change is too slow to drive improvement, or too fast to appropriately engage industry experts; and  
  4. whether the Panel is operating efficiently and effectively, including how it engages with its stakeholders. 

The review is a key focus for the Panel and we are working closely with Panel Members in delivering this work under a new Panel workstream. 

 

Code Simplification

In parallel with the Market Governance Review, together with the Panel, we are looking at the market code documents themselves. 

This Market Codes Review will consider the clarity and structure of the market codes (i.e. the rule books). It will seek to simplify the way obligations and processes (“the rules”) are captured in the current market documents. By making the rules easier to interpret, easier to navigate and easier to change, indirect costs associated with code complexity can be reduced. 

 

Looking ahead

While more challenges lie ahead, I have been impressed at the way our industry has tackled the issues raised by COVID-19, demonstrating an ability to work positively, collaboratively and with agility to seek the best outcomes for the market and customers. 

Technology has allowed us to come together. It has enabled greater engagement and transparency. Going forward, I anticipate this approach will become part of the “new normal” and it will facilitate greater efficiency and participation in industry governance. 

It is positive that this market is asking similar governance questions to those arising in other utilities but at a much earlier stage in its lifecycle. 

The Market Governance Review and the Market Codes Review present great opportunities to ensure our market governance promotes easy and active engagement and supports improvement and innovation for the benefit of customers both now and in the future. I’m really looking forward to building on our collective experiences to build best practice and empower the market through efficient and effective self-governance.

 To find out more about the non-household retail water market governance visit our governance webpage.

 

 

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