Ofwat sends penalty recycling plan back to the drawing board

Ofwat has told the Market Performance Committee (MPC) to look again at its proposals for redistributing penalties accrued from Market Performance Charges.

The MPC put forward a change proposal, CPM008, suggesting the charges paid by wholesalers and retailers should be ring fenced into separate pots for redistribution. This was to to address the asymmetry in penalty payments (retailers perform approximately 25,000 tasks per month which could incur a charge, compared to the approximately 1,000 performed by wholesalers) and hence prevent retailers subsidising wholesaler underperformance. This was recommended to Ofwat by the Code Panel.

Ofwat agreed the incentives on wholesalers under default redistribution arrangements are poor; moreover that larger retailers face diluted incentives to perform well too, since they may receive a large proportion of any penalties back in the form of redistributed funds.

However, it was not satisfied with the MPC’s remedy, arguing this too “is likely to result in weak incentives for good performance from larger retailers and wholesalers – these aspects have not been fully considered in the Panel’s assessment”. It said: “We consider that further work is needed to either improve upon the proposal or identify an alternative appropriate method for dealing with Market Operator credited charges. We request that the Panel reviews this recommendation and resubmits a final report as soon as practicable.”

In terms of alternatives, the regulator gave a nod to a suggestion put forward by some trading parties that charges could fund innovation projects which may save customers money in the long term, as opposed to redistributing these amongst trading parties. It said: “The Panel may wish to take the opportunity to consider this further at the present time given that we have been unable to form an opinion on the present change proposal.”

Ofwat noted its decision produced uncertainty but countered that under the Market Arrangements Code, the first redistribution payments are not scheduled until April 2019, “and we expect that a suitable proposal should have been raised and approved by the Authority well in advance of this date”.