Ofwat has pressed the button on the introduction of charges for wholesalers who fall short on operational performance.
In a decision document published last week and to be implemented on 1 April, the regulator endorsed code change proposals CPW049 & CPM012, which deal with the Operational Performance Standards (OPS) regime.
The approved modifications deal with two principal elements: standardising reporting and introducing poor performance charges. Two separate methodology documents have been produced to ease wholesalers’ concerns about reporting inconsistency and the latest modifications will see the Peer comparison report guidance document amended take into account additional data reporting, including reporting the number of tasks in period into distinct categories: started, completed with deferred timescales and rejected. Ofwat noted: “The MPC believes the additional data being collected will help facilitate assurance, however it recommends that MOSL continue to develop its approach to reporting analytics, audit and performance resolution.”
A single flat rate charge of £40 will be levied on wholesalers at the time of a Key Performance Indicator failure. This is equivalent to the maximum wholesale MPS charge, and will ensure all late tasks incur a material financial penalty (there will be no additional charges when tasks transition from ‘late’ to ‘extremely late’). Ofwat noted the lack of detailed transactional reporting restricts the level of complexity that can be applied to the OPS charging framework at present, though when transactional reporting is available, it suggested a tiered charging structure should be re-examined. In the meantime, the flat rate offers simplicity and enables OPS charges to be introduced promptly at the start of next month.
Wholesalers will be required to submit OPS performance data within six business days of the end of the relevant month and charges will be invoiced nine business days following the end of relevant month. Wholesalers will then have 20 business days after the date of the invoice to make payment.
There will be no cap on the number of late tasks which OPS charges apply to, reflecting an overall lower volume of OPS tasks compared to MPS tasks.
How the charges are used – for example whether they will be redistributed or put into some kind of central pot – is yet to be decided. The MAC states a review on this must begin no more than three months after the introduction of OPS charges, and must conclude no later than nine months after the introduction of charges.
Charges will apply to all standards except a new operational process to be included in the OPS framework – G4, which concerns trade effluent monitoring. This will be reported on but failures not charged for, pending a review in the second half of the 2019/20 financial year. Ofwat explained: “The high number of trade effluent monitoring sample results may distort the OPS figures. Also, due to the higher volume of actual sample results, it was argued that this could be a disproportionately high part of overall OPS performance and therefore could distract from performance areas with the most direct customer impact. It will be beneficial to have a period of embedding prior to the decision on the implementation of OPS charges being made in respect of process G4.” One other new trade effluent process will also be included in the the OPS framework and charges applied: applications for a trade effluent consent.
The decision comes after a long period of consideration which began in March 2018 and has featured work by the Operational Performance Standards Working Group (established in May 2018) and the Market Performance Committee, among others. There was a market wide request for information in November 2018 which produced a mixed bag of views on all the proposed changes, including the principle of self reporting rather than external audit.
The panel recommended the code changes in December, and Ofwat agreed on 28 February. However, there regulator pointed out: “We feel the proposed OPS charge is a short term solution, and there is clearly a need for consideration of an appropriate method which ensures that charges are also applied to ‘extremely late’ tasks. Similarly the proposed reporting but non-charging relating to G4A and G4B we agree should be reviewed following the collection of a full three months’ worth of data.
“We strongly support the OPSWG in their view that a further review should be carried out in the financial year 2019/20, as there is scope for further improvements to the OPS which could include the addition of new metrics.”
Since 1 April 2018, trading parties have paid penalties for late or missed tasks covered by Market Performance Standards. Although both wholesalers and retailers can incur penalties under MPS, the scheme has been seen as disproportionate as retailers undertake over 95% of all MPS tasks, and therefore bear a much higher risk of financial penalties. Retailers have also pointed out that they can incur MPS charges as a direct result of wholesalers’ failure to complete OPS tasks.