Performance penalties to be used to fund retail market improvement projects

From the new year, the penalties paid by trading parties who fall short of expected standards in the business retail market could be used to fund market improvement projects, rather than be recycled back to wholesalers and retailers.

Ofwat has approved code change proposal CPM018, to be implemented from 1 January 2020, which deals with the treatment of Market Performance Standards (MPS) and Operating Performance Standards (OPS) charges. While currently these are redistributed back to trading parties in the same proportion as they shared market operator charges in that financial year, from the New Year a new system will operate:

• by default, 100% of the charges will be redistributed to trading parties in an incentive-neutral approach; and

• there is an option to use some or all of the charges to fund special projects.

The Panel will select these, using pre-defined criteria. For a project to be funded using OPS or MPS charges, it should:

• enhance market functioning and benefit business customers;

• be additional to projects that are already envisaged and funded; and

• deliver broad-based benefits without conferring any significant competitive advantage to individual or small groups of trading parties.

MOSL will support the Panel by shortlisting projects and monitoring their progress. The deadline for exercising the option to use some or all of the charges will be six months after the end of the financial year. Ofwat said: “We are of the view that – in principle – it should not be difficult to identify additional projects that enhance market functioning and benefit business customers without conferring an advantage on individual trading parties.”

CPM018 made amendments to the Market Arrangements Code (MAC) and established a ‘Project Selection and Governance Document’ as an ancillary document to the MAC.

The solution was developed by consultancy firm Economic Insight following a long running debate about how to use the MPS and OPS penalties to avoid the dilution of incentives for trading parties to improve the market. Ofwat rejected a March 2018 plan to redistribute wholesaler and retailer charge pots separately and approved a holding solution in February 2019.

CPM018 is an enduring solution, but Ofwat said the process for project selection and selection criteria should be kept under review.