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UTILITY Week 17th July 2015

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UTILITY WEEK | 17TH - 23RD JULY 2015 | 13 Policy & Regulation Analysis T hird time lucky? The water sector hopes so, because the programme to open the market to competition for non- household customers in 2017 has just under- gone its third overhaul in a year, following an independent review that highlighted the need for "urgent attention" and issued the programme an amber warning. The main concern is the transfer of responsibility from Open Water Markets Limited to Ofwat and Market Operator Services Limited (MOSL). The latest change differs from the first two insofar as it is an operational change aimed at delivering a strategy that is already in place. It follows the forced strategic changes in August last year, when Open Water Mar- kets Limited was wound down following a surprise Treasury ruling, and then earlier this year, when plans for Wics to oversee the programme delivery were abandoned at the eleventh hour. Ofwat took back control of the programme in February, with operational delivery fall- ing to MOSL, a private body set up indepen- dently by three of the water companies. This latest set of changes formalises Ofwat and MOSL's roles, and puts a new delivery struc- ture in place. The transition is seen as essential to keep the programme on track and to keep a lid on costs, which have already spiralled to more than £40 million, largely because of the money needed to create the IT sys- tem. But there are concerns from within the industry that the benefits of opening up the market are being costed out with the delivery expenditure shooting up and eating into any potential profit margin. Structural change The first facet of the overhaul is the creation of six new working groups: the retail market opening management group; the retail mar- ket opening programme group; a communi- cations group; a policy issues group; a work plan review group; and an assurance groups. The groups slot into the Open Water hierar- chy under the jurisdiction of the Department for Environment, Food and Rural Affairs, Ofwat and MOSL. Ofwat's director for market open- ing, Adam Cooper, says the groups will "strengthen and formalise what we had before". He is backed up by the regulator's chief executive, Cathryn Ross, who says: "With the new structure there is appropriate leadership and it provides greater transpar- ency about where decisions are being taken, when, by whom and what the appropriate escalation is." The changes have been well received from the industry, with the general view being this will help the sector to hit the April 2017 deadline. Thames Water Commercial Services direc- tor Graham Southall tells Utility Week the lat- est modification "doesn't feel like a negative change" and is providing "stability". Business Stream chief executive Johanna Dow agrees, calling the latest change "a pos- itive step". She says she is "encouraged" by the developments. Change in costs Ofwat also revealed that the costs of the pro- gramme are set to increase by two thirds, from an estimated £25.3 million in 2013 to £41.8 million for the three years from 2014/15 to 2016/17. The reason? The central IT settle- ment system MOSL is procuring. Currently, there are four bids on the shortlist, with the preferred bidder set to be named next month. The previous esti- mate was completed before the system was designed. Ross says Ofwat had "kicked the tyres" of the budget in 2013 but now the sys- tem has been designed, the "full bottom up" costs are known. These costs could end up hitting the companies, and customers, in the pocket, because it will be the regulated companies operating in the new market that will have to cough up. The full details have yet to be finalised and MOSL's board is set to approve a final business plan next month. Ross says the new figure is a "fair num- ber based on good information" but suggests pressure from Ofwat could see it fall. "That budget is going to be kept under scrutiny as we go forward and we are keen to keep it under pressure." This will be welcomed by the industry, with many companies, including Thames Water and Business Stream, already voicing their concerns over the "narrow" 2.5 per cent margin in the non-domestic sector. Southall says there are industry-wide concerns that the costs could increase still further, eating more into any retail mar- gins. "There is not a huge amount of fat in the retail activity that justifies putting costly infrastructure in place," he says. Ascendancy Water managing director Charles Vincent tells Utility Week the addi- tional costs are inevitable and result "from the additional complexity inherent in a multi-wholesaler environment". With costs spiralling, and companies and customers set to foot the bill, ensuring the new structure limits problems and negates the need to throw more cash at the pro- gramme and IT system is vital. Let's try that again… Ofwat has been forced to overhaul the programme for delivering competition in the non-domestic water market a third time. Mathew Beech asks, has it got the formula right this time? REVISED BUDGET ESTIMATES FOR THE OPEN WATER PROGRAMME IN NOMINAL PRICES (£M) Organisation 2014/15 2015/16 2016/17 Totals for three (£ million) (£ million) (£ million) years (£ million) Ofwat 0.2 4.1 1.5 5.6 OWML 4.1 2.3 - 6.4 MOSL - 12.6 13.6 26.2 Totals per year 4.3 18.9 15.2 38.4 (£ millions) Totals plus 10% - 20.8 16.7 41.8 contingency (£ millions) Source: Ofwat

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