Financial Settlement Strategy

Transcription

1 Financial Settlement Strategy We are seeking stakeholders views on the questions set out in this consultation document. If you have any comments on the paper please contact: Publication Date: 2 January 2014 Response deadline: 14 February 2014

2 Contents 1. Executive summary Products and services in settlement Timing and frequency of settlement Payment terms and credit requirements Settlement and estimation calculation approach Roles and responsibilities in settlement 5 2. Introduction Programme background Document purpose and context 7 3. Defining financial settlement Defining financial settlement Calculating charges Processing payments between market participants Products and services Roles and responsibilities in financial settlement High-level responsibilities of market participants in settlement Collecting and distributing actual usage data Verifying actual meter reading data Storing actual meter reading data Determining usage data for financial settlement Calculating charges due Billing and payment handling Credit management The timing and frequency of financial settlement Ofwat s decision on payment terms Settlement timeline 21 2

3 5.3 Initial settlement, reconciliation and final settlement Error correction and dispute resolution Credit risk management Key enablers required to deliver financial settlement Market documents Market processes and data requirements Data access Governance of end-to-end settlement process 26 Appendix A: Consultation questions and approach 27 Appendix B: Glossary of terms 29 Appendix C: Customer expectations assessment 30 Appendix D: Working group comments 33 Appendix E: Detailed breakdown of products and services 40 Appendix F: Imbalance 42 3

4 1. Executive summary This document sets out our high-level design recommendations for how financial settlement activities will operate in the new retail water and sewerage markets in England. Readers are invited to comment on these recommendations and to respond to the specific consultation questions at the end of each chapter, and collected together in appendix A. Financial settlement is defined as: The calculation of charges and processing of payments between market participants to remunerate them for the products and/or services they have provided. 1.1 Products and services in settlement All products and services that one market participant provides to another will need to be paid for. For the purposes of this document, we have characterised the products and services into three groups. Continuously delivered services where charging is volume based and either metered or estimated, such as a metered water supply. Continuously delivered services where charging is time based, such as a standing charge for meter provision or unmeasured supplies. Event-based services where charging is based on the number and type of events, such as a meter exchange. 1.2 Timing and frequency of settlement Ofwat s information notice published in November sets out decisions that: the settlement period for continuously delivered services will be one calendar day; and the billing period for all services will be one calendar month. For all types of service, we recommend that the market operator (MO) should issue initial settlement calculations for a billing period (calendar month) five business days after the end of the billing period, for all calculated charges due between all market participants. For continuously delivered services, whether volume based or time based, we recommend that, following initial settlement, there should be two resettlement runs, two and eight months after initial settlement, and full and final settlement after 13 months. For event-based services, we recommend that there is only one settlement run, and so the initial settlement will be the full and final settlement. 1.3 Payment terms and credit requirements Ofwat s information notice sets out decisions that: standard payment terms are 30 days from the last day of the billing period, or 15 days after the invoice is deemed to be received, whichever is the later; and 1 Available at: 4

5 a retailer needs to have either a letter of credit from a guarantor with a defined minimum credit rating, or an agreement with a wholesaler to use an escrow account. We recommend that the credit rating requirement for standard payment terms should be the minimum investment grade rating that is, Standard & Poor s (BBB-), Fitch (BBB-), or Moody s (Baa3). Future work will recommend what amount of credit should be posted by a debtor. Market participants may negotiate non-standard payment and credit terms. In order to ensure transparency and a level playing field, we recommend that there should be a requirement to publish details of such agreements and to make them available to all other market participants. 1.4 Settlement and estimation calculation approach The charges due will be based on wholesale charges schemes. For continuously delivered services where charging is volume based and either metered or estimated, reflecting that (i) the market settlement period (a calendar day) is more frequent than meter reading for most services and service points, and that (ii) meter readings may not be available at the time of settlement, we recommend that the following approach should be taken to determining the consumption value used in settlement. Daily metered service points should use actual meter reading values. When daily metered values are unavailable, historical service point consumption data should be used to estimate consumption. Non-daily metered service points should use a combination of periodic meter readings, a yearly volume estimate (YVE) and consumption profiles. Consumption for a settlement period should be based on: o interpolation between two periodic meter readings using consumption profile factors; or o for settlement periods after the latest periodic meter reading, a combination of the YVE and consumption profile factor will be employed. Future high-level design work will consider the process for calculating the YVE and the consumption profiles. 1.5 Roles and responsibilities in settlement The party providing the service should be responsible for determining how much service has been provided, including taking meter readings, and providing this information to the MO. With respect to meter readings, we recommend that the wholesaler should be responsible for any verification of meter readings that retailers provide. For standard agreements, we recommend that the MO should: retain meter readings to use in settlement, and perform any necessary adjustment or aggregation of this data required to perform settlement; determine estimated usage in the absence of actual data; and determine charges due between market participants. We recommend that it should be mandatory for market participants to use these MO services for all agreements, except for non-standard agreements where the MO systems and processes would require change to deliver the services. In such 5

6 circumstances, we recommend that the party providing the service should be responsible for determining charges due. The party providing the service is responsible for billing and collections. Future high-level design work will recommend responsibilities for determining the quantity of credit to be posted by a retailer. 6

7 2. Introduction 2.1 Programme background The UK Government s Water Bill 2 was introduced into Parliament and published on 27 June The Water Bill is designed to address the current and future challenges faced by the water and sewerage sector in England, which were described in the Water White Paper 3. Among other things, the Water Bill is designed to: increase customer choice; improve service provision; stimulate innovation; and drive more sustainable approaches to managing our scarce resources. The Government s key reforms are: the introduction of retail competition for water and sewerage services to nonhousehold customers in England, which will be in place from April 2017; and the introduction of competition in the upstream sector, which will take place at a later date (after 2019). The Open Water programme has been created to facilitate the implementation of the proposed reforms. 2.2 Document purpose and context This document is part of a suite of materials being published throughout They set out the Open Water programme s recommendations for the high-level design for the new competitive water retail market for non-household customers in England. These materials are: The market blueprint, which describes the present and future market arrangements and the different roles in the new market arrangements, and summarises the programme s recommendations for the high-level market design; a series of documents on strategy and high-level design (of which this is one), which set out in more detail the programme s recommendations in areas such as registration and switching, financial settlement, and industry governance and performance management; and supporting discussion papers and option analyses, which have informed the documents listed above. The intended audiences for the high-level design papers are: the strategy, regulation and change teams within incumbent and new entrant water companies in England; Ofwat; potential providers of services and systems to a new central MO and/or to water companies; and 2 Water Bill Water for Life Market reform proposals. 7

8 anyone with an interest in the reform of the water industry. This document is structured as follows. Chapter 3 defines financial settlement, explains its role and characterises the products and services it will deal with. Chapter 4 defines high-level responsibilities for the various financial settlement activities. Chapter 5 sets out the timings and frequencies of these activities and recommends how the resulting credit risks will be managed. Chapter 6 gives an overview of key enablers of financial settlement. In addition to the standard appendices: o o appendix E sets out a detailed breakdown of product and services; and appendix F considers what types of charges for imbalance might be needed once upstream reforms after We have developed the design recommendations set out in this document with consideration of their impact on and response to wider issues, including how they would: ensure a level playing field for market participants; support market consistency both within England and between the English market and the markets in Wales and Scotland; reflect customers expectations of how they hope to see the retail market operate; align with the later introduction of upstream markets; and strike an appropriate balance between scale and complexity, deliverability and the benefits they will generate. In drafting this document, the Open Water team have reviewed and considered the market designs and associated codes for, and met market participants from: the Irish and British electricity markets; the British gas market; and the Scottish water market. We have also met with market operators and experts in these markets such as Ofgem, the Central Market Agency (CMA), the Water Industry Commission for Scotland (WICS), Elexon and Electralink. The recommendations out in this document have been discussed by: an industry working group; Ofwat s Choice and Trading Arrangements Programme Board members; Open Water s Programme Delivery Board; and Open Water s High Level Group. Feedback from these groups has been considered and reflected in the recommendations made. Throughout this document, we ask a number of questions and seek stakeholders views on these. We list all of the questions in appendix A. Please provide your responses to the consultation questions and any other comments or queries you may have regarding this paper by 14 th February 2014, to feedback@open-water.org.uk. We provide an accompanying template for responses on the Open Water website to help this process, which we strongly encourage respondents to use. We will, however, accept responses in other formats if necessary. 8

9 We will be running a workshop on 29 th January for representatives from water companies to discuss the content presented in all of the high-level design papers. Details of this session have been shared with water companies, and for more information please contact feedback@open-water.org.uk. A second iteration of this document will be issued in early summer This will include any changes necessary to align with additional strategy and high-level design papers, which will be published in early summer 2014, and will also reflect any changes made in response to consultation responses received. The recommendations set out in this document are intended to facilitate wider discussion about the changes. Following the consultation, the updated blueprint will act as a recommendation to Ofwat, for the relevant regulatory decisions in due course. 9

10 3. Defining financial settlement Key recommendations made in this chapter Financial settlement is defined as: The calculation of charges and processing of payments between market participants to remunerate them for the products and/or services they have provided. The approach to financial settlement for different products should be set in relation to whether the product is: continuously delivered and measured/continuously delivered and unmeasured/event based; and standard or non-standard. 3.1 Defining financial settlement We define financial settlement as: The calculation of charges and processing of payments between market participants to remunerate them for the products and/or services they have provided. This chapter briefly expands on the components of this definition. 3.2 Calculating charges The financial settlement system we are designing consists of wholesalers and retailers (together, market participants ) making payments to each other, and a central MO. This is distinct from customers paying retailers. Therefore, there are two sets of charge calculations. First, there is the calculation of the charge for each customer of a retailer for the wholesale services that the customer has used. Second, there is the calculation of charges for each retailer for the services that each wholesaler has provided to the customers of the retailer. Figure 1 below shows both the financial flows and the flows of physical product. Although the physical product flows straight from the wholesaler s distribution network to the customer, we assume it passes momentarily through the hands of the retailer. 10

11 Figure 1: Charge calculations The two sets of charge calculations are necessarily connected. The total wholesale charge from one wholesaler to a retailer is the sum of the individual wholesale charges of that retailer s end customers who receive services from the wholesaler in question. This document is primarily interested in the financial settlement of the charges between wholesalers and retailers. It addresses the financial settlement of these charges only other aspects of wholesale contracts will be addressed in the wholesale contracts strategy as part of the second iteration of the market blueprint. However, we consider some aspects of the end-customer charges here for example, responsibility for estimating customer usage. Other aspects of customer contracts will be addressed in the customer contracts strategy as part of the second iteration of the market blueprint. Ofwat is also carrying out further work on charging. The key questions about charge calculation are as follows. What charges should be calculated, and by whom? How should those charges be calculated? When should charges be calculated? We answer the first two questions in chapter 4; we address the third question in chapter Processing payments between market participants The second aspect of financial settlement is the processing of payments between market participants. This is the process by which the provider of the services is paid for the delivery of the services. The main questions in relation to this aspect of financial settlement are as follows. What are the roles and responsibilities of the parties involved in the billing and payment process? What are the payment terms? We address the first question in chapter 4, and the second question in chapter 5. 11

12 3.4 Products and services In order to assess what the best approach to financial settlement is likely to be, we must consider the products and services that are going to be financially settled. In the water and sewerage market, these products and services can be considered in the following three groups. Continuously delivered services where charging is volume based and either metered or estimated (measured), such as a metered water supply. Continuously delivered services where charging is time based, such as a standing charge for meter provision or unmeasured supplies. Event-based services where charging is based on the number and type of events, such as a meter exchange. In the Scottish market, continuously delivered services are called direct services, and event-based services are called indirect services. In addition to this distinction, products and services are also differentiated by whether the product is standard or non-standard. Sometimes retailers will need non-standard services to meet a particular customer request or to provide an innovative service (for example, demand management) and we want to facilitate this. We set out this categorisation of charges in Figure 2 below. Figure 2: categorisation of products and services At this stage in the market design process, we have identified that this differentiation of different types of products is necessary, but we have not identified which products would fall into the standard and non-standard categories. We will set out principles for identifying whether a product is standard or non-standard in the second iteration of the market blueprint. Products and services can be further sub-divided into a number of product types. As the main distinctions between products are those outlined above, this extra level of granularity is not discussed here, but is presented in appendix E. 12

13 The main questions for financial settlement in relation to products and services are as follows. Does the responsibility for calculating charges differ by product, and if so, who calculates charges for different products? How should charges be calculated for each product type? Is there any difference in the settlement timeline for different product types? We address the first two questions in chapter 4, and the third in chapter 5. Consultation questions: FS 3a: Do you agree with our definition of financial settlement? FS 3b: Have we identified the important categories of products for financial settlement in section 3.4? 13

14 4. Roles and responsibilities in financial settlement Key Ofwat decisions summarised in this chapter The MO will have a role in the centralised calculation of charges for financial settlement. The MO will not have a role in billing or payment collections. The party providing the service is responsible for billing and payment. Key recommendations made in this chapter The MO should calculate charges for all standard products. They should calculate charges for all non-standard products unless there are reasonable practical reasons not to do so. In cases where the MO does not calculate usage and charges for nonstandard products, the parties to the contract will make their own arrangements. The MO should retain meter readings for use in settlement, and perform any necessary adjustment or aggregation of this data required to perform settlement. The MO should determine estimated usage in the absence of actual data. The party providing the service should determine how much/many of a service has been provided for eventbased services such as meter exchanges, and submit this information to the MO for use in calculating charges. It should be mandatory for market participants to use the above MO services for all continuously delivered and event-based services in the market, except for nonstandard agreements where the MO systems and processes would require change to deliver the services; these should be managed bilaterally. The MO should not be responsible for performing on-site verification of meter readings. Future work will recommend what role the MO should have in relation to credit management. 4.1 High-level responsibilities of market participants in settlement It has been agreed that the MO will have a centralised role in collating and communicating usage data, and using this to calculate charges for financial settlement. The Open Water High Level Group endorsed this recommendation in July and September and Ofwat s Board approved it in November. Centralising the calculation of charges avoids inefficiencies arising from duplicated systems, hence reducing costs of market participation and therefore barriers to entry. It also helps to create a level playing field for market participants by removing the scope for information asymmetries and anti-competitive behaviour, and should reduce the potential for disputes for example, when a supply switches between retailers. It is also consistent with the primary functions of the market operator in the Scottish retail market (the CMA). 14

15 4.1.1 Standard products and services As discussed above, the MO will have a role in calculating charges. We recommend that the MO calculates charges for all standard products and services, including eventbased services. In Scotland, retailers submit their customers meter readings to the MO, which then uses this data to calculate usage and charges for direct services. However, the wholesaler (Scottish Water) and not the MO calculates charges for indirect services, on the grounds that it has the record of work carried out. Notwithstanding this precedent, in England there are multiple (about 20) wholesalers and we recommend that they submit details of work done to the MO, so the MO can calculate charges centrally for both continuously delivered and event-based services. This will increase efficiency, consistency, and transparency of charge calculation Non-standard products and services For non-standard agreements, if the charge calculation is relatively straightforward and can be easily accommodated by the MO systems without increasing costs, these charges should also be calculated by the MO. However, it could be costly for the MO to modify its systems to deal with complex nonstandard agreements. In this case, it is better for the parties to the agreement to be responsible for all aspects of its implementation. Therefore, we therefore recommend that the MO should calculate non-standard charges unless there are reasonable practical reasons for the MO not to. In the case where the MO does not calculate usage and charges, the parties to the contract will make their own arrangements. 4.2 Collecting and distributing actual usage data Being able to settle a transaction of any form is reliant on a determination of how much of the service has been consumed. These services can be considered in three groups, which we described in section 3.4. For continuously delivered measured services, Ofwat has determined that the retailer is responsible for providing actual meter readings 4. For continuously delivered services where charging is time based, we have considered whether determining how much service has been provided should be the responsibility of the MO, retailer or wholesaler. We recommend that the MO should determine such data, except for non-standard services where it is impractical to do so. The main reasons for this recommendation are that: centralisation should remove duplication of activity and systems and hence reduce costs of market participation, and in turn reduce barriers to entry for new entrants; having a single party performing this activity should reduce the potential for disputes for example, regarding when a supply switches between retailers; and allowing dispensation for non-standard services should remove potential for the MO to constrain innovative agreements in the market. 4 Source: Ofwat price review methodology, 15

16 For event-based charges, we consider that only the party providing the service, such as the wholesaler performing a meter exchange, will be able to advise what services have been provided. 4.3 Verifying actual meter reading data It is common practice in competitive utility markets to confirm that meter readings provided to settle the market are accurate, primarily through carrying out verification visits to a sample of sites. We have considered whether verifying meter readings should be the responsibility of the retailer, wholesaler, the MO, or another third party. We recommend that the wholesaler should be responsible for such verification work, because: meter reading inaccuracies only materially impact the wholesaler, and hence the wholesaler has the greatest natural incentive to verify this data; and the wholesaler will have a metering field force for its domestic customers, and accordingly should be able to provide this service at best value. Once upstream competition is introduced, it is possible that other market participants will also feel the impact of inaccurate meter readings for example, as a result of imbalance mechanisms. At that point, we recommend reconsidering whether it is appropriate to centralise meter read verification, so as to provide an impartial market assurance service to all market participants. 4.4 Storing actual meter reading data Retailers will be responsible for retaining meter readings for example, to evidence how bills issued to customers were calculated. In addition, we recommend that the MO retains the master record of meter reading data provided to them and used to determine financial settlement charges (see later sections on MO settlement responsibilities), to ensure auditability of MO settlement services. 4.5 Determining usage data for financial settlement How usage should be calculated The recommended financial settlement strategy for the market includes a daily settlement period (the smallest period of time for which usage charges are calculated) for continuously delivered services. The charge calculation for the initial settlement for all settlement periods within a calendar month will occur early in the month following the month in which the service was consumed. As not all services are metered, and because services that are metered are not all measured daily, the following approaches should be taken to determine consumption values for settlement periods. Daily metered service points should use actual meter reading values. When daily metered values are unavailable, historical service point consumption data should be used to estimate consumption. Non-daily metered service points should use a combination of periodic meter readings, a yearly volume estimate (YVE) and consumption profiles. For periods between two meter readings, consumption profiles should be used to interpolate usage over the period. For the period after the last available reading, a YVE and consumption profiles should be used to estimate usage. 16

17 Non-metered service points should use a combination of the YVE and consumption profiles. In addition, it may also be necessary to perform the following transformations to consumption data to enable financial settlement. Aggregation of consumption at the service point level to some higher level for example, as happens in the gas market to then enable settlement at a gas distribution zone level. Adjustment or uplifting of consumption for example, as happens in electricity markets to uplift measured consumption to account for losses in the distribution network. The losses in water are significant and further work is needed to decide how these will be accounted for Who should calculate usage For each of the above activities we have considered whether the retailer, wholesaler or MO should perform them, and whether the responsibility should change for different services and types of agreement. We recommend that the MO should be responsible for estimating usage for all customers. Potentially, this is complex. By centralising estimate calculation there should be efficiency gains, as individual market participants will not need to perform this activity. This will also result in more consistent estimation across all customers, as the risk that different market participants interpret estimation rules is removed. We will consider in the detailed design how the YVE and consumption profiles are calculated. 4.6 Calculating charges due The next step in financial settlement is to combine usage data with charging schemes to determine the financial payment due between the two parties. We have considered whether the retailer, wholesaler or MO should perform this activity, and whether the responsibility should change for different services and types of agreement. Our recommendations are that responsibilities for this activity should be the same as for the determination of usage data (as described in section 4.5). The MO should calculate charges due for both continuously delivered and eventbased services performed under a standard agreement. The MO should calculate charges due for both continuously delivered and eventbased services performed under a non-standard or bespoke agreement unless there are reasonable practical reasons for it not to. The MO should be permitted to offer to carry out changes to its systems and processes to enable usage calculation for such agreements, on a commercial basis. Otherwise, the retailer and wholesaler should be responsible. We describe the main reasons for these recommendations in section Billing and payment handling Financial settlement concludes with an invoice being issued, the debtor making a payment, and the creditor processing that payment and managing the debt in the event of late or non-payment. 17

18 We have considered whether these activities should be managed bilaterally between counter-parties, principally wholesalers invoicing individual retailers and retailers paying each wholesaler, or whether payments should be routed through the MO that is, the MO invoicing retailers, retailers paying the MO, and then the MO paying wholesalers. We have concluded that these activities should be managed bilaterally and the MO will not offer such services. The main reasons for this recommendation are that: centralisation would require development of additional payment handling systems, which already exist within retailers and wholesalers; centralisation would impose additional credit and investment risks on the MO, which would still exist for wholesalers, and as such drive up credit management costs in the market; and Ofwat s decision on default payment terms removes information asymmetries and prevents anti-competitive behaviour as regards billing and payment handling. 4.8 Credit management To mitigate counter-party credit risks, market participants will have to post cash or a letter of credit. Future high-level design work in early 2014 will evaluate roles and responsibilities and recommend if the MO should perform any credit management activities. Consultation questions: FS 4a: Do you agree that the MO should calculate charges for all standard products, and for all non-standard products unless there are reasonable practical reasons for the MO not to do so? FS 4b: Do you agree that the MO should retain meter readings for use in settlement? FS 4c: Do you agree that the MO should perform any necessary adjustment or aggregation of meter readings data required to perform settlement? FS 4d: Do you agree that, for the purposes of financial settlement, the MO should determine estimated usage in the absence of actual data? FS 4e: Do you agree with our recommendation for how estimated usage should be calculated as set out in section 4.5.1? FS 4f: Do you agree that it should be mandatory for market participants to use MO services for standard products and services? FS 4g: Do you agree that it should be mandatory for market participants to use MO services for non-standard products where the MO provides services for the nonstandard product? FS 4h: Do you agree that the MO should not be responsible for performing on-site verification of meter readings? FS 4i: Do you agree that the party providing an event-based service such as meter exchanges should determine the quantity provided? 18

19 5. The timing and frequency of financial settlement Key recommendations made in this chapter For all types of service, the MO should issue initial charge calculations for a billing period (calendar month) five business days after the end of the billing period, for all calculated charges due between all market participants. For continuously delivered products and services, whether volume based or time based, following initial settlement there should be two resettlement runs, two and eight months after initial settlement, with full and final settlement after 13 months. For event-based services, there should be only one settlement run, and so the initial settlement run will be the full and final settlement. The minimum credit rating for the standard credit requirements should be: Standard & Poor s (BBB-); Fitch (BBB-); or Moody s (Baa3). 5.1 Ofwat s decision on payment terms Ofwat is setting separate price controls for wholesale and retail activities for the existing companies for the period Among other things, this creates increased transparency and helps new retailers to compete on a level playing field. So that they could prepare separate regulatory business plans for wholesale and retail, companies needed a clear definition of: wholesale and retail activities for example, meter reading is a retail activity; and payment term assumptions, since this affects working capital requirements for both wholesale and retail. Ofwat published a consultation on the second point in October , and in November published an information notice setting out its decisions 6. We have summarised the decisions below. 5 wnload#

20 Ofwat s decisions at a glance Setting of payment terms Wholesalers must offer standard terms to everyone. Non-standard terms can be offered where a wholesaler and retailer agree with each other to do so. Wholesalers must publish any non-standard terms they agree. Scope of products and services Payment terms apply to all products and services provided between wholesalers and retailers. These payment terms do not cover services that the wholesaler provides directly to end-customers. Settlement period One calendar day our working assumption is that this will be midnight to midnight. Details of payment terms Billing period Payment period Credit requirement Standard term: One calendar month. Standard term: 30 days from the last day of the billing period, or 15 days after the invoice is deemed to be received, whichever is the later. Standard term: a retailer needs to have either: a letter of credit from a guarantor with a minimum credit rating that will be set out in the market documents; or an agreement with a wholesaler to use an escrow account. Additional safeguard for deviation from standard term: a wholesaler needs to: offer proportionate credit and collateral arrangements; and explain clearly the rationale for credit decisions. These payment terms are consistent with typical retail payment terms for nonhousehold customers, minimising the working capital requirements for new retailers while leaving the cash flows of existing companies broadly unaffected. Services provided directly by wholesalers to end-customers rather than retailers may have non-standard payment terms, perhaps in line with existing payment practice, and this might include developer service charges such as for capacity checks. 20

21 5.2 Settlement timeline The diagram below sets out an indicative settlement timeline. We have included definitions of the components on the timeline in the glossary (see appendix B). This timeline is starts with a billing period, comprising a number of settlement periods. At the end of the billing period, the MO calculates charges, and sends these to the market participants. Once wholesalers have issued invoices based on these charges, the retailers have until the end of the payment period to make the payment. We recommend a billing period of one calendar month, with the MO being required to issue charge calculations for each day in the month by the fifth working day after the end of the billing period. The wholesaler will then issue the invoice as quickly as reasonably practicable. As noted in section 5.1, Ofwat has decided that the invoice falls due and is payable 30 calendar days after the month end, or 15 calendar days from the date of the invoice, whichever is later. This gives the wholesaler an incentive to issue the invoice by the 15th day of the following month. For example, the deadlines for the forthcoming billing periods would be as in the table below. Note that the date for the wholesalers issuing invoices below are the latest dates that invoices can be issued before the due date of payment is delayed. Where the 5th, 15th or 30th day after the end of the billing period is a non-working day, the next working day should be the relevant date. Billing period 21 MO issues charge calculations Wholesalers issue invoices Invoices fall due for payment January February February March 2014 February March March March 2014 March April April April 2014 April May May May 2014 May June June June 2014 The market code should include late payment terms (such as the 3% above base rate interest for late payment currently in the water supply licensing or WSL common contract) as an incentive to pay on time. There needs to be an escalation procedure if the retailer s failure to pay persists. A precedent exists in the provisions for default by non-payment by non-household customers: Section 61 of the Water Industry Act 1991 (WIA91) in conjunction with a supply agreement allows the appointed company, after serving notice, to remove the

22 meter, which effectively disconnects the supply. (Schedule 4A of the WIA91 sets out the exclusions, which include any dwelling which is occupied by a person as his only or principal home.) However, it would not be appropriate to disconnect a customer because of its retailer s failure to pay on time. 5.3 Initial settlement, reconciliation and final settlement Continuously delivered services Charges for services such as water supply and wastewater removal often depend on usage. If the relevant meter readings are not available, usage and charges have to be estimated. For these services, the initial settlement is necessarily an imprecise estimate. These estimates can be updated and made more accurate after meters have been read. Therefore, we recommend that there should be an initial settlement and then a reconciliation re-settlement of charges. This is intuitively the case for continuously delivered and measured services. It is less intuitive, but nevertheless the case that this should also be true of continuously delivered unmeasured services. This is because more up-to-date data on factors affecting charges, such as changes to rateable value, can become available after the initial settlement has taken place. Therefore, we recommend that there is an initial settlement, and reconciliation for both continuously delivered measured and unmeasured services. At some point in time, charges need to be finalised to keep the process manageable and so that market participants can finalise their accounts. Typically, small non-household customers have their meters read every six months, while larger users have their meters read monthly or daily. However, sometimes a meter reading may be missed so it may be two months for monthly reading and 12 months for 6-monthly reading before usage can be determined reliably. Therefore, we recommend that usage is reconciled and charges are re-settled two and eight months after initial settlement (in line with Scotland), with full and final settlement after 13 months (subject to any dispute and appropriate resolution thereof). So, for example, at the same time as the initial settlement for January 2019 there would be first reconciliation for November 2018, second reconciliation for May 2018 and final settlement of December Event-based services For event based services the rational for having resettlement of charges is less clear. The purpose of having re-settlement for continuously delivered products is that all the information on usage is not available at the time of charge calculation for initial settlement. For event based services on the contrary, all information about what services were delivered in the billing period should be available at the end of the billing period. Only errors in data, rather than missing data, would result in the need to recalculate charges. In order to give companies a strong incentive to provide the correct data first time, we therefore recommend that for event based services, the initial settlement is also the full and final settlement (subject to any dispute and appropriate resolution thereof). 22

23 5.4 Error correction and dispute resolution Once an invoice is issued, the payee may dispute some of the charges and this needs to be resolved. Similarly, the parties may agree that there has been an error. If errors are corrected and disputes resolved within the payment window between the invoice being issued and payment falling due, it may be possible to correct the charges and pay the correct amount on time. Otherwise, there may need to be an interim payment on account and a subsequent resettlement. The details of these processes are yet to be determined and will be included in version two of the Market Blueprint. 5.5 Credit risk management Ofwat s information notice published in November sets out two methods of credit risk management; the debtor should have or obtain either: a letter of credit or parent company guarantee from an entity with a minimum credit rating set out in market documents; or an agreement with a wholesaler to use an escrow account. Ofwat has not proposed what the level of the minimum credit rating should be, or how the escrow account would work. We recommend that the credit rating should be: Standard & Poor s (BBB-); Fitch (BBB-); or Moody s (Baa3). This is the minimum investment grade rating. It provides some assurance while not raising unnecessary barriers to entry. We recognise that we and Ofwat have to date only considered the quality of credit required, and not the quantity. An alternative idea is to use data from Dun & Bradstreet 8, which assesses both creditworthiness and how much credit should be extended. We would be interested in views on this idea. The second iteration of this market blueprint will recommend a preferred approach to the amount of credit, and the details of an escrow account as an alternative credit guarantee. Consultation questions: FS 5a: Do you agree that the MO should issue calculated charges five business days after the end of the billing period? FS 5b: Do you agree that, for continuously delivered products and services, there should be initial settlement, re-settlement after two and eight months and final settlement after 13 months? FS 5c: Do you agree that for event-based charges there should be one settlement run, and no resettlement? FS 5d: Is a credit rating requirement of Standard & Poor s (BBB-), Fitch (BBB-), or

24 Moody s (Baa3) appropriate for market participants letter of credit or parent company guarantee? 24

25 6. Key enablers required to deliver financial settlement Key recommendations made in this chapter The market rules for financial settlement should be set out in the market documents. The data requirements for financial settlement will be considered in detailed design. The governance arrangements for the financial settlement process will be developed in the market governance and performance management strategy. 6.1 Market documents The recommendations set out in this and subsequent versions of the financial settlement strategy will be implemented through the market documents. These include licences, codes and related documents. Ofwat has also said that it will update the current access code guidance to reflect the payment terms that it has set. This will be done by 1 April The form of these market documents, and hence how rules for financial settlement and other areas, will be set out will be developed in the second iteration of the market blueprint. Bilateral arrangements for non-standard products and services will fall outside of central settlement hence will not go through the MO. However, these bilateral arrangements will still be subject to the rules set out in the market documents. In the second iteration of the market blueprint, we will set out principles for categorising products as standard or non-standard. We will ensure that the drafting of the market documents takes account of all market participants and arrangements, and not just those that involve the MO. 6.2 Market processes and data requirements The market processes carried out as part of financial settlement will include standard data processes, data flows and structures. The requirements to provide this data should be set out in the market documents and will specify: what data is required; from which participants; and when. The high-level structure of the market documents will be set out in the codes architecture. The details of the data requirements will be considered as part of detailed design. 6.3 Data access The two main issues for data access are as follows. First, how do we ensure that all the parties that need data can access it? Second, how do we ensure that parties that should not have access to information cannot access it? 25

26 We consider that making the MO the holder of the master record of data, including meter readings, will enable all participants that need data to have ready access to it. They will only have one organisation the MO to deal with and hence one system. So, this should make accessing data efficient, provided that the rules around data access are set up to take account of all participants data needs. Where non-standard arrangements are in place between market participants, we would expect data needs to be considered as part of these agreements. On the second question how do we avoid inappropriate data access we are aware of the issue and will consider this issue as part of the systems architecture and data model. 6.4 Governance of end-to-end settlement process Governance arrangements are required in addition to obligations on participants to protect the integrity of data that forms the basis of the settlement process (and therefore the basis of the financial transactions that occur). These arrangements will include details of: how the settlement process is governed; who is responsible for end-to-end governance of the settlement process; who is responsible for ensuring MO governance; audit of the settlement process/data; and the dispute resolution processes. We will consider these issues as part of the second iteration the market blueprint, in the market governance and performance management strategy. 26

27 Appendix A: Consultation questions and approach Consultation questions We are seeking views in relation to the following questions posed throughout this document. FS 3a: Do you agree with our definition of financial settlement? FS 3b: Have we identified the important categories of products for financial settlement in section 3.4? FS 4a: Do you agree that the MO should calculate charges for all standard products, and for all non-standard products unless there are reasonable practical reasons for the MO not to do so? FS 4b: Do you agree that the MO should retain meter readings for use in settlement? FS 4c: Do you agree that the MO should perform any necessary adjustment or aggregation of meter readings data required to perform settlement? FS 4d: Do you agree that, for the purposes of financial settlement, the MO should determine estimated usage in the absence of actual data? FS 4e: Do you agree with our recommendation for how estimated usage should be calculated as set out in section 4.5.1? FS 4f: Do you agree that it should be mandatory for market participants to use MO services for standard products and services? FS 4g: Do you agree that it should be mandatory for market participants to use MO services for non-standard products where the MO provides services for the nonstandard product? FS 4h: Do you agree that the MO should not be responsible for performing on-site verification of meter readings? FS 4i: Do you agree that the party providing an event-based service such as meter exchanges should determine the quantity provided? FS 5a: Do you agree that the MO should issue calculated charges five business days after the end of the billing period? FS 5b: Do you agree that, for continuously delivered products and services, there should be initial settlement, re-settlement after two and eight months and final settlement after 13 months? FS 5c: Do you agree that for event-based charges there should be one settlement run, and no resettlement? FS 5d: Is a credit rating requirement of Standard & Poor s (BBB-), Fitch (BBB-), or Moody s (Baa3) appropriate for market participants letter of credit or parent company guarantee? Consultation approach Please provide your responses to the above consultation questions and any other comments you may have regarding this paper by 14 th February 2014, to feedback@open-water.org.uk. We provide an accompanying template for responses 27