Workshop 5: Discussion Paper

Workshop 5: Discussion Paper How will my wholesale business interact with retailers? Introduction This workshop offers the industry a further opportunity to consider the practicalities of arm s-length separation in a competitive market. On this occasion we will consider the operational interaction between separate retail and wholesale activities. Typically, retail activities can include the following: retail pricing and tariffs; the billing process; collection of charges; debt follow-up and debt management; meter reading and customer meter operations; call and correspondence handling; responses to customer enquiries, complaints or requests for information; key account management; liaison with the wholesaler to deal with customer issues; and marketing. In England the context of the retail-wholesale separation has been mapped out under PR14 with Ofwat: setting out its view of retail and wholesale activities in its final methodology Setting price controls for 2015-20 final methodology and expectations for companies business plans ; and setting separate binding price controls for household retail, non-household retail, and wholesale (water and sewerage) activities. As such there will be three separate price controls (or four for the water and sewerage companies). Having separated clearly the retail and wholesale activities it becomes necessary to consider how the two will work together in order to best serve customers and to ensure that all retailers in an area can expect the same level of service from their wholesaler. An Operational Code is one way to deal with these operational interfaces. In essence the Operational Code is the glue that joins these two distinct activities back together again. The Operational Code in Scotland is structured around specific retailerwholesaler interactions, such as the steps necessary to arrange a new connection. 1

The code has been changed over time in order to ensure that it continues to meet the needs of both the wholesale and the retail market participants. Indeed, the Scottish code has changed materially since market opening to deal with the revised trade effluent, new connections and metering processes that have been introduced. It has also been amended to deal with contestable services. Why is the Operational Code so important? The Operational Code helps to ensure that there is a level playing field and to reassure the new entrant or retailer operating out of its home area that it is being treated fairly. Of course, a level playing field relies on participants complying with the code and following the processes at all times. Ensuring that this happens may be a role for a compliance officer within an appointed business. A light touch A key point is that the code should deal with these interactions at a very high level, without interfering in the way in which each party undertakes its specific activities. This can be tested with relative ease by asking the question: would the code create any barriers to entry in the market? As such, the code is not intended to supplement or replace internal procedures where these are consistent with the Operational Code. Since the code operates at a high level and relies on the retailer accepting areaspecific processes (for example around bye-laws and emergencies), it should be possible for any appointed business to comply with the core operational processes that will be set out in the second iteration of the Market Architecture Plan. Agreeing the core operational processes is only the first step towards finalising an appropriate Operational Code. These processes need to be supplemented by the standards or timelines required of the wholesaler s response to retailers that are a necessary component of any effective code. These standards or timelines may be more or less demanding than those currently offered to customers by the appointed businesses (the time taken to replace a meter would be an example). Ofwat may decide to take a view on the standards and response times included in the Operational Code. Other industry examples Gas The Uniform Network Code is the legal and contractual framework governing the supply and transportation of gas. 2

The code includes a common set of rules which ensure that competition can be facilitated on level terms. It governs processes such as balancing the gas system, network planning, and the allocation of network capacity. Electricity Electricity Codes form the rulebook for operating the GB electricity industry at transmission level. Each of the codes focuses on a different area of the industry. The Grid Code is the technical code for connection and development of the National Electricity Transmission System. The Operational Code: Generic principles The guiding premise in drafting an Operational Code is that as far as possible the retailer would have exclusive contact with customers and the wholesaler would only have contact directly with the retailer s customers in certain, narrowly defined instances (such as emergencies). The Operational Code should be designed from an operational perspective rather than an overly legalistic one. It should be written clearly and in plain English so that it is easy to understand. In addition it may be possible to use the code to bring together within the one document a number of existing processes that the companies operate in relation to the water network. This would allow retailers to understand readily their interaction with the wholesaler and, in turn, with their own customers. What might an Operational Code seek to cover? The code would set out, for example: the procedures that the wholesaler should follow in undertaking planned activities; the process that the retailer should follow such that the wholesaler can manage unplanned work and operational emergencies; and procedures that both parties should adopt in handling, for example, metering, new connections, contacts, enquiries and complaints. Exploring this further, specific topic headings could be: new connections which would include details of the information required by the wholesaler to accommodate new connections to the network; quality assurance (eg water quality sampling/water byelaws) this would detail processes to monitor compliance with applicable water quality rules, water bye-laws and to investigate water quality complaints; 3

metering this would involve procedures for metering such as installation, removal and replacement of meters, meter accuracy checks and fault reporting and repairs; contacts, enquiries and complaints this would seek to set out, for example, the processes for dealing with these issues by the wholesaler (including a timetable for the wholesaler to respond so that the retailer can respond to a complaint promptly); planned activities this would include procedures for short- and long-term planning undertaken by the wholesaler and the interaction with the retailer; unplanned changes to services this would include the operational arrangements that will apply in the event of changes in the nature of the water and/or sewerage service provision. These processes would deal with emergency planning, the declaration of an emergency and the implementation of emergency plans; and trade effluent control this would include processes for obtaining and modifying trade effluent consents, trade effluent monitoring, pollution incidents and the termination of trade effluent consents. Some new entrants may not want to take responsibility for all of the retail activities. For this reason it may be appropriate to allow a retailer to contract with third parties (including the wholesaler) to deliver retail activities on their behalf. However, in those sub-contracting cases it is important to make sure that the retailer retains responsibility for ensuring that the activity is delivered. What benefits can accrue from an Operational Code? By its very nature, an Operational Code brings clarity to the processes that link the customer-facing activities with asset management and operations. This clarity frequently brings simplification and consequent opportunities for cost reduction. These simplifications are also likely to bring improvements to the customer experience. What does a wholesale business have to do? As noted earlier, it is critical that the wholesale business always follows the processes set out in the Operational Code. The main obligation on the wholesaler is to have the facility to accept requests and information from the retailers. These requests have to be processed appropriately in line with the recognised rules (principally in order of receipt, except when there is an objective reason, understood by all market participants). Scottish Water refers to this function as its Wholesale Services Desk. Establishing such a function may require some change to how responses to 4

customer contacts within the call centre have been actioned by the operations and asset management activity. How best can we progress the development of the Operational Code(s)? To be effective, an Operational Code needs to work for all parties retailers and wholesalers. In particular, it needs to work for all types of retailer (those just separated from the wholesale activities of an incumbent, and new entrants, both large and small). As we begin to move from high level design (Market Architecture version 2) into the detailed design phase, it will be increasingly important that the views of all parties are heard. This is likely to require incumbent companies to form a retail and a wholesale viewpoint. If experience from Scotland is repeated, the retail arm of the incumbent may frequently agree more with other retailers than with its sister activity. If it does not, there could be a question as to whether or not the retail arm is genuinely operating at arm s length from the wholesale activity. Summary The Operational Code is the glue that joins the retail function (now likely to be provided by several different organisations) and the wholesale activities in each appointed area. It is a document that is crucial to ensuring that there is a level playing field and is likely to be a key area where wholesale companies should want to ensure that they can demonstrate compliance. The Operational Code is pitched at a relatively high level and could allow for region-specific emergency and bye-law provisions. It should therefore be possible, subject to the level of service required, for the wholesale businesses of the appointed companies to use broadly similar, if not the same, Operational Code(s). In order to help us focus on the practicalities of the Operational Code we have again developed four scenarios for breakout groups to consider and to use as a basis for discussion around the operational interaction between retail and wholesale (see Appendix). 5

Appendix: Scenarios for discussion In order to give tangible expression to the issues discussed above we have set out below four separate scenarios for discussion in breakout groups. Scenario A Connections The retail business is coming under pressure from its customers to allow it to undertake or sub-contract a significant element of the connection works. The incumbent wholesaler is quite legitimately expressing concerns regarding quality control, supervision and sign-off of the connection works. Is there a way to reconcile both of these interests in an Operational Code and maintain a competitive market for new entrants? Scenario B Service levels A new retail entrant has approached the incumbent wholesaler to say that it is being offered different service levels to those offered to the incumbent retailer. The wholesaler justifies itself by differentiating the service provision and the innovative approach being taken by the incumbent retailer. How could this approach be addressed in an Operational Code? Scenario C Customer contacts The retailer is insisting that it is the first point of contact for its customers for all matters under an Operational Code. The incumbent wholesaler is objecting for a number of reasons, including managing water supply in emergency situations. Is there a compromise that can be reached here? Scenario D Wholesale support Your neighbouring incumbent wholesaler is setting up a number of dedicated wholesale functions. For example a wholesale billing team, account managers, new connections team, etc to deal with its Operational Code obligations. This concerns you as you do not have the resources to match. How do you ensure that you comply with the Code and meet your competition law obligations without necessarily going down the same route? 6