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Assurance working group:
market operator
Purpose of this document
In April 2017, a retail market for non-household customers in the English water industry
will open. In advance of this, stakeholders will need assurance that the necessary
preparations have been (and are being) made to allow the market to open and to
secure its on-going operation.
There are a wide number of stakeholders involved in the market with different interests,
obligations and assurance needs. To ensure that these needs are understood and met,
Open Water has been asked by Defra and Ofwat to:
“…procure an assurance framework, which will be used by Defra and Ofwat to gain
assurance that the non-household retail market will be ready for competition on time,
and in a way that will deliver benefits for customers.”1
This framework will define the assurance requirements of stakeholders, agree
underlying principles and objectives, and at a high level, set out what approach will be
taken to delivering these requirements.
This document summarises the discussions of an Open Water and market participant
working group on the requirements for assurance in relation to: the establishment of
the market operator; and how the creation of the market operator and the
implementation of its systems might be conducted to provide assurance about
readiness for market opening. It makes recommendations from the group to support
the development of the assurance framework in this specific area. As such, the views
given reflect those of the group and are not necessarily those of Open Water itself.
Understanding assurance needs
Multiple bodies have different stakes in the market operator –
assurance requirements will vary
The market operator will play a critical role in ensuring that the market is able to
function effectively. As such, a diverse range of stakeholders have an interest in the
market operator - these may range from customers wanting assurance that their
transfer will be handled smoothly and safely, to incumbent companies seeking
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1
Ofwat letter to company CEOs 13 February 2015
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assurance that their statutory obligations – where they depend on the market operator
– are being properly discharged.
The assurance requirements for some stakeholders may therefore need to take
primacy over others – particularly if the market operator is discharging a statutory
obligation on their behalf and the risk that they take on is potentially greater. The
assurance framework should therefore consider some segmentation.
Overall, assurance will likely be needed in two key areas:
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that the required specifications have been properly identified in the context of
the broader market framework; and
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that the market operator has been (or will be) developed to the required
specifications, with effective governance, and to time etc.
Defining the role of the market operator
The role of the market operator needs to be properly defined
A fundamental element of providing assurance about the market operator is that its role
has been properly defined – there should be a clear understanding of what the market
operator should (and should not) be required to do.
In order to provide assurance that the role of the market operator has been properly
defined, consideration should be given to:
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What is the primary role of the market operator (for example, registration,
settlement, meter validation)?
What is the secondary role of the market operator (for example, identify
changes required to codes and transactions during operation)?
Have these roles been properly defined in the broader context of the market (for
example, there is no duplication of these roles elsewhere)?
Do these roles work within the framework of rules set out by the market codes?
What transactions does the market operator need to undertake to fulfil its role?
What data does the market operator need to fulfil its role?
What capacity does the market operator need? (for example, is different
capacity needed on day 1 (when there could be surges in activity) compared to
that required for on-going operation)?
When does the market operator need to be operational (for example, a phased
approach or all at once)?
Assurance of the market operator is closely linked to
assurance of the market codes
The role of the market operator is heavily defined by the processes and transactions
set out in the suite of market codes and the more detailed code subsidiary documents.
Whilst assurance will be needed that the market operator works as those documents
intended, it will also be important that there is assurance that those documents
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themselves are appropriate (for example, that they properly transpose the legal
framework into practice). See also the outcome of the market codes working group.
The systems procured and model followed for the market
operator need to achieve the defined role
Assurance would be needed that this defined role has been properly translated into a
detailed technical specification and that the procured systems and model of operation
that meet these requirements.
Building the market operator
Assurance will be needed about data
Data is fundamental to the operation of the market operator and the market itself.
There will be multiple and varying assurance needs in this regard. These needs may
change once the market is operational. For example:
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At go live (or shadow operation) a broad range of stakeholders (for example,
the market operator itself, Ofwat, Defra and the Secretary of State) will require
assurance that the data provided by participants is ready, complete, of the
required quality, and in the required format.
As market participants prepare data, they will seek assurance that the data
requirement has been properly defined in the first instance, and once the data is
being transitioned to the market operator, that it will be properly handled.
Customers may need assurance that any data that relates to their premises or
their own details will be safely handled once provided to the market operator.
Testing will be crucial to provide assurance
The success of the market operator will depend not only on the data provided but also
whether transactions work as expected. These transactions depend on a number of
interactions between different participants. Assurance will be required that these work
as intended by the code framework. There will be an important role for testing in this
regard.
A risk based approach would help to identify those processes and transactions that are
most important to effective market operation. Testing could seek to grade different
transactions – eg “all critical stage 1 transactions passed, 98% of ‘important’ passed,
75% of lower priority transaction passed, and remaining issues will be sorted by...”.
Participants could be required to sign-off that a process works. Criteria might be set
that need to be met before the next stage can be carried out.
Given the critical role that testing should play, assurance may in turn be required that
this testing has been appropriate – properly targeted (using a risk based approach),
using a robust methodology and verified. Depending of the criticality of the transaction
being tested, third party validation may be required in some instances.
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Assurance will be needed that the market operator can work as
an entity in itself
The market operator will not only perform an important role within the market but will
also need to operate as an entity in itself, with its own employees, assets and strategy
(in part driven by the market codes). Assurance may be required that the market
operator has been properly established so that it can discharge its duties on an ongoing basis. For example:
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Does is have proper governance?
Has it employed
Is it sufficiently financed?
Is it properly using its financial resources?
Governance as the market operator is developed
There needs to be effective governance
Given the range of stakeholders, each with different respective interests in the market
operator, it will be important that there is effective governance of its development and
on-going operation. This governance framework, including respective responsibilities
and authorities, needs to be clearly documented and adhered to. Where governance
and accountabilities are not clear, stakeholders will need assurance that they are being
managed.
Where uncertainties exist, there are measures in place to
manage them
The process and timeline for preparing the market for ‘go live’, together with the
multiple stakeholders involved, mean that there are uncertainties that need to be
managed.
As companies make their preparations for go live, including investing in systems and
process changes, they will need assurance that where uncertainties exist, they are
known and being properly managed. For example, whilst the wholesale retail code is
being developed using a consultative process by Open Water and companies, there
will not be certainty over its final form until it is passed to, and agreed by, Ofwat who
has statutory responsibility for approving it.
Progress against critical milestones is monitored
The fundamental question for assurance will be whether the market operator is ready in
time for market opening. A number of critical milestones will need to be reached before
the market operator goes live.
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Stakeholders will need assurance that these milestones are appropriate, are being met,
and that any risks to delivery are being managed (see also outcome of company
plans working group).
Transparent change control exists
As the codes and the broader framework are being developed through a consultative,
multi-stakeholder process, there will likely be changes to these documents and
processes before they are formally approved by the responsible authorities. As
companies begin to make their preparations for market opening against detailed
specifications, they will need to take account of any changes that are made. As such, it
will be important that:
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there is effective communication of changes;
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the impact of these changes (for example, cost, resource, interdependencies
etc) are understood; and
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there is a clear decision making process, including transparency about the
rationale for any changes.