Analysis: The shadow market: a taste of competition

On 3 October the shadow market will open, and water firms will get a taste of what competition looks like. Utility Week asks some major industry players if the process has gone according to plan.

The shadow market is one of the biggest steps towards the opening of the non-household water retail market. It is the industry’s practice run and not only provides an opportunity to test market systems and processes, but also to test the readiness of participants from both a retail and a wholesale perspective.

Johanna Dow is chief executive of incumbent Scottish retailer Business Stream, which has been active in the market since it opened in Scotland in 2008. She emphasises that the plan for the shadow market is not to test all the elements of a live competitive market, but to test real-life conditions “as far as possible”.

It has not been an easy ride for Market Operator Services Limited (MOSL), the company tasked with delivering and operating the central information systems and processes that will enable the market to function.

In February, the firm made the difficult decision to allocate a “red” status to the ­market opening programme, indicating that it was in imminent danger of falling off track. The move was required due to “a number of issues” during the first phase of building the central market operating system. Then in July doubts were cast over the success of the entire market opening process when a paper published by an independent group emerged, warning that the timetable was “exacting in the extreme”, and saying it had moved the programme to “amber/red” status.

Now MOSL insists the programme is back on track and, although it is still on “amber”, five companies have successfully uploaded live data to the central system, effectively marking the beginning of the “as live” shadow market period ahead of schedule.

“This is a highly complicated and ­mission-critical programme with multiple customers that we are delivering on time and within budget,” a MOSL spokesman tells Utility Week. (See the column from MOSL chief executive Ben Jeffs, on facing page).

In a recent Q&A with Utility Week, the managing director of Kelda Group’s newly-formed retail business Three Sixty, Robert Marrill, said that in time things will need to change. But, he said, “we’ve got what we’ve got. We should make it work to the best of our abilities”.

“There are bound to be teething troubles as we go through shadow and market opening, but until you start playing in it, you don’t know what these will be,” he added.

The shadow market is a chance to iron out any creases in the system, before the real thing. It is important that companies get the switching process right for customers so they do not become disengaged.

Dow says it is “crucial” that the sector does not lose sight of the customer during the next six months and warns that “there is still much work to be done to ensure that customers fully understand the choices available to them”.

The market has seen a flurry of activity in the past six months, starting with Portsmouth Water’s announcement in December 2015 that it would exit. Things really stepped up in March when Severn Trent and United Utilities teamed up in a joint venture – later named Water Plus – and then two large incumbents – Southern Water and Thames Water – announced in quick succession that they would exit.

Dow tells Utility Week that, following recent acquisitions and mergers, it would be “useful to assess how the market infrastructure will cope with large-scale transfers of customers, which is unlikely to be stress-tested during shadow market”.

As we move into shadow operation there is no turning back. No-one is under any illusion as to the enormity of the task ahead, and its success depends on the full participation of all involved.

Sue Amies-King, chief executive of Water Plus, says the focus will be on “working together through shadow and beyond to get this right for customers”.

Comments from the industry

John Reynolds, chief executive, Castle Water

Castle Water is unique in being the only independent retailer who will be active in the shadow market from the start, acting as the retailer in the shadow market for customers of both Portsmouth Water and Thames Water, collectively over 16 per cent of the English market.

“Castle Water is one of the largest suppliers active in the Scottish market and our experience with systems in Scotland for managing customer details and switching is an important part of our readiness for the English shadow market.

“We made the conscious choice when deciding on our systems strategy to partner a developer from 2015 onwards able to support us across both England and Scotland. Consequently, we are already using the market and invoicing systems which we will be using in the shadow market: for example, since April we have been invoicing customers in Portsmouth using the same systems we will use when the market opens.

“Castle Water has taken an active role in working with MOSL to be ready for the market, and benefitted from participating in user acceptance testing at an early stage which has ensured we are familiar with the CMOS (MOSL’s market systems) and in carrying out transactions.”

Johanna Dow, chief executive, Business Stream

“The shadow market is a crucial part of the preparations for English market opening. It goes without saying that we need to trial the market processes and systems for a successful competitive environment, but we also need to test the capabilities of all participants and their readiness to participate from a retail and a wholesale perspective.

“The plan isn’t to test all the elements of a live competitive market during shadow market, but it is important that we test ‘real life’ conditions as far as possible. Following recent acquisitions and mergers, it would be useful to assess how the market infrastructure will cope with large-scale transfers of customers, which is unlikely to be stress-tested during shadow market.

“So the first indication we’ll have is immediately the market opens, when we are likely to see large volumes of customers switching, if not through organic transfers then through the retail exit process, which will put considerable pressure on the system from the outset.

“It is also crucial that we don’t lose sight of the customer during the next six months. If customers are not aware of the choices on offer, we risk leaving them behind, and many could fail to gain from the changes. There is still much work to be done to ensure that customers fully understand the choices available to them – and the benefits to be had.

“We must engage with these businesses now, and create the demand which will motivate suppliers to innovate and improve services for all customers – not just the large users. This in turn will help to ensure the long-term success of an open market.”

Robert Marrill, managing director, Three Sixty

“As with any new market and with the complexity of the industry there will inevitably be challenges… I am sure the market will have some issues to overcome as we all gain experience, but I think it’s important that as a sector we focus on making the transition to open market work.”

Sue Amies-King, chief executive, Water Plus

“Shadow operation is an important opportunity for industry to test processes and iron out any issues in advance of market opening.
“Having learnt from the opening of other markets, one thing we have to get right for customers is the switching experience.”

Adam Cooper, director of market opening, Ofwat

“The start of the shadow market phase moves the programme further towards the implementation of the enduring market arrangements – in other words the implementation of one of the most significant changes in the water industry for decades.”

Read Adam Cooper’s full column here

Ben Jeffs, chief executive, Market Operator Services Limited

“At MOSL we are fortunate to have an extremely supportive board and a talented team working alongside the CGI delivery team. The pace has been relentless from the beginning. Despite all the challenges, we are all a week away from having delivered the shadow market on time, albeit with a few things left to conclude early in the shadow market. 

“This is a fantastic achievement by the industry. The opening of the non-household water market is truly transformational and signals the start of an exciting new era for the sector as a whole. Over the next six months we will continue to work together, and learn as much as possible, so that customers have the best possible experience when the market finally opens.”

Read Ben Jeffs full column here