Market Operator Services Ltd (MOSL) 2019/20 MOSL Business Plan

Market Operator Services Ltd (MOSL) 2019/20 MOSL Business Plan

over

184,000 switches1

2019/20 total base budget of

£8.3 million

code changes considered by the Panel

49

1 As at 1 November 2018

Financial settlement of around

£211ma month

One market operator, representing…

… providing the infrastructure, information and governance services to enable customers to switch retailer and for settlement to take place between wholesalers and retailers…

… putting cost efficiency at the heart of everything we do, while ensuring the delivery of a stable market.

5 self-supply retailers

29 national retailers

12 regional retailers

25wholesalers

retailers

a reduction of 7 per cent compared to the

£9 million targetpre-agreed by members in the 2018/19 Business Plan

a change budget of

£1m a market audit cap of

£500k

46

Contents

1. Executive Summary 01

2. What we will deliver in 2019/20 03

3. Bilaterals 09

4. New market improvement fund 11

5. Budget 13

Annex 1: The journey so far - progress and challenges 23

Annex 2: MOSL’s key services 25

Annex 3: 2018/19 Outturn 26

Annex 4: Funding principles 27

1. Executive Summary

As the water retail market develops, so too are the expectations around what the market needs to deliver for customers, for businesses in the market and for wider society.

To meet these rising expectations it is imperative that progress in resolving poor performance and improving quality data be accelerated. This requires determined action and we are committed to using the tools at our disposal to help drive market improvement in priority areas, where we can work with the market to make the greatest difference.

We will continue to ensure we deliver the essential market services which trading parties value. We have also decided to focus on four priority areas where we can make real progress towards improving performance:

6 We will drive real improvement in market performance and data quality, in particular supporting significant measurable improvement in the key areas of settlement and switching, enabling more accurate billing, and a better experience for customers.

6 We will make significant improvement in the quality of bilateral engagement between parties. We will do this by developing a market-backed solution which lowers cost, improves integration between wholesalers and retailers, reduces the need for manual reconciling of data issues, improves data quality and insight, and improves the customer experience.

6 We will support the stability of the market by making it easier to use the Central Market

Operating System (CMOS) and provide improved reporting. We will also minimise the impact of our relocation to Southampton, acting quickly to deal with any emerging risks.

6 We will take steps to enable a greater pace of change. We will propose that Ofwat should no longer need to consider and approve the low level and mechanical changes and we will consult on whether there should be more CMOS releases each year.

We are creating a new ring-fenced Market Improvement Fund of £250k, to allow us to go further and faster on improving performance, especially in relation to the issues created by poor data quality. This is in addition to our base costs.

The total 2019/20 market operator budget of £10,696k is on par with the 2018/19 budget and 3% lower than the £10,990k budget projected for 2019/20 in the 2017/18 Business Plan. On a like for like basis, excluding the bilaterals project and Market Improvement Fund which are included in these plans, this represents a 8% reduction from the 2018/19 budget.

We have reduced the cost of the market audit (a £300k reduction from the capped 2018/19 cost) while maintaining a valuable service, and we are reducing spend on external legal and consultancy costs by a £184k reduction which is made possible by increasing internal resources.

We are on track to begin to deliver like for like cost savings of £7.4 million (undiscounted) over a ten-year period, envisaged in the Relocation Budget, approved by members.

MOSL BUSINESS PLAN 2019/2001

Delivering the benefits of this market in a sustainable way, and at the rate of progress expected, takes time and investment. There has been significant progress in the 18 months since the market opened. The central operating systems and processes have worked without any major problems that threatened market stability. Initiatives are now in place to drive and incentivise improvement such as performance charging, and changes to corporate governance arrangements mean all categories of member have a voice on the Board. We have improved integration to CMOS for all parties by developing innovative interfaces through the MVI (Medium Volume Interface) thus reducing barriers to entry and exit. Other developments are set out in Annex 1.

We acknowledge that in some areas we have not made the progress we wanted or the market hoped for. The delay in issuing the Market Performance Operating Plan (MPOP), caused to a large part by needing a re-focus on new initiatives that emerged in-year, did delay a more planned approach to improved data quality.

Our plans for 2019/20 reflect member and Panel feedback which emerged through extensive discussions on priorities and issues, for example, through our CEO Survey, the Market Forum discussions and through responses to the draft Business Plan we shared for comment.

Not all the issues affecting the market are for MOSL to resolve. For example, the quality of

customer service and permitting open access to data are for others to address. However, our position as market operator at the heart of the market with access to market wide data does give us a unique ability to work with the market on improving priority issues.

Our approach flows directly from the strategy we published last summer. It covers five years to 2023, a recognition that the goal of an efficient, stable and low-cost market can only be delivered over time. Full payback from investment to improve efficiency and performance will not be immediate, but is critical to achieving the goal.

The five pillars supporting the strategy will continue to shape what we do and how we do it: delivering the services the market needs; market governance which is transparent and efficient; innovation; engaging effectively within and beyond the market, and stabilising both the market and MOSL.

We know some members felt the Board could have better explained the rationale behind the decision to relocate to Southampton. We are making sure the actual relocation is receiving the right degree of care and focus.

We will continue to look for better and more cost-efficient ways to engage digitally with the market. Working closely with members is core to the way we work.

We look forward to working with the market to deliver these plans.

MOSL BUSINESS PLAN 2019/20 02

https://www.mosl.co.uk/files/content/Market%20Performance%20Operating%20Plan%20VI.pdf


Stability

2. What we will deliver in 2019/20

Investing in our people, processes and systems, delivering in a timely, accurate and sustainable way, underpinned by reliable systems and repeatable market processes.

Our plans focus on:

6 Improving the efficiency of financial settlement

6 Ensuring an equitable and effective market for retailers

6 Improving the efficiency of customer switching

6 Improving trading party experience of doing business in the market.

This will be achieved through a combination of initiatives to tackle market wide issues, and improve individual trading parties’ performance. We will prioritise, facilitate and drive improvement to these benchmarked levels. We will provide the peer performance and market information trading parties need: simple to use, and easy to access, filter and extract.

We will use the formal performance resolution process to make sure individual performance issues are addressed, and improvements delivered.

We will use the market audit to support market stabilisation. This will bring increasing confidence through an independent audit programme targeted on key risks and issues in the market, and by holding parties to account. It will complement the market performance framework and risk analysis.

Market stability

In our strategy we make a clear commitment to focus on areas where our input can make the greatest possible improvement to the performance, stability and efficiency of the non- household market, for the benefit of its customers.

The Market Performance Operating Plan (MPOP) we developed and launched this year delivers the stepped approach set out in our Market Improvement Strategy, focusing on delivering improved results in priority areas.

We will use our position at the centre of the market to shine a light on the causes of friction and the barriers to effective competition and innovation. We will address them in a collaborative way. We will share good practice, refining and implementing incentive frameworks, and using the Market Issues Register to escalate areas of concern to the market governance groups, including the Panel and the Market Performance Committee.




https://www.mosl.co.uk/download-document/6529758019249610a0a382971a6286ed

https://www.mosl.co.uk/download-document/6529758019249610a0a382971a6286ed

The relocation funding from members in 2018/19 is ensuring the Company’s move away from London to our new base in Southampton protects member interests and makes possible an efficient transfer of knowledge.

The relocation brings financial and resource benefits, for example, through the lower cost base.

The relocation to new offices in Southampton is leading to new ways of working, including new opportunities for more efficient virtual communications and discussion. We have been able to retain the services of the majority of our employees until we complete our move away from London on 31 January 2019.

This supports the efficient transfer of knowledge and allows us to deliver compliant market operation.

Carefully-designed phased recruitment, a capture of all processes, and the knowledge transfer plan are combining to increase the resilience of our operations. We will quickly identify and act on any emerging risks. We are using these initiatives to cement a learning organisation which is flexible and agile, and delivers our commitments efficiently.

The market audit will provide an independent view of MOSL’s compliance and an assurance opinion on the Central Market Operating System (CMOS). This will give members the necessary revenue assurance on settlement.

Stabilising MOSL

Service

Focused on delivering high-quality, reliable and compliant services . We will build reporting capability and tools which provide information and insight on the key areas of data quality and market monitoring, which will create a better functioning market.

A significant element of our value comes through enabling the market to govern itself effectively. We will ensure the services we deliver allow trading parties to implement their business strategies and deliver their services efficiently for the benefit of customers.

We will use our established service model, based on the delivery of thirteen key services, to continue to provide effective, low-risk and compliant market operation. These services are listed in Annex 2.

We will ensure we provide accessible, timely and resilient services which meet the needs of trading parties. We will continue to improve trading party reporting solutions to CMOS to provide trading parties with the right information.

We will deliver these services within a framework of continuous improvement, monitoring and reporting on our performance, seeking feedback on what is valued by trading parties, and understanding what is required.

We will implement an annual service review, including monitoring of service metrics. This will allow us to assess our performance, to identify areas for improvement and benchmark our performance against similar code bodies.

We are anticipating an increase in on-demand services as the market develops, for example, in the areas of handling queries, disputes, and market entry and exit . Our resourcing model will allow us to respond to these demands in a managed way which protects the stable and timely services we know are valued by trading parties.

We will continue to invest in our people, processes and systems, which together are critical to our delivery. We will develop the guidance, training and engagement required to meet the needs of an increasingly diverse set of trading parties. This is a clear area of focus, considering our relocation, and we will make the necessary investment in training.


The issues caused by inconsistent bilateral ways of working has been regularly raised by trading parties as an example of where innovation can make a significant impact.

We know that the notable friction around bilateral arrangements between wholesalers and retailers is caused predominantly by inconsistent adoption of the standard, proliferation of diverse technologies, poor data quality and poor operational integration between parties. Although we understand these issues do not affect all parties in the same way, or to the same extent, resolving them will bring significant benefits to the market.

We have made provision in this Business Plan to work with the market on implementing an industry solution to this industry problem to support reduced regulatory intervention, improve customers service and enable better data quality. We believe a solution to bilaterals has to have industry wide adoption and we will progress a code change with the Panel to that effect.

There is more detail on our plans to tackle bilaterals in Section 3 below.

We have heard your concerns about CMOS usability and navigation. In this Business Plan we have made a provision to develop and implement improvements to the navigation, search capability and usability of the highest volume CMOS functional areas. Where the issues

are aligned to understanding and knowledge, we will provide updated and easy-to-use training material.

We will continue to invest in tools which enable trading parties to engage both with us and each other quicker and more cost-effectively, without the need for so many time-consuming face-to-face meetings. This will allow more day-to-day issues to be resolved faster, freeing time for the more fundamental issues.

On all innovation initiatives, we will continue to work closely with the Panel , and continue to draw on the Digital Strategy Committee (DSC) for advice. The input from these senior industry leaders from a range of parties has been invaluable, for example, in thinking through the best way forward on bilateral engagement. We will continue to expand our engagement with the Retailer Wholesaler Group (RWG) and Self-Supply Forum. This will help give industry greater clarity on issues and solutions that are financially viable and deliver benefits at both the strategic and practical level.

Developing the Medium Volume Interface (MVI) and proactive notifications are both initiatives which have delivered benefit and efficiency that have been welcomed by industry, and these will continue.

Innovation

Digital capability and innovation will help improve the market by easing market friction and reducing overall costs. Our digital initiatives will focus on solutions that cater for the needs of parties in the market and reduce barriers to entry and exit.


Being a proactive facilitator of robust market governance arrangements helps drive a smoother market operation. It enables MOSL to deliver value for its members, and to evolve the central system in which they have invested.

Governance

The restructure of MOSL’s corporate governance arrangements in 2018 ensures all categories of members have a vote and means that Board discussions, decisions and its advice to the Executive take account of experience from across the market. Two new Non-Executive Directors, Andy Hughes and Josh Gill, have joined the Board as a result of these changes.

The complexity of the change process creates significant and very specific resource demands.

We will use the analytical capability and experience of our market design team, and the flexible operating model we have developed, to provide the required support to the Panel and trading parties. This is an area of demand-led work which is likely to increase as the market develops. We will continuously examine the way change is managed, to find ways to drive efficiencies for both trading parties and the Panel:

6 We propose that only the most material change proposals (for example, those which impact policy or strategic issues) should in future be reviewed and approved by Ofwat. This would reduce the amount of time and resource currently consumed by change. When developed, our recommendation will go first to the Panel, and then to Ofwat.

6 We will consult members on whether more CMOS releases each year would bring increased market efficiency. While some members believe it would increase the speed of change, others say this would be difficult to manage internally and could undermine the careful management and testing of the many trading party systems which support stability. We will take account of all views in reaching the best outcome for the market.


Engagement

We will engage proactively with trading parties, recognising the importance of doing this in a cost-effective way. We will support and facilitate discussions and work groups on key market issues and provide service-focused engagement for our members.

We will continue to review our channels for engaging members, to make sure this is done in the most efficient and appropriate way. We know how critical the MOSL website is to the market as a means of communicating information and development. We are carrying out an operational review of the website to find ways of making it more responsive, intuitive and valuable. The results of this work will flow through during 2019/20.

With our move to Southampton we will ensure that we utilise the most effective digital communications to ensure that interaction with our members, the Panel and its sub-committees is as easy and efficient as possible.

The organisational values we have adopted will define not just our work, but the way we work and interact with the market. These values - expertise, clarity, respect, influence – reflect the importance we place on ensuring effective engagement with our members and other stakeholders.

We know that trading parties value the work of our Portfolio Managers. We will continue to provide trading parties with a single point of contact and the opportunity to meet with them regularly. Through this one-to-one engagement we can discuss not just individual trading party

issues, but also performance issues, market development, rectification plans and code changes.

We will continue to engage with the market by supporting and facilitating work groups. This comprises, not just the forums such as the User Forum under the codes, but also supporting Panel committees like the Trade Effluent Issues Committee (TEIC). We are keen to encourage and facilitate this engagement where the outcome aligns to improving the market.

Face-to-face meetings are invaluable at certain points and for some issues. However, they add cost to the market. We are looking at ways to reduce this cost to trading parties in an appropriate way, making sure there is no unintended detriment to the way we provide and discuss valuable information. There are several ways this can be done, for example, we know from feedback that the recording and providing remote access in real-time through Skype for Business as part of the User Forum is valued.

We plan to host the User Forum in different areas of the country, recognising that delegates come from regionally-dispersed trading parties. This will give all trading parties the ability to attend at least some meetings in person.


3. BilateralsWe have identified through feedback that bilateral arrangements between wholesalers and retailers are causing friction in the market through inconsistent adoption of the processes, proliferation of diverse technology, poor data quality and poor operational integration between parties. Although these issues do not affect all parties in the same way, or to the same extent, we believe that most of the market would benefit from resolution of these issues and have elevated bilateral arrangements to be a priority area in our 2019/20 business planning.

We firmly believe that industry solutions should be adopted for industry issues. These are most likely to create an efficient and healthy market, and reduce the risk of regulatory intervention. bilaterals is one such opportunity.

Throughout 2018 we supported industry collaboration to identify the tangible issues caused by bilaterals. We engaged industry across strategic and operational levels with involvement from operational groups, the Panel, Digital Strategy Committee, Self-Supply Forum, User Forum and individual trading parties. We received insightful responses to our questionnaire sent to all parties which helped shape the key issues. Our engagement with Ofwat indicated strong support and the Water Retail Council agree.

Our assessment of the themes emerging from this engagement shows friction is being caused by:

6 High level of rejection rates from incomplete / inaccurate forms

6 Inconsistent practices in handling forms and processes

6 Multiple user access and authentication (multiple login)

6 Costly staff education and training caused by diverse ways of working

6 Lack of adoption of the API standard that supports the Operational Terms

6 Lack of visibility of SLAs and inconsistent operational standards.

This ultimately creates a situation in which there is:

6 Poor integration between wholesalers and retailers

6 Inefficient operations manually reconciling data issues

6 Poor data quality and insight

6 Less than optimal customer experience.


As switching numbers increase, so too will the friction caused by the current situation. Even trading parties not as adversely affected today will benefit from future-proofing their operations. There are currently 734 active wholesaler/retailer agreements in place; 317 of which were added since market opening.

The solution will be wide-ranging with respect to transactions covered. We will seek a Code change to make the approach mandatory, to maximise the benefits. At this stage we think that offering a technology solution is most likely to meet the needs of the market.

Although the costs are included in the budget, spend will be subject to the same high degree of board scrutiny, challenge and approval as any other significant spending decision in our budgets.

The business case will assess overall cost of the solution compared with likely overall benefit to industry. We will ensure that the solution, which we anticipate will include a technology element, delivers a proportionate amount of value for our trading parties. This value proposition will be under the scrutiny of the MOSL board on presentation of the business case. Board Directors

represent every category of membership, which should give all trading parties assurance that the business case will be considered in its full context and for every demographic of our market.

By addressing bilateral issues, we anticipate:

6 Improved customer experience

6 Reduced risk of regulatory intervention

6 Reduction in overall cost to transact in the market

6 Evolution of the market to a natural position of standardised processes.

In September the MOSL Board approved a project to develop an industry business case for an effective, market-wide, market-backed solution. That business case will be presented to the February MOSL Board. The budget allocated in this Business Plan to roll out a bilateral solution would only be released if the Board approves the business case.


Our approach to resolving market issues, as set out in the Market Improvement Strategy (MIS) and Market Performance Operating Plan (MPOP), is to focus on a clear set of prioritised results. This approach provides the clarity, direction and best route needed to achieve improved performance, at this stage of the market’s evolution.

While there has been good progress in identifying priority issues, there is at the same time growing concern inside and beyond the market that greater progress is needed to improve poor performance, for the market to be able to deliver the customer benefits envisaged when it was created.

This will provide the in-year capability to address areas of further improvement.

This will allow us to respond quickly and nimbly to newly-emerging threats or opportunities to improve performance in the market. While some areas of poor performance are deep-rooted, we believe these issues can be resolved through

concerted effort supported by the necessary resources.

The market performance framework will continue to develop, supported by some powerful levers: clear and transparent peer reporting, levying of performance charges and the rectification and improvement plans now in place. This additional funding will mean that we will be able to address elements which may have already been subject to early market review and change but where it has become clear further change may be required. However, we recognise that this improvement may be needed in areas which have yet to be subject to any previous review work.

These additional areas could, for example, include a review of incentive mechanisms, the way performance-related charges work, whether the service level agreements in place support improvement work. This will be identified, scoped and prioritised. We will use the MPOP review process to identify opportunities to add value through targeted market improvement work.

4. New Market Improvement Fund

We are therefore including a ring-fenced fund of £250k, in addition to our base costs, covering the delivery of our market performance and improvement.

We are well positioned as market operator to work with the market to drive the necessary degree and pace of improvement to performance, and specifically the quality of data.


https://www.mosl.co.uk/download-document/020391bf2b3a2ab21a05e946d4647171

https://www.mosl.co.uk/download-document/1814f39e28d7b029bc182484abf5015c

The oversight for the rationale - including value for money - for this work would be provided by the MOSL Board. The Panel would be closely involved as part of the MPOP framework, within which this will sit.

This intervention would address areas of friction, and opportunity, raised by MOSL, trading parties and other stakeholders, and for which we believe there is a clear appetite for us to address in a timely and appropriately-governed manner.


The 2019/20 budget will deliver a stable and reliable market operator providing the platform for a well-functioning trusted market, from our new base in Southampton. This budget will enable us to invest in both the central system and processes to facilitate effective market change and governance and will allow the market to continue to develop and evolve.

We are currently tracking below budget for 2018/19 due to a delay in recruitment, as a result of awaiting the relocation decision. Subsequent to member sign-off we have accelerated recruitment and brought in additional support to enable us to meet our 2018/19 Business Plan and as a result we are forecasting the year-end outturn to be materially in line with the 2018/19 revised budget. We are also on track to deliver

the relocation within the Relocation Budget of £2,195k, which includes a contingency of £410k which we are currently not forecasting to use. The relocation cost in 2018/19 is not recurring and therefore has been excluded in the 2018/19 comparators.

The total 2019/20 market operator budget is £10,696k being on par with the 2018/19 budget and 3% lower than the £10,990k 2019/20 budget projected in the approved 2017/18 Business Plan. On a like-for-like basis, excluding the bilaterals project and market improvement fund, this represents a 8% reduction from the 2018/19 budget. Also, we are on track to begin to deliver the cost savings of £7.4 million (undiscounted) over a ten-year period, envisaged in the Relocation Budget, as approved by members.

Base costs £

People costs 4,484,138

Operating costs

Rent 180,000

Variable IT costs 272,490

IT initiatives 350,000

Admin costs 223,205

Assurance and audit 125,000

Legal and consultancy 200,000

CGI 1,937,266

Panel and committees 573,900

Total operating costs 3,861,861

Total base costs 8,345,999

5. Budget

The 2019/20 base budget of £8,346k, marks a decrease of 6% from the 2018/19 base budget of £8,901k.

2019/20 change cost remains in line with 2018/19 budget at £1m.

The market audit cost has been capped in 2019/20 with the upper limit at £500k, a reduction of £300k on the 2018/19 budget to address feedback from members. The approach considers workload, and priorities which have already been identified through prior year audits and the market performance framework which identify areas that are already being addressed.

A market-backed bilateral solution is budgeted for, subject to Board approval of the Business case, to be delivered for an anticipated cost of £600k.

A new Market Improvement Fund of £250k has been created to enable MOSL to deliver targeted market improvement initiatives quickly over and above its operational market improvement work.


2019/20 budget 2018/19 budget Var. £ Var. %

Base cost 8,345,999 8,901,254 (555,255) (6%)

Market audit 500,000 800,000 (300,000) (38%)

Change 1,000,000 1,000,000 - -

Total (excluding projects) 9,845,999 10,701,254 (855,255) (8%)

Bilaterals 600,000 - 600,000 -

Market improvement 250,000 - 250,000 -

Total 10,695,999 10,701,254 (5,255) 0%


Our base cost comprises the people and operating costs for us to be able to deliver the required infrastructure, information and governance services to trading parties.

We plan to deliver this with approximately the same size of organisation as was planned for 2018/19. This is despite an anticipated increase in on-demand services, and the need to manage through the inevitable impacts of a relocation away from London. We will do this by improving the efficiency of our processes, ensuring we remain focused on the most important issues, and working to agreed plans.

By the end of January 2019, we will have fully relocated to our new base in Southampton and we are setting up the company to deliver savings of £7.4 million (undiscounted) over a ten-year

period through reduced location and people costs.

While we will be operating from a new more cost-effective location, it is critical that our base cost is sufficient for us to establish a stable operation that will drive long-term benefit, through the continued investment in our people, processes and systems. This investment will ensure we have the expertise and agility to operate a compliant, stable and reliable market; robust market processes; and the ability to effectively deliver market change.

For 2019/20, our people costs are £4,484k and our operating costs are £3,862k, leading to a total base cost of £8,346k, a reduction of £555k on the 2018/19 budget.

Base cost

See the Annex 3 for details of how this translates against our 2018/19 performance and forecast.

2019/20 budget 2018/19 budget Var. £ Var. % Ref

People costs 4,484,138 4,594,387 (110,249) (2%) 5.1

Operating costs 5.2

Rent and rates 180,000 475,920 (295,920) (62%) 5.2.1

Variable IT costs 272,490 269,408 3,082 1% 5.2.2

IT initiatives 350,000 419,000 (69,000) (16%) 5.2.3

Admin costs 223,205 347,378 (124.173) (36%) 5.2.4

Assurance and audit 125,000 145,000 (20,000) (14%) 5.2.5

Legal and consultancy 200,000 383,808 (183,808) (48%) 5.2.6

CGI 1,937,266 1,912,353 24,913 1% 5.2.7

Panel and committees 573,900 354,000 219,900 62% 5.2.8

Total operating costs 3,861,861 4,306,867 (445,006) (10%)

Total base cost 8,345,999 8,901,254 (555,255) (6%)


5.1 People costsOur people costs are projected to reduce by £110k (2%) in 2019/20. These savings are already being realised as we build our new Southampton-based team.

In 2018/19 our people budget reflected a company of 53 colleagues. We are confident a similar model (54 colleagues) in 2019/20 will enable us to deliver the Business Plan objective.

Our 2019/20 headcount includes one additional head from our 2018/19 planned headcount total. This role is in market design, to provide additional resource to the secretariat which services an increasing number of Panel sub-committees. We have also redefined certain roles across the teams to ensure we recruit colleagues with the necessary capability to best deliver our 13 services.

Colleague Headcount 2019/20

2019/20 Headcount

CEO 1

Corporate Affairs 4

Digital 10

Finance12

Market Design13

Market Performance14


The Finance team includes our financial management, commercial, legal, compliance, risk and HR functions.

The finance team provides budgetary oversight and reporting to management and the Board. The team invoices members and facilitates

required payments as well as being responsible for our statutory filings.

The legal and commercial function provides the business with the necessary expertise to ensure we fulfil our legal and commercial requirements and provides the Company secretariat function. We have increased capacity in this team to increase the quality and consistency of code change drafting.

The compliance team is responsible for leading our internal risk and compliance review processes, including monitoring and managing our compliance against the governing codes and reporting the Company’s compliance to the Board and Market Performance Committee.

Our HR team oversees recruitment and colleague departures, ensures HR policies are adhered to, develops and provides the appropriate training to our colleagues, and ensures that performance is appropriately managed.

The Market Design team provides the secretariat services for the Panel, four Panel Committees and all Panel sub-groups. The team also provides the Chairs for the Trade Effluent Issues Committee, the Credit Committee and change working groups, where these are established.

The Panel is currently considering establishing a Panel Committee to consider systems changes and releases and we have therefore planned to support this group going forward.

The team acts as a “critical friend”, using insight to provide support and information throughout the change process, supporting trading parties in developing and assessing changes to the market rules. This includes analysis of impacts and development of legal text for Wholesale Retail Code (WRC) and Market Arrangements Code (MAC) changes.

We anticipate the volume of change to increase in 2019/20. In the year to date the

team has considered a range of market issues including credit arrangements, trade effluent arrangements, controls and processes associated with settlement processes at final reconciliation and the calculation of system generated reads. We anticipate a similar level of work on market issues through 2019/20.

Market Design (13 roles)

Finance (12 roles)

The 2019/20 headcount plans are as follows:


The Corporate Affairs team makes sure we share information and ideas in an effective, managed and consistent way.

The team is responsible for how we engage with key decision-makers and influential voices outside the market, as well as for the channels we use to communicate with the market to make sure trading parties get the information they need, when and how they need it.

The team is responsible for building and maintaining strong relationships with new and traditional media, which supports accurate and informed media reporting and debate about the market.

It develops and communicates core information about the market including what it is, and how it works.

The team leads on engaging with MOSL’s people, including the induction of new joiners, so they can play a full part in shaping how the company delivers and develops.

The Market Performance team works closely with the market to deliver improvements in key areas of performance, such as the poor quality of data. It leads on the market performance framework, including secretariat services to the Market Performance Committee, overseeing

Market Performance Standards and Operating Performance Standards analysis, and the reporting and levying of charges as appropriate. This team also leads on taking forward performance rectification plans, where trading parties have been found to be under-performing against market performance standards.

The Market Performance team includes our three Portfolio Managers who provide a valued and critical liaison point for trading parties across the market, providing them with support, challenge and insight.

The Operations team within this Directorate provides several critical services including market entry assurance, settlement, disputes and queries.

Market Performance (14 roles)

Corporate Affairs (4 roles)

The Digital team provide IT expertise to our internal design and change boards which supports market and MOSL-driven change. The team works closely with our IT providers to deliver system releases, carrying out MOSL testing and facilitating market testing.

The team works on IT initiatives to support market improvement. In 2019/20 the team will focus on CMOS usability solutions and improving the reporting functionality.

The team will have a key role to play in working with the industry in relation to determining the appropriate bilaterals solution.

Digital (10 roles)


5.1.3 Southampton staff costsVacancies created by colleagues leaving in January or April, and current vacancies, will be recruited as far as possible from within the Southampton area. The cost in Southampton is expected to be around 10% less than the 2018/19

London equivalent. By investing in core areas, we can successfully engage in the market, and invest appropriately in market efficiency and effectiveness.

5.1.4 Other costsWe expect our other staff costs to reduce by 43% in 2019/20. This is a result of reduced recruitment costs and being able to utilise the knowledge

transfer training materials developed as part of the relocation.

5.1.1 Stabilisation costsWhen we announced our decision to move out of London, we made it a priority wherever possible to retain current staff, as part of our strategy, to ensure that vital market intelligence, information

and our understanding of core processes was retained. Although a number of our current team will have left by the end of April, we intend to invest £144k in stabilisation costs to ensure an effective knowledge transfer process during in the first half of 2019/20.

5.1.2 London Staff costsOf our current London-based team, 18 (from a total of 40 full time colleagues) will relocate with us to our new base. This means people will transfer from London to Southampton-based contracts.

This will enable us to continue building on our existing data and CMOS expertise and minimise the disruption to the market and our members.

The cost of those London staff members relocating is expected to increase by 4% in 2019/20, driven by annual performance reviews, and certain promotions to more senior roles in the organisation.

2019/20 budget 2018/19 budget Var. £ Var. % Ref

Stabilisation costs 143,967 - 143,967 - 5.1.1

London staff costs (London to Southampton contracts)

2,307,763 2,215,683 92,080 4% 5.1.2

Southampton staff costs (Southampton roles replacing London roles)

1,856,225 2,068,555 (212,330) (10%) 5.1.3

Other staff costs 176,183 310,149 (133,966) (43%) 5.1.4

Total 4,484,138 4,594,387 (110,249) (2%)


5.2 Operating costs

Operating costs include system and office costs that enable MOSL to deliver its services and priorities identified under the five pillars in our strategy.

5.2.1 Rents and ratesOur rent and rates, including maintaining the office, are expected to cost £180k in 2019/20, a reduction of £296k (62%) on 2018/19. Annual rent of £109k has been straight-lined across a three-year period to include negotiated discounts flowing from the relocation outside of London, where rental costs are more favourable.

5.2.2 Variable IT costsVariable IT costs of £272k are in line with the prior year (2018/19’s £269k) and are in relation to the licenses, subscriptions and infrastructure we require to operate our non-CMOS systems and host our reporting solution.

5.2.3 IT initiativesThe initiatives for operational improvements of £350k (£419k in 2018/19) are focused on improvements to trading party reporting solutions and on improving the usability of CMOS. Our approach to prioritising the usability concerns will be to conduct a consultative assessment of usability issues with trading parties to identify areas within the LVI portal causing the most inefficient operation. Where this is caused by poorly-realised user experience screens we will change the portal functionality and where this is caused by lack of understanding of CMOS functionality we will update and provide better training.

5.2.4 Admin costsAdministrative costs of £223k consist of office support and business insurance premiums, including the required PI and D&O insurance for the Panel and its sub-committees; the Board; and for MOSL; IT equipment; general travel and subsistence costs; as well as general office costs.

This represents a £124k reduction on 2018/19 and is a result of the business not having to budget for potential dilapidations and move costs as the business will have a permanent base in Southampton.

5.2.5 Assurance and auditAssurance and audit costs of £125k include our external audit and internal audit costs, plus the on-going external assurance costs required to maintain our business continuity accreditation. This is a £20k reduction due to the required investment in 2018/19 to obtain business continuity accreditation.

5.2.6 Legal and consultancyLegal and consultancy costs of £200k are budgeted to provide the business with the required legal expertise and advice to ensure compliance with our code obligations and the law. Consultancy costs are budgeted to support MOSL with project and non-enduring work.

Total legal and consultancy fees are expected to reduce by £184k (48%), a result of the business relying less on external consultancy firms and increasing our internal resource within the legal team to support the code change process.

5.2.7 CGIOur contractual service and license cost for CGI for 2019/20 is £1.79m, consistent with 2018/19. The total budget also includes additional costs related to escrow; licenses; support; testing tools and environments; and new member CMOS training of £147k.


*This graph is indicative of the number of meetings currently planned. 2018/19 meetings are estimated due to full year not yet complete and more sub groups may be added in 2019/20.

5.2.8 Panel and committeesThe Panel is the senior industry group responsible for overseeing the market codes and arrangements which govern the business water market. It keeps the market codes under review, making sure that they are operating effectively and evolve in a way that delivers and facilitates efficient and effective market outcomes.

The Panel and sub-committees agree the location of where their meetings will be held, per the market codes. Panel members have emphasised that Panel meetings and meetings of its sub- committees promote the widest possible market participation. The Panel has concluded that to

facilitate participation, its meetings (and those of its sub-committees) will be held in London and will not, as a matter of course, be held in Southampton. The Panel has acknowledged that the terms of office of existing Panel members are coming to an end in March 2019, and it will be for the newly constituted Panel to determine where the Panel and its sub-committees will meet from April 2019 onwards.

We anticipate 66 meetings (in person) will occur during the year for both the Panel and its sub- committees. We have therefore made a provision of £191k for Panel and sub-committee meetings to be held in London (meeting rooms, with appropriate AV facilities).

We are expecting the number of committees and the number of meetings to increase in 2019/20 as we strive to resolve key market issues, anticipate an increasing number of demand-led requests and as we work with our members to make market improvements and code changes.

The cost for the Panel, Market Performance Committee (MPC) and Trading Disputes Committee (TDC) includes independent panel member costs for the chairs, independent members and expenses for all members. We are budgeting for the average Panel meeting

to cost £13,150 per meeting. The average MPC budgeted cost is £6,900 per meeting and the average TDC budgeted cost is £4,000 per meeting (this assumes full day meetings). The cost per independent Chair will remain at £1,500 per meeting, including preparation time (equating to 1.5 days). For all other meetings the primary cost is driven by budgeted expenses, to facilitate and provide a level playing field for those who have a role in the committees. This brings the total cost to £574k.


5.3 ChangeThe CMOS Release 5.0 (October 2018) saw the implementation of three change proposals, with investment of £256k. During the next financial year, we have four changes proposals locked in for Release 6.0 (May 2019), totalling £180k. Release 7.0 (November 2019) currently has six pipeline system impacting changes forecast, and we currently anticipate this release to be the biggest release to date. These changes include enabling sewerage wholesalers to create

their meter networks (raised from the TEIC) and improvements to the Long Unread Meters Report.

We expect that more system-impacting change will be raised within the next financial year. We anticipate the change budget will also be used for third party support on ‘non-system’ impacting changes for projects such as the Credit Committee and developer services.

Therefore, we propose a change budget of £1m, the same as for 2018/19.

5.6 Market improvement fundTo enable us to deliver focused, value-adding market improvement we have allocated £250k to a Market Improvement Fund which is in addition to our base costs to the deliver our market performance and improvement work.

This fund will be overseen by the MOSL Board, and would require business case approval to draw down on, which would have to demonstrate value across the industry. In agreeing candidate projects the Panel would be closely involved and provide input.

5.4 Market auditWe propose decreasing the cost of the market audit budget to £500k (2018/19 budget cap £800k) in response to member feedback and to ensure that the market audit drives value.

The approach will ensure trading parties continue to rectify identified audit issues and work on individual rectification plans from previous audits

and our market improvement plan. It will also provide assurance on MOSL and the trading parties, carrying out site visits where required. We do not believe this increases risk around confidence in the market due to the insight, analysis and the market improvement strategy being carried out by the Market Performance team with review at the MPC.

5.5 BilateralsWe propose a £600k budget for the implementation and delivery of a market-backed bilateral solution. This is currently an anticipated cost, which will be confirmed through a tender process. The budget would cover initial design and build costs, including the required technical support to progress the required code changes. We will continue to work with prospective suppliers to consider a subscription/service-based model that will limit initial implementation

costs by spreading build and service across the life of the solution. Spend will be subject to the same high degree of board scrutiny and challenge as any other significant spending decision in our budgets.

To maintain this momentum and to deliver an industry solution, at pace, we have made a provision within this Business Plan of £600k to progress the delivery of the solution to the bilaterals issues.


Annex 1: The journey so far - progress and challengesMOSL has made significant progress, both as market operator and supporting the development of the market.

The market is still in its early phase but there are encouraging signs. The market is functioning smoothly, no major issues have occurred to undermine the market, and Market Performance

Standards charges have been introduced smoothly.

Despite this progress, there is widespread agreement that big challenges remain, and much remains to be done to improve stability and performance, for the benefit of market participants and ultimately customers.

Evidence of Progress

Over the year since the 2018/19 Business Plan was published, areas on which MOSL has made significant progress working with the market include:

6 Delivery of the Panel strategy, which set out the Panel plan for the next two years, providing clarity and focus for this key market governance group

6 49 change proposals (code and system-impacting) were recommended by the Panel to Ofwat and 153 CMOS defects fixed in three releases

6 Delivered the Market Improvement Strategy and Market Performance Operating Plan (MPOP) which set out the areas of focus and targeted interventions and outcomes

6 Consistent messaging from MOSL on importance of data quality in effective switching and efficient settlement, bolstered by production of detailed market dashboards, which provided market and trading party level visibility of data quality issues

6 MPOP impact already being felt, addressing long unread meters, yearly volume estimates (YVE) and other estimation data metric concerns

6 Support for and facilitation of working groups (TEIC, DSC, Credit committee etc.)

6 Delivery of the MVI capability which simplified

the trading party experience, reduced cost to operate by enabling all parties to batch transact with CMOS and lowered barriers to entry by enabling new entrants the ability to operate without having expensive IT estates and middleware integration with CMOS

6 Delivery of the market framework performance reporting in-house enabled us to avoid costly CMOS changes and set the foundation for enhanced reporting outside of the problematic Jaspersoft software

6 Delivery of proactive notifications and automating the removal of peek and dequeue worklists enabled our trading parties to spend valuable time on higher value activities rather than reviewing open CMOS transactions to identify if their intervention were required

6 Developed and shared a Market Issues Register to help prioritise and focus market improvement and remedial actions

6 Completed the Year 1 market audit, issuing individual audit reports for every trading party, settlement assurance report issued on CMOS and MO compliance audit completed

6 Initiated market performance standards charges and subsequently the first batch of rectification plans for underperforming trading parties.

The Market


6 Strategy launched, setting out our Company’s strategic vision and objectives for the next three to five years

6 Terms of Reference established for all code-governed, MOSL-led and industry-led groups – published on the MOSL website to provide clarity and transparency

6 Resolved discrepancies between our governance documents, and gave all members a full Board voice in our corporate decision-making

6 Started an external Board effectiveness review, for the Board to assess its performance

6 Developed a new Market Operator Compliance Regime

6 Hypercare approach implemented to manage our engagement with trading parties at varying stages of entry/exit/change or whilst going through performance challenges. Portfolio Managers keep this under constant review

6 Quarterly Market Review re-launched to give senior stakeholders the most important updates on the market and MOSL

6 Regular use of live streaming and webcasts for industry forums, meetings and presentations to enable trading parties to engage and get key messages in a way that works for them

6 Annual CEO survey established to provide insight into priority issues which helped to shape the Business Plan

6 Re-designed MOSL’s organisational model to become more effective and efficient

6 Worked with colleagues and the Board to develop and implement a set of values to build our culture

6 Delivered an HR framework to support the development and performance of our colleagues, which also provides the infrastructure to oversee performance management

6 Introduced new HR and Finance systems smoothly

6 Began the relocation to a lower cost base in Southampton, with a strategy to retain key knowledge and operational capability.

MOSL


Annex 2: MOSL’s key services


Annex 3: 2018/19 outturn

Notes:

1 - We are currently forecasting to be £119k under the 2018/19 revised budget

2 - Our 2019/20 business plan budget is £555k less than the 2018/19 original budget

3 - At the point of our relocation announcement, savings were to be realised through delaying the investment in various Digital initiatives, plus savings were to be released through training and other support services

4 - Our people costs in 2018/19 are projected to be £266k under budget, a result of unfilled vacancies due to our relocation to Southampton

5 - Our consultancy spend is projected to be £177k over budget, a result of using third party support to help deliver our 2018/19 Business Plan objectives and increase resilience in our employee headcount.

18/19 YTD (April to October)

18/19 full year forecast outturn

18/19 revised budget

Relocation adjustment

Original 18/19

budget19/20

budget

Var 18/19 forecast

outturn vs. revised budget

(under)/over

Var 19/20 budget

vs. 18/19 original budget

(less than)/more than

People costs 2,371,981 4,298,597 4,564,387 (30,000) 4,594,387 4,484,138 (265,790)4 (110,249)

Operating costs

Rent and rates 277,317 472,159 475,920 - 475,920 180,000 (3,761) (295,920)

Variable IT costs 84,774 280,109 269,408 - 269,408 272,490 10,701 3,082

IT initiatives 47,092 244,000 244,000 (175,000) 419,000 350,000 - (69,000)

Admin costs 148,588 296,504 347,378 - 347,378 223,205 (50,874) (124,173)

Assurance and audit 72,917 127,100 125,000 (20,000) 145,000 125,000 2,100 (20,000)

Legal and consultancy 269,115 521,032 343,808 (40,000) 383,808 200,000 177,2245 (183,808)

CGI 1,526,420 1,933,284 1,912,353 - 1,912,353 1,937,266 20,931 24,913

Panel and committees 210,483 344,344 354,000 - 354,000 573,900 (9,656) 219,900

Total operating costs 2,636,705 4,218,532 4,071,867 (235,000) 4,306,867 3,861,861 146,665 (445,006)

Total 5,008,686 8,517,129 8.636,254 (265,000)3 8.901,254 8,345,999 (119,125)1 (555,255)2


Annex 4: Funding principles

Invoicing of membersThe industry codes allow the market operator to profile its charges throughout the year and we plan to profile the market operator cost evenly through the year (i.e. 1/12 of total cost per month).

MOSL costs will be recovered from each market participant monthly in advance, based on the principles outlined in Schedule 6 of the Market Arrangements Code.

Redistribution of excess fundsThe 2019/20 budget has been based on our expectation of cost for the year to enable MOSL to meet our obligations as set out under the codes and deliver the on the initiatives and projects outlined in the plan.

As in previous years we will continue to keep the budget under review and will return any unused

funds to members unless there is a market consensus to allocate unused funds to a specific market improvement project. There are three allocated costs in the Business Plan (market audit, bilaterals and Market Improvement Fund) that will require Board-approved business cases. If the costs of these projects are below the approved budget, the budget will be reforecast and savings returned to members in the same way charged.

Additional servicesAdditional services revenues and costs are not included in the budget. A list of additional services is presented on our website. The cost of these services will be funded directly from the service requirement and charged directly to the member(s) using them.

The funding principles are set out in Section 10 and Schedule 6 of the Market Arrangements Code (MAC). The market operator costs for 2019/20 of £10,696k (excluding VAT) are borne 50:50 by wholesalers and retailers. Wholesalers’ costs are allocated based on the number of supply points, while retailers’ costs are allocated one third based on the proportion of supply points registered and two thirds based on the proportion of primary charges levied, plus a £250 monthly fixed charge.


MOSL,

The White Building,

1-4 Cumberland Place,

SO15 2NP

Tel: 020 8616 7444

Email: [email protected]

www.mosl.co.uk

Documents

Market Operator Services Ltd (MOSL) 2019/20 MOSL Business Plan