CCW’s response to the Market Performance Framework Reform Programme – Consultation 4

Yes, we largely agree that KPIs should have both a ‘minimum’ and ‘outstanding’ standard, where appropriate.

For all KPIs, we want to see trading parties striving to exceed the minimum, in order to deliver greater benefits for customers.

Being clear on what constitutes an ‘outstanding’ performance is useful information for customers by including them in public peer comparison reports. Customers using this information to inform their engagement in the market could incentivise trading parties to maintain a higher level of performance.

We would also expect these standards to be reviewed as performance improves so that standards continue to incentivise the right behaviours to deliver customer service to a high standard and benefits to customers.

We believe performance standards should sit outside the Market Codes, and sit with the Performance Assurance Committee in terms of responsibility. This will allow sufficient flexibility, which is one of CCW’s key asks of the revised Market Performance Framework (MPF).

It is important that the new framework can adapt quickly to changing circumstances to ensure that outcomes for customers are not compromised, particularly where it may be appropriate to revise standards. It is important that trading parties remain strongly incentivised and where this would involve tightening standards as performance changes, we would not want it to be delayed through the code change process.

In terms of the proposed governance, we believe the PAC should have a high degree of autonomy to propose changes to standards. While we agree with Strategic Panel having oversight, we would not want the approval process to be too burdensome, as this may negatively impact customers if changes took too long or were overly complex in process.

We welcome clarity on Strategic Panel’s role in this process and how this might impact the pace of change.

No, we do not agree with the three financial tools. We strongly support the inclusion of penalty charges in the reformed MPF, we are extremely cautious of outperformance payments and would only expect these to be used in very limited circumstances, and we do not believe compensation payments are needed as a financial tool in the MPF.

Once penalty charges are set at a level that genuinely incentivises improved performance, we believe this should result in trading parties improving in key areas, such as meter reading/asset maintenance, and customer data. Complaints relating to billing and charges and administration account for the majority of business customer complaints to CCW. Billing and charges complaints accounted for 78% of our complaints about retailers in 2023-24. Complaints of this nature should reduce if performance in these areas improves through strengthened protections.

We believe the inclusion of outperformance payments should only be in very limited circumstances, if at all, particularly as the basic levels of customer service are still not being delivered for all business customers seven years on from the market being fully opened to businesses in England. Any payments of this nature need to be carefully designed and contingent on other incentives to improve performance. We do not want to see trading parties rewarded for simply performing well in their core functions, or for lesser degrees of failure. We welcome MOSL recognising this in the design principles document of the consultation. For performance to be rewarded, the trading party needs to be a true outlier in terms of exceptional performance, and clear and tangible benefits for customers need to have been delivered. In addition, we strongly believe that there should be no ‘reward only’ KPIs, as this approach is inconsistent with the ODI model used in Ofwat’s price controls for water companies. It is important to drive improvements for customers, using strong incentives.

We do not believe compensation payments are needed as a financial tool in the MPF, and we question their inclusion. The purpose of the revised MPF should be to incentivise trading parties to deliver good outcomes for customers, and improve poor performance, rather than providing a mechanism for an aggrieved party to be reimbursed. While this might incentivise wholesalers to improve their service to retailers in order to avoid paying compensation, there are already other proposed intervention tools to do this. Customers who are impacted by poor performance will not necessarily benefit from their retailer being compensated either. It could also be seen as another way to reimburse charges to trading parties. Therefore, we do not support this tool being included in the revised MPF.

Yes, we strongly agree with the proposal not to have a cap on penalty charges.

The existence of a penalty cap is one of our main criticisms of the current MPF, as trading parties are insufficiently incentivised to address poor performance once the cap is reached. This also allows service levels to further deteriorate once a cap is reach. This has a negative impact on customers. We want to see a cap on penalty charges removed as part of a revised MPF.

In addition, for the reasons provided in response to Question 2.6, we also do not believe compensation payments are needed in the revised MPF.

We somewhat support the principles for tools and performance standards, but not largely or completely for the reasons previously provided.

We generally agree with the first 9 proposed penalty charge principles, and believe that if penalties are implemented in line with these, customers should see improved outcomes under the revised MPF.

PC5 – “May be charged at different levels” – While we acknowledge there is a degree of complexity with this, we urge MOSL to implement different levels. If poor performance in a particular area significantly worsens, it is appropriate for penalties to increase in line with this to increase the incentive on trading parties to address it. Given one of the overarching principles of the revised MPF is to hold the right trading party to account, this should not be
controversial.

We particularly support principle PC8 – “Should exceed the cost of addressing the performance issue”. Currently, it can be cheaper to pay a penalty rather than invest in addressing the root cause of poor performance. Customer outcomes will never significantly improve if this remains the case, so we welcome this as a key principle.

PC10 – We do not agree with the proposed “order of priority” as we do not believe any charges should be redistributed to trading parties as per the current process. Similar to the current cap on penalties, redistribution risks disincentivising trading parties to improve performance. We want to see this removed from the reformed MPF. If any funds remain after funding the Market Improvement Fund, these could be committed to other market projects that will benefit customers. We are keen to work with MOSL and Ofwat on the options that could be explored to deliver greater customer benefits.

We agree it is sensible to calculate penalties by basing them on a trading party’s individual performance, and apply based on the reporting frequency of the KPI.

It is important to have a system that is simple for trading parties to understand, and give a high degree of confidence that they are being charged accurately. Any undue complexity may hinder the effectiveness of the reformed MPF, which will ultimately cause a negative impact on customers if trading parties’ performance does not improve, as a result of misunderstandingand inefficient application.

Our overarching comment is the use of outperformance payments should be very limited, if at all, and only rewarded where a trading party is a true outlier in terms of exceptional performance. It could also be determined by the levels of customer activity in the market. If the levels of customer switching and engagement increase, and customers receive greater benefits from the market, it would not be appropriate for retailers to be rewarded for exceptional performance when they would be benefiting from attracting more customers.
Therefore, we do not believe outperformance payments are needed or should apply once the market becomes more competitive. The same principle could also apply with penalties, as there is less need to financially incentivise retailers to improve performance on an area of service when competitive pressures to do this are stronger. This is why it is important for the MPF to be agile to respond to the changing market.

OP1 – We strongly agree that these should not be rewarding ‘business as usual’, but what constitutes this may depend on the particular activity. For example, customers may consider that a very significant number of actual meter reads being taken is simply their retailer doing what they are being paid to do as a core service, rather than delivering something ‘exceptional’ which warrants a reward. MOSL need to design this in a way that does not reward trading parties for doing their job, but delivering truly excellent service that delivers greater benefits to customers.

OP3 – Basing on average performance needs to be carefully applied to ensure that trading parties cannot qualify for a reward without truly delivering a service which is ‘above and beyond’ in a particular area. It is possible that ‘average’ performance is at a level that is less than customers receive.

OP5 – There should be no automatic redistribution of penalty charges, at all, regardless of how many, if any, outperformance payments are made. We want to see the redistribution of charges removed and we are strongly opposed to this in the current system. If applied at all, these should be funded by penalty charges, but we do not agree with the implicit suggestion in the rationale that outperformance payments are partly needed to limit the annual redistribution of charges to trading parties.

We strongly believe outperformance payments for retailers should be very limited, if used at all, and only rewarded where a trading party is a true outlier in terms of exceptional performance. In light of this, we do not have any specific comments about the proposal for payment itself.

We do not have any specific comments on the principles. This is because we do not believe compensation payments are needed in the revised MPF, as outlined in our answer to Question 2.6.

While there might be a need to develop a mechanism for compensating impacted trading parties, this should not sit within an MPF that is designed to incentivise improved outcomes for customers. It is also unclear what value a compensatory payments tool would have in terms of providing an extra incentive on trading parties to deliver services to a high standard, or improve performance.

There is a clear distinction between penalty charges and compensation payments, and we believe the latter is not suitable for inclusion in the revised MPF. The overarching purpose of the MPF should be to incentivise improvements for business customers, rather than provide a mechanism for trading parties to be compensated for poor performance. In addition, it is unclear how a compensation payment tool might incentivise trading parties to improve performance, which should be the qualifying criteria for an intervention tool being included in the MPF. We, therefore, believe that it is desirable for penalty charges to be included in the MPF, and for compensation payments to sit within another process outside of this.

Given that the proposed compensation payments will not be based on precise financial impact (as stated in the CP3 principle), it is possible that these could be subject to challenge if the affected trading party does not believe it is representative of the loss incurred. Any disputes that may arise from this could distract trading parties from focusing on improving customer outcomes, thereby negating the main purpose of the MPF. For the reasons outlined previously, we do not believe compensation payments should sit within the MPF.

Please see our earlier comments. We do not have any specific comments on the way payments are proposed to be made, as we do not believe compensation payments should sit within the MPF.

We agree with most of the additional financial incentives principles, in particular AP1. It is vital for the revised MPF to genuinely incentivise good performance, which not only includes incentivising trading parties to avoid failure, but also to rectify any failures that do happen as swiftly as possible. We are, therefore, supportive of the proposed metrics (such as M03) that have been created with this in mind.

AP2 – Regarding the application of one type of financial incentive, we are supportive of penalty charges, outperformance payments should only be used in very limited circumstances, if at all, and we do not believe compensation payments should sit within the MPF.

Taking into account our earlier comments, and with the exception of PS10, we generally agree with the performance standards principles and believe they should drive the right trading party behaviours, and good customer outcomes. In particular, where there has been a failure, there is a clear customer impact that needs to be rectified as swiftly as possible. We, therefore, agree that some performance standards should be set at effectively 100%, as outlined in PS2 and PS5.

PS3 – We support the aspiration of absolute performance standards where possible. However, these need to be carefully designed to ensure a stretching, and well evidenced target is set. We do not want the MPF inadvertently making it too easy for trading parties to perform ‘well’ against standards, with no significant improvements for customers. The revised MPF must ultimately drive improvements in service to the benefit of customers, and respond to changes in the market to strengthen incentives where necessary.

PS9 – It is of upmost importance for trading parties to exceed the outstanding performance standard for any payments to apply and for these to be in very limited circumstances. As per our previous comments, the outperformance payment tool needs to be carefully designed so there are no rewards for simply doing a good job. Trading parties needs to be true outliers in terms of exceptional performance, and clear and tangible benefits for customers need to have been delivered. In addition, we strongly believe that there should be no ‘reward only’ KPIs.

PS10 – While we agree with the distinction between compensation and how companies are performing against standards, we do not believe a compensatory payments tool should be included in the revised MPF for the reasons previously provided. In addition, while the PS11 principle applies direction to the Performance Assurance Committee, it is welcome that discretion in their intervention is included in the rationale.

We support the use of both charging models 1 & 2. We are particularly supportive of Model 2, as we agree that 100% performance should be achievable on some KPIs. It is vital for customers that where there are no barriers to achieving targets, trading parties are appropriately incentivised to meet them to ensure high levels of service.

For the reasons outlined earlier in the consultation response, we do not believe
compensatory payments have a place in the MPF, so they should not feature in the charging models. The inclusion of outperformance payments should only be in very limited circumstances, if at all.

We want the MPF to be agile and adapt to changing circumstances and market conditions. In line with this, it may be necessary for charging models to change in the future. We, therefore, want MOSL to undertake a comprehensive review, two years from the date of implementation, to ensure the models are fit for purpose, and driving good customer outcomes.

• The financial incentives (i.e. penalty charges/ outperformance payments/
  compensation payments) assigned to this theme, e.g. would you add or remove any?
• The calculations and rationale for the charging model(s) applied to the KPIs within this theme?

We strongly support the proposal that retailers will continue to be penalised until they successfully submit a meter read. Under the current MPF, there is a disincentive to address the initial failure, which then impacts customers if they continue to be charged based on inaccurate estimation and on estimates for a longer period of time. In order for this to genuinely incentivise behaviours, it is important that penalties are set at a level which incentivises retailers to address root causes of any failures to read meters. This should also enable retailers to meet our Five-year review recommendation of issuing customers a minimum of two bills each year based on actual meter reads.

For MO1, the target levels need to be set high enough to ensure that retailers are providing a service that is clearly considered ‘above and beyond’. For  biannually read meters we expect to see meters read twice a year. This would not be achieved if one read was submitted and accepted in the last 7 months as proposed. As meter reading is a core service, customers rightly expect meters to be frequently read, this is also evident in CCW’s research on meter reading frequency with small and medium business customers. Therefore, we do not want to see retailers rewarded simply for meeting this expectation.

As outlined earlier in the consultation, we do not want to see any charges redistributed to trading parties given the disincentives this creates. These and outperformance payments must not be interdependent. If a significant amount of penalty payments remain at the end of each year, these should fund other improvement projects that could benefit customers.

We are keen to work with MOSL and Ofwat on the options that could be explored to deliver greater customer benefits.

• The financial value of charges for each KPI within this theme?
• How the value of performance standards are calculated?

We broadly agree with the proposed calculation methodology, as outlined in the worked examples. It is sensible that this is in proportion to the number of expected meters to be read, as this clearly represents the customer impact.

However, our overall opinion of how effective an incentive is will be determined by the value of the charge. This needs to be set a level where it is more cost effective for retailers to address the root causes of problems reading meters, rather than simply pay the penalty. The design of MO1 should also ensure that retailers are largely in control of this activity, as it will exclude active B5 and C1 requests that the wholesaler has responsibility for. It is, therefore, fair to apply stronger penalties when failures are more likely to entirely be in a retailer’s control.

• The financial incentives (i.e. penalty charges/outperformance payments/compensation payments) assigned to this theme, e.g. would you add or remove any?
• The calculations and rationale for the charging model(s) applied to the KPIs within this theme?

We broadly agree with the financial incentives attached to metrics MO4 and M06, apart from our views on compensation payments. Customers want meter reads to be based on actual reads, with the majority of respondents (88%) in CCW’s research of small and medium businesses believing it is important their bills are based on meter reads rather than estimates. This principle also applies to when they switch retailers. Given how retailers are permitted to submit estimated transfer reads in certain limited circumstances, we agree that these metrics should be penalty only, and particularly agree that M06 has a 100% performance level for late transfer reads. Despite having the option to submit estimates, we expect retailers to be striving to either take a visual read, or work with the customer to obtain one from them instead, where it is safe to do so. It is important that customers’ bills are based on the water they are using.

We would like further clarity on how M09 will be incentivised, as it was our understanding that this metric was originally proposed to be outperformance payments only, which we would not support. This KPI needs to include penalty charges for any failures. However, it is unclear under what circumstances a retailer would be penalised given the fact estimates are permitted in certain circumstances. We want to see greater clarity on this KPI.

An alternative metric to M09 would be to measure the number of actual reads vs inaccurate estimation (potentially based on a series of estimates which may be incorrect) rather than treating all estimates the same. Measuring the amount of inaccurate estimation will better identify whether or not there has been an adverse impact on customers. We do not want to inadvertently encourage a significant increase in estimation, but exploring this further would help to incentivise more accurate billing.

As smart metering increases, we would expect to see the level of estimates reduce. It is therefore important the revised MPF is sufficiently agile to recognise these changing circumstances, and adapt metrics and incentives accordingly. Until this point, the MPF should incentivise retailers to make every effort to read meters.

• The financial value of charges for each KPI within this theme?
• How the value of performance standards are calculated?

As outlined in our response to Question 7.3, the calculation methodologies for the
performance standards are sensible, but whether or not this results in greater
incentivisation will depend on the value of the charge. This needs to be set at a level that incentivises retailers to address root causes of problems reading meters and submitting reads.

• The financial incentives (i.e. penalty charges/outperformance
  payments/compensation payments) assigned to this theme, e.g. would you add or remove any?
• The calculations and rationale for the charging model(s) applied to the KPIs within this theme?

We agree with the inclusion of penalty charges as a financial incentives. In our Five-year review, we urged wholesalers to significantly increase the rollout of smart meters for business customers, given the increases that should be seen in billing accuracy and more available consumption data. With this data from smart meters it should be relatively easy for wholesalers to receive and submit reads. We, therefore, expect the MPF to respond to the changes that smart metering will deliver and for the charges and payments to be changed.

This should always focus on delivering high levels of customer service.
Given the relative ease of reading smart meters, we would expect all wholesalers to be performing at a high level for MO2, so they should not be rewarded for meeting what should be an expected high standard. Therefore, it is not appropriate for outperformance payments to be included in this incentive.

• The financial incentives (i.e. penalty charges/outperformance
  payments/compensation payments) assigned to this theme, e.g. would you add or remove any?
• The calculations and ration ale for the charging model(s) applied to the KPIs within this theme?

On a similar basis to our answers to the previous questions in this section, we agree with the use of penalty charges. Incorrect customer data continues to drive a significant proportion of administration related complaints by business customers to CCW. In 2023-24 incorrect account information accounted for 28% of all administration complaints that CCW received. It is, therefore, important that wholesalers are adequately incentivised to deliver these activities to a high standard.

Our comments on outperformance payments are the same as our previous comments on this subject.

We would urge MOSL to develop M14 as a KPI. Retailers having reliable information of where a customer’s meter is located is crucial to ensuring the meter can be read successfully, resulting in an accurate bill for the customer. As this is a metric that is already in use in the current MPF, it should be relatively straightforward to explore this further. Given the development of the proposed KPIs rely on the data assurance programme, we believe this programme needs to complete before these could be considered for inclusion in
BR-MEX. We have concerns that MPF metrics included in BR-MEX will not benefit from the same flexibility as the rest of the MPF, so we do not want to see metrics included that have not been fully developed and tested.

• The financial value of charges for each KPI within this theme?
• How the value of performance standards are calculated?

Please see our comments on question 7.7.

• The financial incentives (i.e. penalty charges/outperformance
  payments/compensation payments) assigned to this theme, e.g. would you add or remove any?
• The calculations and rationale for the charging model(s) applied to the KPIs within this theme?

It is important that bilateral requests are not permitted to remain unanswered or delayed where this impacts the outcome of good customer service. We strongly agree with the use of penalties as an incentive on wholesalers to complete these on time. In addition, the applicable SLAs need to measure whether or not the wholesaler has completed the request, rather than only focusing on how quickly they have responded to the retailer.

For the reasons previously stated, we do not agree that compensation payments should be included in the revised MPF, so we do not support them applying to M10. However, this particular activity has a large impact on customers, given the risk of continued inaccurate billing while a meter remains unread. While we recognise failures to address long unread meters should be captured under M18, there is a risk that poor performance against B5 & C1 requests may be masked by good performance against other bilateral requests. We, therefore, urge MOSL to separate B5 & C1 requests from M18, and have M10 as a standalone metric, subject to separate incentivisation. A separate focus on this activity is warranted in order to achieve greater billing accuracy for customers, and may particularly help address legacy issues.

We currently support the decision that M17 should not be associated with a charge, as we agree there is no evidence that deferrals are currently being applied inappropriately. However, customers can be negatively impacted by requests being deferred, so we also agree with the implementation of a KPI to provide the Performance Assurance Committee with more visibility in this area. If there is future evidence that deferrals are not either being applied correctly, or their use is causing significant customer detriment, MOSL and the
Performance Assurance Committee need to explore how to address this.

• The financial value of charges for each KPI within this theme?
• How the value of performance standards are calculated?

In line with our previous comments on this subject, we believe that charges should be set at a level that genuinely incentivises wholesalers to improve their performance against the associated standards. It should not be more cost effective for trading parties to pay penalties, rather than address the root causes of performance failures.

• The financial incentives (i.e. penalty charges/outperformance
  payments/compensation payments) assigned to this theme, e.g. would you add or remove any?
• The calculations and rationale for the charging model(s) applied to the KPIs within this theme?

To ensure customers are billed accurately, it is essential that all types of meter are being read frequently, and the relevant trading party is properly incentivised to do so. We, therefore, agree with the financial incentives assigned to this theme, and particularly agree that the standards applicable to non-market meters should be the same as those for market meters.

Our comments on outperformance payments are the same as our previous comments on this subject, particularly as meter reading is a ‘core activity’.

• The financial value of charges for each KPI within this theme?
• How the value of performance standards are calculated?

In line with our previous comments, the financial value of charges needs to be sufficiently high enough to genuinely incentivise wholesalers to perform well against the standard.

Very.

Very.