Ofwat confirms cashflow measures and caps bad debt

Ofwat has confirmed the measures it will take to protect consumers, wholesalers and retailers in the business supply market during the coronavirus pandemic.

The bad debt borne by retailers will be limited to the equivalent of 2 per cent of their business market turnover. Ofwat said it will monitor how much extra coronavirus-related bad debt emerges in the market and will add regulatory protections if the threshold is exceeded.

To ensure they are able to pay and prevent their customers from facing inappropriate bills, retailers will also be allowed defer a portion of their wholesale charges until the end of July to March 2021. However, they will be required to pay a minimum of 60 per cent of their charges for the period or 94 per cent of the cash they collect from customers – whichever amount is greater.

Wholesalers have been encouraged to add interest to the deferred charges to encourage retailers to seek alternative sources of financing, including government support schemes, although Ofwat set a maximum notional rate at 5.98 per cent. This is equivalent to the PR19 nominal wholesale allowed return on capital, plus an additional 1 per cent.

In the event that a retailer fails, the bad debt wholesalers are exposed to will be limited to their average monthly charge on that retailer rounded to the nearest million pounds. Ofwat said the cap will cover part, but not all, of the risks wholesalers face because of the deferred charges, and that it will not be altered, even if the liquidity measures are extended beyond July.

Working closely with MOSL, the regulator made a series of code changes since mid-March to protect customers and to ensure they will have access to retail services now and in the future.

It added that any customer that can continue operating as normal and is able to pay should be subject to all normal debt collection processes.