Ofwat to defer wholesale charges and adjust price cap

The water industry regulator has proposed deferring up to 40 per cent of wholesale charges until the end of July to provide liquidity to the water retail market as well as setting a limit for bad debt to be absorbed by retailers.

Ofwat said that in the current climate retailers should expect to absorb bad debt cots up to 2 per cent of turnover. These levels normally sit at around 2 per cent.

It said that if bad debt levels appear to be rising beyond the 2 per cent mark, it would provide extra protection – either by adjusting the price cap via the Retail Exit Code, or capping bad debt exposure. The level of cap will be set later this week (30 April).

“While we expect water companies to be resilient to the shocks associated with an economic downturn, including the higher risk of retailer exit, we do not consider it appropriate that liquidity measures introduced in March to support the retail market should come at the expense of the financial resilience of the wholesalers,” the regulator said.

Despite mechanisms to shield wholesalers from bad debt, they will be partially exposed so Ofwat will cap the amount to ensure wholesalers’ financial resilience is not impacted.

To improve liquidity Ofwat said retailers should pay a minimum of 60 per cent of the bills each month although wholesalers should continue to invoice the full amount.

Deferred wholesale charges should be paid back in full by end March 2021 with wholesalers encouraged to add interest to payments as a means of incentivising retailers to use other, cheaper, forms of credit and liquidity where possible.

The idea is to relieve retailers of the burden of paying the full amount charged at a time when they are receiving less in payment from customers, while at the same time ensuring wholesalers are not wholly burdened with the shortfall.

Following a consultation by Ofwat and MOSL, the regulator published its recommendations that will be finalised and implemented by 30 April.

As part of the consultation Water UK on behalf of wholesalers proposed a minimum of 70 per cent of charges should be covered by the retailers. They  also highlighted that wholesalers should only offer liquidity as a last resort after retailers had explored other options such as government assistance.

Ofwat said payment will be deferred through to the end of July although wholesalers will continue to bill retailers for the complete amount. To qualify for deferred payments the retailers must provide information about the proportion of invoiced amounts they are receiving from their customers.

Retailers will be encouraged to chase payments from customers who are operating and in a position, to pay, but simultaneously to identify cases where that is not appropriate and offer support to customers as necessary.

Should retailers who opt to defer payments not comply with the scheme’s requirements of supplying information the option would not be made available beyond July.

The regulator also stated that additional costs resulting from coronavirus should not all be passed onto customers. It said both wholesalers and retailers should be prepared to bear some of the additional costs, consistent with other sectors across the UK economy.

Ofwat said it will continue to analyse evidence from the consultation and consider recommendations before publishing its final decisions at the end of this week.