Ofwat sets out bad debt recovery for non-household market

Following a consultation Ofwat has announced bad debt costs recovery in the non-domestic water retail market will begin from April 2022, which will likely take the form of a raised price cap.

The regulator set out terms for revising regulatory protections to protect the market and customers from risks of systemic retailer failure as a result of lockdown. Previously Ofwat said retailers should be resilient to bad debt up to two per cent and it would act if that threshold was exceeded.

In March and April 2020, the regulator and market operator MOSL made code changes to protect business customers from unfair bills during lockdown, and retailers from charges. These measures gradually wound up in the latter months of 2020 but the full impact of excess bad debt was yet to be seen.

Ofwat decided, following the consultation, that regulatory protections would be amended to allow retailers to begin to recover a portion of excess bad debt from non-household customers from the start of the next financial year.

The body previously said its “minded to” position would be to let retailers recoup a portion of excess bad debt from non-household customers by raising price caps under the retail exit code (REC) uniformly across the market.

Ofwat said waiting until next year to introduce any options will give a better understanding of what is happening to bad debt levels following the unwinding of government support schemes. It also said if the preferred option of amending the REC cap was imposed in April, it will give retailers more time to adjust pricing for non-price-controlled customers.

CCW, which supported an extended recovery period before any potential price increases, urged for the impact to be spread over a number of years to lessen the effect on business customers.

The report noted the benefits that implementing regulatory revisions earlier than April would have for retailers who have particularly experienced increases in customer bad debt levels, however Ofwat said in its ‘minded to’ position that retailers “should be able to recoup efficient working capital costs incurred in financing (their own portion of) excess bad debt costs”. It added that revised provisions taking effect from April 2022 would include efficient working capital costs incurred for October 2021 until April 2022 to provide an alternative for such relief to begin from the earlier date. Further, it considered the prospect of administrative and cost hurdles for both retailers and customers if there was a mid-year tariff changes.

A further consultation will begin this month before Ofwat publishes a decision in July on customer bad debt in the sector. In February 2022 it anticipates publishing a decision on the parameters of recovery mechanism that will apply from April 2022.