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The price cap for water retailers may be temporarily raised by 0.31% from April 2022 to address bad debt linked to Covid-19.
The regulator has proposed increasing net and gross margins in the business retail (REC) price cap for at least two years to provide headroom for retailers to raise prices.
Ofwat has launched a consultation on its approach to combatting the increased risk from business customers defaulting on payments that could leave retailers facing bad debt costs beyond reasonable levels.
The regulator and market operator MOSL intervened from the start of lockdown to put special measures in place to buffer retailers and their customers from shocks that could lead to systematic retailer failures. The measures were unwound from late 2020 onwards but the issue of bad debt remained under consideration.
The 0.31% rise was calculated on the basis that retailers can recoup three quarters of excess costs from all billpayers, which helps avoid the burden of costs falling on smaller or unengaged customers.
At this stage the regulator will not pursue a true up, as it had suggested in a July consultation because bad debt costs – at 2.87% of market turnover for the two years ending March 2021 – were not considered to have materially risen beyond manageable levels. A true up was considered to involve significant effort and costs to retailers that would be disproportionate as bad debt costs were only marginally above the 2% threshold.
In April 2020, Ofwat agreed to provide protection if bad debt costs across the non-household market exceeded 2% of revenue and launched a consultation in July to allow an increase to the price cap.
Georgina Mills, business retail market director at Ofwat said: “This small and temporary upward adjustment to the business retail price cap aims to protect customers in the longer-term by promoting stability of the business retail market, whilst maintaining strong incentives on retailers to keep bad debt costs as low as possible”.
Ofwat has called for stakeholder views and evidence by 12 January and will publish its decision in February ahead of changes taking effect from April 2022.
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