Water retailers fear impact of wholesaler uncertainty

Water retailers have expressed concerns that their money is not safe being held by wholesalers which are less financially resilient.

Jacob Tompkins, chief executive of the Water Retail Company, told Utility Week the issue has come to a head amid uncertainty around Thames’ finances.

Retailers pay wholesalers for services either in cash or letters of credit insured by a bank. Under market rules, credit arrangements between retailers and wholesalers state that the former must pay upfront to cover the risk of retailer default.

Tompkins described the situation of having to pay up front to a company with a worse credit rating than itself as “completely absurd”.

In particular, he raised concerns that if a company such as Thames were to go into special administration, money could be held for several months while the receiver undertakes assessments.

“For a retailer’s cash flow, that is a huge amount of money,” Tompkins said. “We are very worried that our cash isn’t safe. We’re also questioning why on earth we have to pay the money anyway.”

He added that instability of wholesalers has caused a rise in the costs of letters of credit. “Banks tell us that the water companies are more of a risk than they were,” he said. “They’ve increased the cost of our letter of credit by 0.6%, which isn’t a huge amount but it’s more money per year for us.”

Tompkins added: “We’re having to pay more because their credit has dropped, it’s an absurd situation.”

Thames’ situation has brought the issue into focus, however Tompkins stressed that the issue is not new, adding that this situation has caused tensions since the market opened. “It’s an uneven playing field, because affiliated retailers do not have to post credit support in their own area,” he added.

Retailers raised the issue with MOSL and Ofwat this week after Moody’s downgraded Thames Water’s credit rating.

“Maybe they are too big to fail and they’ll be bailed out by the government,” Tompkins said. “But why are we positing cash with companies whose credit rating is worse than ours?”

Tompkins said despite strong relationships with wholesalers, fears remain that costs are being burdened on retailers and business customers.

“We set up the business to do water efficiency, the less liquidity we have the more difficult it is to offer free water efficiency measures to customers,” Tompkins said. “Any benefits we would get from not having to post credit support would increase our liquidity and enable us to do more efficiency, which is what we need at the moment.”

Castle Water proposed a code change to MOSL that retailers should not have to post credit for wholesalers with a less than satisfactory credit rating.

The code change committee will consult on the change later this month to directly address the issue of credit support placed with wholesalers.

MOSL said it was closely monitoring the situation with Thames Water and reviewing the potential implications for MOSL, the market and its trading party members. “As market operator we work with all parties to minimise any risk to market participants and their customers.”

In other water retail news, Anglian and Northumbrian are understood to be in discussions about the sale of their joint-venture retail business Wave Utilities.