Wholesalers say retailers should bridge liquidity gap

Retailers should be required to pay “an absolute minimum” 70 per cent of wholesale water charges to bridge the gaps in liquidity in the struggling non-household market, wholesalers have told Ofwat.

In response to Ofwat’s consultation on finding longer-term solutions to support the non-domestic market during the coronavirus outbreak, Water UK, on behalf of the water wholesalers, urged Ofwat to avoid short-term emergency actions that could compromise long-term stability.

Last week Ofwat opened a consultation to assess ways to reach a permanent solution to the problems faced in the non-household water market because of the pandemic. Tensions have centred around bad debt and liquidity.

The wholesalers said the regulator should be “fully conscious” that they are bearing many risks across all areas of their businesses because of coronavirus.

The group said the remaining liquidity gap should be central to regulatory decisions going forward and said wholesalers should strictly be the “last resort” to provide it.

Furthermore, it said retailers should be permitted to collect payments from customers and establish or extend commercial financing as well as “taking reasonable steps” to access support from government to bridge the gap – with liquidity offered by wholesalers being the least preferable option.

The consortium said asking retailers to pay more than 50 per cent of wholesale charges each month was “entirely reasonable” to address the gap and said a minimum of 70 per cent of charges should be met by retailers.

The code change by Ofwat and MOSL to request retailers to pay 50 per cent of wholesale charges – or more if they are able to – was met with confusion. One company expressed concern to Utility Week that without being able to chase debts retailers wouldn’t have the funds to cover 50 per cent. They questioned how the percentage was reached because it seemed an arbitrary figure.

In its response, Water UK suggested liability for bad debt should be limited for retailers and in part borne by customers.

The problem of bad debt has been raised by all parties with wholesalers noting the unprecedented economic conditions giving rise to levels of bad debt beyond what any retailer could have allowed for.

Pointing to the intrinsic link between liquidity and bad debt, the wholesalers said: “All parties – retailers, wholesalers and customers – need full clarity at the earliest opportunity (and no later than the end of this month) simultaneously on both issues related to liquidity and bad debt. One cannot be resolved without the other,” while reaffirming the willingness to engage with all parties to quickly resolve the issues.

Water UK on behalf of its members welcomed measures in place so far by MOSL and Ofwat to free up liquidity in the market without damaging the financial viability of wholesalers.

It requested that MOSL provide further guidance and clarity on the code modification relating to customers’ premises being marked as vacant with a question mark over how this would be monitored now and in the future.

“The use of the vacant flag is having a real impact on the water sector now, and we welcome early action by Ofwat to address any misuse as soon as possible,” the group said.

Water UK said wholesalers have engaged constructively with the regulator and market operator MOSL to find solutions that support all parties in the short- and longer-term during these exceptional circumstances.

It recommended that Ofwat should seek the view of ratings agencies before finalising code changes to avoid “unintended consequences” of any regulatory adjustments and implored that any actions should minimise disruption to the market.

The consortium said it wanted to see Ofwat continuing to work with wholesalers and retailers as it finalised the code changes.

“The tight timescale and urgency of this issue has already led to some unintended consequences through misinterpretation and lack of clarity, which have required urgent clarification and guidance from Ofwat. We want to ensure that all parties follow both the letter and spirit of any new requirements. We would ask Ofwat to continue to work openly with the industry to minimise the risk of unintended consequences in the next few critical weeks.”