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COVID-19: Ofwat decision on proposals to address liquidity challenges and increases in bad debt

  • COVID-19: Ofwat decision on proposals to address liquidity challenges and increases in bad debt

About the entity

The economic regulator of the water sector in England and Wales.

Ofwat has published its final decisions on how it will intervene to support customers’ interests in the business retail market through the current Covid-19 pandemic.

Its focus is to protect the interests of customers while ensuring they have access to reliable water and associated retail services now and into the future.

Following a review of consultation responses and Panel recommendation, Ofwat has made the following decisions:

  • Ofwat has decided to provide for a further period of liquidity support to Retailers. Reflecting consultation responses and that the payment mechanism includes an element of catch-up of wholesale charges deferred in March and April, Retailers who opt into these deferred wholesale arrangements will be required to pay the higher of either:
  • 60% of primary charges due to the Wholesalers; or
  • 94% of the cash they have collected from their customers.
  • The 60% minimum proportion of wholesale bills due will be fixed for the settlement runs in May, June and July.
  • Retailers should receive liquidity support to the end of July 2020, where required, and all deferred wholesale charges should be paid back in full by the end of March 2021. Ofwat will review and consult on next steps early in the summer.
  • Wholesalers will be able to charge interest on deferred payments, including to incentivise Retailers to use other sources of liquidity (including government finance) where they can. Ofwat has decided to set a maximum interest rate of 5.98% nominal. This is equal to the PR19 nominal wholesale allowed return on capital plus 1%.
  • Retailers should be prepared to bear outturn bad debt costs to a level equivalent to 2% of their retail business market turnover. Ofwat will monitor the level of additional Covid-19 related bad debt emerging in the business retail market and if it looks like bad debt across the market is likely to exceed the 2% threshold, Ofwat will provide regulatory protections for a portion of this exposure. Retailers who have seen historic levels of bad debt in excess of 1% should expect to absorb – in full – such incremental bad debts costs up to an amount equal to an additional 1% of their annual turnover in addition to their historic, pre covid-19, levels of bad debt.
  • We have set a cap on the additional exposure that each Wholesaler will face as a result of providing liquidity to each Retailer. On a Retailer failing, the bad debt the Wholesaler will carry, after the price control sharing factor has been applied, will be capped at the £m figure equivalent to the average monthly wholesaler charge for that Retailer. Consistent with our objective to protect customers, this cap covers part, but not all, of the additional risk Wholesalers face from Covid-19 liquidity measures. We will not alter this cap even if the liquidity measures are extended beyond July.

Ofwat will revisit the Customer Protection Code of Practice (CPCoP) to ensure customers seriously affected by Covid-19 continue to be protected. Customers who are operating normally and can pay should be subject to normal debt recovery processes.

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