Credit arrangements in the business water retail market reviewed
Today, Ofwat publishes the findings of a review on the effectiveness of the credit arrangements in the business water retail market. The review was undertaken to establish whether the current credit arrangements hamper the development of effective competition by creating undue and unfair barriers to entry – especially for smaller new entrants.
The current credit framework requires retailers to offer collateral to wholesalers in order to enter and operate in the market. The review has found that while in principle, such requirements are appropriate, the operation of the credit arrangements requires changes to ensure that it is not hindering entry, creating an unlevel playing field, or inappropriately increasing new entrants’ costs.
One key area of concern is around Parent Company Guarantees (PCGs). The review has found that credit constitutes a significant proportion of costs for new entrant retailers and that typically they can only access the most expensive forms of credit. In contrast, associated retailers access PCGs often at zero or very low cost.
Ofwat will be seeking reassurance that associated retailers have been pricing in a way that fairly reflects their access to PCGs and has asked the Codes Panel to improve transparency of PCGs and consider whether changes to the rules are required to ensure a level playing field for all retailers.
The review has not found it necessary to introduce measures specifically targeted at new entrants – Ofwat is reassured and encouraged by the fact that industry has responded positively to potential concerns of smaller retailers, by introducing credit options which reduce the costs of entering the market.
Emma Kelso, Ofwat Senior Director of Market Outcomes and Enforcement said:
“It’s promising to see that the market has been proactive on credit measures for new entrants. However, we would like to see the industry pick-up the baton in leading the work to improve the functionality of the credit arrangements. For example, we are keen that the industry Codes Panel takes forward work looking at the use and transparency of Parent Company Guarantees and alternative credit arrangements, and a package of work to ensure payment history is more accurately reflected in the credit arrangements as a priority.”