Information for business customers during the Covid-19 pandemic
The impacts of Covid-19 are being felt across the whole of the UK economy. Government and regulators have been acting together to support businesses through this period. In the water sector, Ofwat’s actions have been guided by the central principle of protecting customers’ short and long term interests – in particular by relieving businesses of the immediate pressure of having to pay water bills if impacted by Covid-19 while ensuring all customers have access to reliable water and associated retail services now and into the future.
Many businesses will have reduced their commercial activities or have temporarily closed in the face of measures to combat Covid-19. Overall demand for water in the non-household sector over the next quarter is likely to fall as a result. Such reductions will not be immediately apparent to wholesalers and retailers, because for example settlement volumes will be on the basis of ‘business as usual’ forecasts of water usage. Absent other measures, this would mean retailers would be liable for paying wholesalers for higher volume consumption than would have occurred.
Ofwat and MOSL worked together to progress urgent code changes aimed at more accurately reflecting the amount of water being consumed by business customers. We also wanted to understand the impact of Covid-19 on retailers, in particular where they may be impacted by delayed payments, creating a liquidity issue in the market. In order to inform our thinking on these issues, we sent out two calls for inputs, one related to reduced demand and the other related to late payment.
On 30 March, working closely with the market operator MOSL, we put in place urgent retail code modifications to resolve the immediate liquidity problem facing retailers in the business retail market and align wholesale bills more accurately to the reduced consumption caused by temporary business closures.
On 16 April, we published a consultation proposing to introduce a package of measures which would be more enduring and protect the interests of customers.
Following a review of consultation responses, we presented our position in light of the responses and proposed a code change on liquidity to the Industry Codes Panel. We have now published our decision document and decided on the following:
- 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. We 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. We have 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. We 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, we 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.
While the decisions set out in this document provide much needed certainty and clarity to the sector on the issues of liquidity and bad debt in the medium-term, we are conscious of the need to continually review how Covid-19 is impacting the water sector and those operating within it, to ensure any interventions we make are timely, proportionate and fit for purpose.
On 15 May, we published a consultation proposing to introduce a code change that will continue to protect customers, while enabling Retailers to recover and manage debt from customers who are operating and are able to pay their water bill. We welcome your views on the questions detailed in section 7 of the document by 5pm on 20 May 2020.
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