Ofwat has confirmed its decision to temporarily increase the maximum prices business retailers are permitted to charge as a result of increased levels of bad debt.
The water regulator said retailers’ abilities to respond to increased debt due to Covid are expected to be constrained by the temporary strengthening of protections for non-household (NHH) customers and the presence of price caps.
As a result in April last year Ofwat committed to provide additional regulatory protections if market-wide bad debt exceeded two per cent of NHH turnover. This was on the basis that historical data suggested two per cent represented a normal recession type scenario that a prudent retailer was expected to have planned for.
Information provided by retailers earlier this year indicate outturn bad debt costs for 2019-20 were around 2.9 per cent and 2.1 per cent for 2020-21, giving a cost for the two years ended March 2021 of 2.5 per cent.
As such, Ofwat believes revisions to regulatory protections are warranted.
A decision document published by the regulator today (26 July) includes the proposal to adjust retail exit code (REC) price caps.
Retailers will be permitted to recover a portion of market-wide excess bad debt costs via an upward adjustment to the maximum prices they are permitted to charge their customers from April next year.
Ofwat believes that by reducing the risk of systemic retailer failure, the longer-term interests of customers should be protected.
To calculate an initial adjustment to the REC price caps accounting estimates and provisions made by retailers in their financial results to years ending 31 March 2020 and 2021 will be used. A further request for information will be issued in October this year to include the latest customer collections and collect updated data.
Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers may experience. A consultation on the proposed adjustment to the price caps is expected by December this year.
On a market-wide basis, retailers will bear 25 per cent of bad debt costs where these are more than two per cent, while NHH customers will bear the remaining 75 per cent.
This represents a shift from Ofwat’s previous proposal which would have seen a 50/50 split if market-wide bad debt costs were equal to or less than three per cent.
Responding to the announcement Mike Keil, director of policy, research and campaigns at the Consumer Council for Water (CCW), said the measures place a “disproportionate burden” on business customers.
He said: “We recognise the risk posed by bad debt needs to be shared but this places a disproportionate burden on business customers. We want to see a more equitable split between customers, retailers and wholesalers.
“A third of business customers have told us they have been severely impacted by the pandemic but this move could place even more pressure on them through higher bills.”
Elsewhere, Ofwat said there were three other areas where it has not reached definitive conclusions and is seeking further evidence.
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the two per cent threshold.
- Undertaking the true up – If a true up is required, Ofwat has set out how it expects this to work in practice.
Georgina Mills, business retail market director at Ofwat, said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic retailer failure as the business retail market continues to feel the impacts of Covid-19.
“By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”