Water retailers have called for assurances from Ofwat on how they can continue to support business customers through difficult trading times and what will happen to bad debts.
The outcome of the soon to conclude (22 January) consultation by Ofwat on bad debt costs in the non-household water market has been called “absolutely critical” for investor and lender confidence in the sector.
Since the pandemic began, water retailers have been helping customers who were forced to shut up shop due to lockdown restrictions, many with little or no notice.
This led to an administration headache, unpaid and deferred bills, incomplete meter read data and uncertainty over the future. Ofwat and MOSL swiftly brought in a number of protections to bolster retailers and allow them to support their customers through the tough times.
Measures including vacancy flags while businesses were closed while suspension of some charges were wound down after the first lockdown with the rationale that retailers have had ample opportunity to be in touch with their customers so the need for temporary changes to bills was less urgent.
With restrictions continuing and some industries, such as late-night and entertainment venues where distancing is impractical remaining closed for 10 months, the risk of elevated bad debt is likely to worsen.
Ofwat is currently consulting with retailers to measure bad debt costs, which will help the regulator establish each retailer’s bad debt costs before the pandemic, and calculate costs since the introduction of Covid-19 measures – for individual companies and the sector.
James Cleave, chief financial officer at Everflow Water said the outcome of Ofwat’s consultation is very significant for the retail market hinged.
“A key priority for all retailers is to gain some certainty on how excess bad debt will be recovered. Ofwat is considering this now, and it is absolutely critical to investor and lender confidence that decisions are made within the next few months that will give some comfort on the longer-term viability and success of the market.”
In its provisions set out in April, the regulator did not specify details of how retailers could recoup from their customers some portion of bad debt costs above what was considered reasonable to absorb – which Ofwat limited to 2 per cent.
Cleave added that during the newest lockdown, getting hold of customers who have fallen behind on payments has been one of the biggest issues Everflow is facing.
He said: “Retailers are bearing a growing debt burden, while being expected to pay wholesale charges in full, alongside repayments of wholesale charges that were deferred in 2020 under the liquidity support scheme. This is not sustainable.”
Ofwat’s consultation included exploring options for amending regulatory protections because of the bad debt situation. Any changes to protections are due to be published in April, but these would not take effect until the following year.
Meanwhile Wave has called for protections introduced at the first lockdown to be reintroduced and extended until next year for businesses temporarily closed due to the pandemic.
Chief executive Lucy Darch said the amended customer protection code of practice added a layer of protection for businesses and payment plans are being offered but the company would welcome the option to pause billing to customers while their premises are closed.
Darch said there is an urgent need to resolve the bad debt problem and the UK Water Retail Council (UKWRC) has been discussing the issue with Ofwat.
“Retailers need a solution factored into the price review from April 2021 for the increased level of bad debt provision that will result from Covid-19,” she said. “There is urgency on this, as bad debt in the sector is now well in excess of the level perceived when the market was set up.”
She added a return to temporary vacancy flags for premises while they are closed and suspending billing are also being discussed by the UKWRC.
“We’d like to see a solution which pauses billing to support customers while their premise is closed, and a mirrored pause in wholesale/settlement costs,” Darch suggested. “This doesn’t necessarily need to be the same mechanism as before, but something simple and helpful for customers.”
Wave will be using its ability to reduce Yearly Volume Estimates in the settlement system to reduce wholesale bills and, in the absence of any other mechanism to pause wholesale costs, to ensure that cashflow doesn’t get out of step.
During the initial lockdown retailers were able to access loan support packages offered by commercial banks, which were therefore limited by commercial considerations.
Wave said with such sources already being used, further funding support to retailers will need to come from more government-backed schemes, with further protection to encourage banks to lend over and above what was offered last time.
Darch said: “The only alternative to this is to rely on investors, and they can naturally be expected to want visibility of how any further investment will be recovered, which in turn will be entirely dependent on Ofwat’s ongoing review of the bad debt resulting from Covid-19.”
As retailers continue to support their struggling customers through such an unexpectedly long time of uncertainty, their funding positions will once again be put under pressure, which Darch said is why it is important to address the excess bad debt provision in the April 2021 price review.