WICS consults on wholesaler counterparty credit risk protection plan

As flagged in the previous Week in Water, the Water Industry Commission for Scotland has opened a consultation paper on proposed modifications to pre-payment arrangements in the non-household retail market arguing that existing protection for the wholesaler's

counterparty credit risk was currently in question.

WICS has proposed:

  • to increase the pre-payment required from licensed providers to Scottish Water to a maximum of 54 business days;

  • that no further escrow accounts are entered into and existing escrow accounts are closed (at the same time as the pre-payment rule is implemented) and the proceeds returned to the appropriate licensed provider; and

  • Scottish Water pays interest on pre-payments at an annual rate of 4% nominal.

Responses to the consultation should be submitted by 15 August 2016. WICS plans to bring in the changes (subject to the outcome of the consultation) from January 1 2017.

The mechanism for this change will be directions to Licensed Providers under paragraph 6 of Standard Licence Condition A7 and to Scottish Water under paragraph 8B of The Water Services (Codes and Services) Directions 2007. And WICS would need to make "a number of consequential changes" to its licence application guidance and changes to the market codes too would be needed. So WICS would issue a new template Wholesale Services Agreement to reflect the proposed policy changes were they to be implemented.

WICS' chief executive, Alan Sutherland, said the proposals were made in light of the impact of a retailer failure in 2012. The rules then in place failed to protect Scottish Water, only halving its loss said Sutherland.

While Sutherland's approach was “at variance" with what Ofwat's recent ruling the WICS chief warned that counterparty credit risk was real and urged wholesalers to “think hard” about how they would manage it.