Ofwat launches retail credit review

On Friday, Ofwat confirmed it is reviewing credit arrangements in the business retail space and said it expects to publish its findings as the market turns a year old in April.

In designing the credit options, the intention was to apportion risk fairly between wholesalers and retailers.

The market settled on a requirement for retailers to provide 50 days of collateral cover to wholesalers, and gave retailers seven options on how to provide this – ranging from prepayment and cash deposits to letters of credit and insurance.

However, some retailers have argued these terms are onerous and more limited in practice than on paper.

Jacob Tompkins (pictured), co-founder of The Water Retail Company, for instance, told The Water Report that for genuinely new entrants (start ups, rather than entrants from other markets), only two options are available in practice to those without a trading history who cannot access parent guarantees or letters of credit etc: prepayment, or posting 50 days’ cash on deposit, both of which are a major challenge to cashflow. His company attempted use of insurance but this was rejected by some wholesalers.

Launching its review, Ofwat said: “Some have asked if the current requirements are too stringent and could dissuade smaller, new entrants from competing in the market. To make sure the market is effective, Ofwat wants to test those arrangements to ensure they are proportionate and targeted and to see if there are better ways to protect customers and make sure the market is dynamic and competitive for retailers.”

See interview with Jacob Tompkins in January’s edition of THE WATER REPORT