Ofwat clears alternative payment terms for retailers

From 31 January, retailers will be able to request more flexible payment terms from wholesalers after Ofwat approved Code Change Proposal CPW048 on alternative payment terms – against the advice of the Panel.

Yorkshire Water Business Services proposed the introduction of “alternative” payment terms to complement the existing pre-pay and post-pay options contained in the Business Terms of the market for the payment of primary charges from retailers to wholesalers. Ofwat reported the retailer argued the existing two alternatives “are rigid and may create barriers to entry due to the financing requirements for pre-payment and the necessity to have built a credit history to meet the credit support amount necessary to access post-payment terms. In addition, the proposer considers that the pre-payment and post-payment options can inhibit a retailer’s ability to innovate and offer customers flexible terms of payment”.

There was widespread industry consultation. Those opposed to the change cited among other reasons unfair advantage for associated retailers, the cost of implementation and operation of the new arrangements, greater complexity, and increased risk to wholesalers. The Panel recommended CPW048 be rejected after three members opposed it.

Ofwat however accepted the change proposals, noting eight Panel members were in favour and on the grounds that it would reduce barriers to entry, increase flexibility, and could benefit end customers: “Successful agreement of alternative payment terms may result in working capital and cashflow benefits for retailers, which in turn could enable retailers to innovate their price and service offerings and offer more flexible payment terms to non-household customers.

"There may be benefits to competition which could be gained by the introduction of alternative payment terms, inclusive of the potential for increased switching if retailers are able to offer more flexible payment terms.”

The regulator also accelerated the proposed implementation timetable from 29 March to 31 January. Wholesalers will not be obliged to offer alternative payment terms, but shall be obliged to give “due and proper consideration” to proposals for them.