Castle Water last week submitted an urgent change proposal (CPW079) to the business retail market panel concerning credit security obligations for retailers, in light of the prospect of reduced wholesaler credit ratings and increased credit risk.
Castle argued a number of wholesalers have already publicly flagged that if their final PR19 determinations reflect their drafts, they will be unachievable. Moody’s has also recently highlighted average sector rating of Baa1 today could fall to Baa2, and that investment grade ratings could be at risk for some water companies.
Castle said: “This raises the prospect of retailers being at risk for significant sums under the current credit support arrangements as a result of their unsecured status, their treatment under special administration or the lack of promptly effective alternative remedies.” It added: “Actual or prospective insolvency of any wholesaler therefore raises concerns about the stability of the competitive market as a whole.”
The retailer further pointed to asymmetry in the treatment of wholesalers and retailers under market rules, in that the Codes provide for retailers to supply varying levels of credit support dependant on their creditworthiness. “The same principle should be applied to the creditworthiness of wholesalers,” it argued.
Castle suggested that in the event that a contracting wholesaler has a below minimum credit rating, “a contracting retailer which has opted for post-payment and to provide Eligible Credit Support or Alternative Eligible Credit Support shall not be required to post Eligible Credit Support or Alternative Eligible Credit Support until such time as the current credit rating of the contracting wholesaler is revised to be at or above a minimum credit rating.”
CPW079 also dealt with the related subject of addressing circumstances in which a wholesaler draws on credit security above the level of payment owed by a retailer, which the Codes do not currently provide for. Castle proposed this should not be allowed.
The points will be considered at the October Panel meeting.