Covid-19 prompts urgent action from Ofwat and MOSL

SPECIAL BULLETIN ISSUED LAST WEEK TO THE WATER REPORT SUBSCRIBERS

• Business market: moves to bolster retailer cashflow

• Household market: prioritise core service and helping customers as Performance Commitment penalties will be reconciled

MOSL and Ofwat have responded to urgent calls from retailers for support during the coronavirus crisis with a package of measures, some of which will be implemented immediately.

Meanwhile, Ofwat has also written to wholesale water company chief executives setting out its wider expectations of them during the outbreak.

BUSINESS RETAIL MARKET

An urgent panel meeting was convened on Friday with to implement code changes immediately for the following actions:

• Waive performance charges with effect from 1 March, for a limited period, given the difficulty reading meters resulting from social distancing advice and premises access issues. Retailers were told to keep reading meters where safe to do so and to encourage customers to provide reads.

• Suspend a January code change, which allowed 2019/20 performance charges to be put into a market improvement pot; these will now be recycled back to trading parties, with effect from April.

• Enable retailers to offset 2020/21 Market Operator charges against prior year performance charges, with effect from April. This benefit was not extended to wholesalers “to protect MOSL’s cash flow”.

More complex actions, for implementation over the next two to three weeks, include:

• Improving settlement estimation to reflect reduced water consumption – the preferred route is through the use of temporary vacant flags for closed premises, to stop wholesale charges and initial settlement runs being auto generated in CMOS.

• Ofwat and MOSL to convene a senior trading party group to collaborate on approaches to late payment and bad debt.

There will also be longer term consideration of wider regulatory impacts, including what the implications of the virus are for price determination policy (per capita consumption targets, for instance, will be impossible to meet with people confined to their homes and washing their hands much more frequently) and Retail Exit Code decisions.

In a separate letter to wholesaler bosses, Ofwat CEO Rachel Fletcher said she expected them to adopt “a reasonable and pragmatic approach to the collection of wholesale charges from retailers who may be facing difficulties in obtaining payment from their customers”. A follow up letter co-signed by Ofwat senior director Emma Kelso and McMath explained: “There is a high likelihood that there will be a number of retailers who will be unable to collect sufficient funds from customers in order to meet wholesale payments as they fall due, as prescribed under the current market codes.” The preferred option to tackle this is to adjust the proportion of primary charges payable to wholesalers in initial settlement runs. Kelso and McMath called on wholesalers and retailers to collaborate and propose solutions.

Fletcher also advised wholesalers to suspend business disconnection during the crisis, even if this is requested by retailers: “We would not expect to see customers disconnected for non-payment where the delay in payment is caused by factors relating to coronavirus”. Ofwat is considering urgent changes to the Customer Protection Code of Practice to require retailers to treat non payment during these times as force majeure events, thereby not qualifying for disconnection.

Before these letters, on Tuesday, the UK Water Retailer Council (UKWRC) which represents retailers with 99% of supply points in the English market, wrote to Fletcher calling for action in four key areas:

1. Payment terms with wholesalers – anticipating large numbers will default on payments as their businesses close or collapse, retailers requested an urgent change to Section 9 of the Business Terms, to allow payments to wholesalers (which are made in advance of retailers billing customers) to be rescheduled, to help manage cashflow.

2. Vacant flagging for businesses that are forced to close – this would prevent wholesale charges being auto-generated, when retailers stand little chance of recouping them.

3. Relaxation of meter reading performance standards – the UKWRC argued the obligation for cyclic meter reads should be suspended, as social distancing restricts retailer access to meters, and to remove the incentive for retailer employees to take risks.

4. Allocation of insolvency risk – Under current market arrangements, the risk of customer insolvency lies entirely with retailers. “It seems inevitable that under the current circumstances there will be a material increase, and we ask that Ofwat consider how this risk could be more equitably shared between wholesaler and retailer.”

The underlying concern is for the long term financial stability of retailers, given profitability was already a major issue before the virus outbreak.

UKWRC chair Phill Mills said he was “reassured” by the actions but remained concerned Ofwat’s position on “retailers’ number one issue – payment terms from wholesalers” was not strong enough and would not guarantee a consistent approach across wholesalers. Moreover, he feared “analysis paralysis” for actions not being taken immediately, arguing retailers need measures to be actioned now.

HOUSEHOLD MARKET

Ofwat endorsed water companies’ choices to prioritise meeting their core service obligations over wider Performance Commitments while they are short staffed and restricted by social distancing advice. Fletcher said: “For the avoidance of doubt, incentives and penalties in our regulatory regime should not get in the way of effective prioritisation in the interests of customers.”

She confirmed there would be consideration of ex post adjustments to the regulatory settlement as part of the normal reconciliation process. “This will require that companies can demonstrate how their operations have been impacted by CoVid-19 and how they made their decisions.”

She called on companies to help the likely growing number of vulnerable or financially stretched customers in coming months “including by considering opportunities to increase financial assistance and by adopting suitably supportive and flexible payment and debt collections practices”.

Fletcher praised the “professionalism and collaborative spirit the sector has shown in establishing sector-wide incident management processes to confront common problems and drive coordination between companies where possible”. She urged companies to learn lessons from each other and make information easy to access and understand.

For its part, Ofwat will minimise consultation and information requests during this testing time and establish effective communication channels for companies with it and other regulators.

Water company staff were included on the government’s list of key workers, published late last week, which means their children will continue to be able to attend school from today despite the wider education system shut down.

Water company challenges resulting from the virus are understood to include:

• Business continuity issues – staff absence, limitations to routine work caused by social distancing policy, supply chain issues;

• Revenue recovery – from the business market/retailers (see above, settlement is c£210m a month); and in the domestic market given water is a low priority bill and financial hardship will likely rise. This comes on top of an already tight PR19 settlement;

• Operational challenges – including heightened risk of sewer blockages and flooding resulting from customers flushing loo roll alternatives down the toilet.

• Performance commitment risks – including from per capita consumption growth, and because of a need to prioritise core service obligations.