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  • by Karma Loveday

Business bad debt set to be recovered through retail price cap uplift

Bad debt in the water retail market caused by Covid-19 trading restrictions seems likely to exceed the 2% of revenue threshold Ofwat previously agreed would trigger regulatory protections for retailers (bad debt is forecast to be around 2.5% between April 2020 and March 2021). Consequently, Ofwat has set out how it is minded to proceed.

In a consultation open until 6 April, it proposed:

  • cost recovery from customers should start from 1 April 2022 (an alternative consideration is 1 October 2021);

  • retailers’ accounting estimates should be used to estimate initial bad debt costs –  a subsequent true-up would then be required once more accurate information is available and were the true up to show bad debt costs did not exceed the 2% threshold, Ofwat would unwind any additional protections implemented;

  • recovery will be via a market-wide, uniform uplift to the retail (Retail Exit Code) price caps – this will affect customers using below 50Ml a year who have not contracted with a retailer;

  • if market-wide bad debt costs are equal to, or less than 3%, retailers and non-household customers should each be expected to bear 50% of excess bad debt costs whereas, should market-wide bad debt costs exceed 3%, retailers would be expected to bear 25% of excess bad debt costs and non household customers 75%; and

  • any upward adjustments to the price caps will be set in place for a minimum of, and so spread over, two years.

Ofwat noted that consistent with its commitment in 2019, it planned to commence a wider review of the REC price caps later on in 2021/22, with any adjustments resulting from this wider review expected to be implemented from April 2023. It added that it also proposes to make some allowance for efficient working capital costs incurred in financing such bad debt costs during 2020/21 and 2021/22, up to the point any adjustments to the price caps take effect.


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