Ofwat consults on easing credit arrangements for retailers

(by Karma Loveday)

Ofwat is consulting until 3 July on revising the credit and collateral arrangements in the business retail market. It reasoned that the current arrangements were largely developed ahead of market opening, and now there is nine years’ worth of evidence on which to make revised decisions. 

The proposed changes involve: 

• Backstop credit security and risk sharing – Ofwat proposed reducing the current requirement for a retailer paying wholesalers in arrears to post credit security equivalent to 50 days of its monthly wholesale payment, by ten days to 40 days. It said tighter licensing requirements, proven interim supply arrangements and enhanced financial resilience monitoring indicated that the probability of retailer default and a wholesaler’s exposure to any single retailer are now "materially lower” than assumed at market opening.  

• Backstop Unsecured Credit Allowance (UCA) – Ofwat plans to produce a new UCA framework that retailers could use without the need for bilateral negotiations with wholesalers. This would have two components: a credit score aspect, under which UCA entitlement is linked to each retailer’s credit score; and a payment history aspect, under which UCA increases in tiers with good payment history. The regulator noted that UCA agreements – where a portion of credit support is uncollatoralised by agreement – are widely used in the market. But these are currently inconsistent and administratively burdensome.  

• Monitoring Parent Company Guarantee (PCG) arrangements – To enhance transparency of PCG arrangements (these are supposed to be arm’s length and reflect the retailer’s specific risk, but sometimes are priced below true economic costs causing potential competitive distortion), Ofwat has proposed requiring retailers relying on PCGs to provide more information related to how they determined the arm's length nature of their PCG arrangement and requiring the guarantor to co-sign this declaration. In addition, MOSL will publish a non-confidential summary of PCG arrangements in a standard format, and Ofwat will conduct a risk-based review of statements. 

• Ofwat has approved and implemented CPM060 & CPW156 –  a code change to allow third party access to business customer consumption data, where customer consent has been evidenced. Third parties will be able to submit a single request to MOSL covering a customer’s property portfolio, rather than needing to submit multiple requests to different wholesalers or retailers to acquire this information. Ofwat said this would benefit customers through more prompt third party advice on matters relating to their consumption, including their Environmental, Social and Governance (ESG) reporting obligations. The change was proposed by arbnco, a software and data service company, that sought to assist its real estate clients with measuring, reporting and improving ESG reporting.