Ofwat is warning over increases in bad debt in the business water sector retail market as a result of COVID-19 - the regulator has launched a new consultation on proposals to address the issue.

Measures aimed at combating the spread of Covid-19 and strengthening protections for non-household customers who are late paying their bills could result in higher than expected levels of bad debt in the business retail market.

In April 2020 Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue, which it considered was the level of bad debt an efficient and prudent retailer should have planned for.

Today the regulator has signalled that, on the basis of available information, levels of bad debt across the market are likely to exceed this 2% threshold.

As a result Ofwat is consulting on amending the price caps, which apply to small and medium Non-Household customers who have not engaged in the market.

Retailers will be expected to bear market-wide bad debt costs up to 2% in full. Ofwat proposes adjusting the price caps to enable market-wide bad debt costs in excess of 2% to be shared between retailers and non-household customers.

Ofwat proposes to make an initial adjustment from April 2022, with a subsequent adjustment once more accurate information is available. Ofwat has made it clear that if bad debt costs turn out not to exceed the 2% threshold, it will unwind any additional protections implemented.

Ofwat’s consultation sets out the following preferred positions in relation to:

Timing – Ofwat proposes retailers’ accounting estimates be used to estimate initial bad debt costs. A subsequent adjustment will be made once more accurate information is available.

Recovery mechanism - Ofwat proposes to make a market-wide, uniform uplift to price cap levels, giving retailers additional freedom to adjust their prices in the light of increased bad debt costs.

If market-wide bad debt costs exceed 2% Ofwat proposes the following sharing factors:

• Outturn bad debt costs up to 3% - retailers and non-household customers should each be expected to bear 50% of any market-wide bad debt costs in excess of 2%.
• Outturn bad debt costs exceed 3% - retailers should be expected to bear 25% of any market-wide bad debt costs in excess of 2% and non-household customers 75%.

Georgina Mills, Business Retail Market Director at Ofwat said:

‘These proposals are aimed at protecting the interests of non-household customers in the short and longer term, including from the risk of systemic retailer failure as the business retail market continues to feel the impacts of COVID-19.

In doing so we want to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition. By setting out our proposals today we are also providing additional clarity to retailers and their investors.’

Deadline for comments is 6th April 2021 - click here to download the consultation paper Business retail market Customer bad debt - Consultation