UK water regulator plans price cap rise due to higher bad debt levels

(Alliance News) - UK water regulator Ofwat on Friday announced a consultation to amend price caps ...

Alliance News 5 March, 2021 | 12:08PM
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(Alliance News) - UK water regulator Ofwat on Friday announced a consultation to amend price caps on small and medium non-households due to higher than expected bad debt levels in the business retail market.

Ofwat explained that measures put in place to combat the spread of Covid-19, as well as stronger protections for late paying non-household customers, may "result in higher than expected levels of bad debt in the business retail market."

In April 2020, Ofwat committed to increased regulatory protection of bad debt costs in the market were higher than 2% of non-household revenue. Based on available information, this is considered likely.

Consequently, the regulator is consulting on amending prices caps, applying to small and medium non-household customers who have engaged in the market.

While Ofwat emphasised that retailer are expected to bear market-wide bad debt costs up to 2% in full, it intends to adjust price caps so that market-wide debt costs over this amount are shares among retailers and non-household customers.

The first initial adjustment is planned for April 2022, with another to follow once more accurate information is available. Any additional protections will be unwound its bad debt costs do not end up exceeding 2%.

The Ofwat consultation includes that retailer's accounting estimates be used to estimate initial bad debt costs. It also sets out 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."

In the case that market-wide bad debt costs exceed 2%, then sharing factors are proposed. These involve, for outturn bad debt costs up to 3%, retailers and non-household customers being expected to bear 50% of market-wide debt costs over 2%.

For outturn bad debt costs over 3%, retailers would bear 25% of market-wise bad debt costs over 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."

United Utilities Group PLC, Severn Trent PLC and Pennon Group PLC are water utilities listed on the London Stock Exchange. Pennon was up 0.7% Friday at 934.40 pence, while United Utilities 0.1% lower at 881.00p and Severn Trent marginally higher at 2,210.00p.

By Anna Farley; annafarley@alliancenews.com

Copyright 2021 Alliance News Limited. All Rights Reserved.

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Securities Mentioned in Article

Security Name Price Change (%) Morningstar
Rating
United Utilities Group PLC 944.00 GBX -0.30
Pennon Group PLC 1,014.00 GBX -0.10 -
Severn Trent PLC 2,393.00 GBX 0.00 -

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