Water industry regulator Ofwat has launched a new consultation on its proposals for the introduction of arrangements in 2017 to address the situation where a water or sewerage supply licensee ceases to supply its non-household customers.

The arrangements Ofwat is proposing to put in place are particularly important in the context of the new retail market opening for competition in 2017. Ofwat has also launched a separate consultation on deemed contracts to be read in conjunction with its proposals.

The consultation document explains why interim supply arrangements are necessary and how they will fit within the overall framework of customer protections for the new retail market. It also describes the circumstances in which Ofwat anticipates the interim supply arrangements would be called upon and sets out the legal and regulatory framework underpinning the interim supply arrangements.

Arrangements will protect customers in event of retailer failure

Outlining the background to the consultation, the regulator said:

“Ofwat considers that the best way to protect customers in the new retail market is to ensure that the market arrangements are effective, with high levels of competition among retailers. However, from time to time, companies in competitive markets fail, for example as a result of direct insolvency or insolvency of a parent company.”

“As well as ensuring that customers are protected in the event of a retailer failure, interim supply arrangements are also required to maintain the orderly and efficient operation of the market.”

“For example, in the absence of an expedient replacement of a failing retailer, there could be unreasonable bad debt exposure for the wholesalers for the region(s) in which the retailer was operating. If the interim supply arrangements do not mitigate this risk then this could, for example, lead to higher credit cover requirements which would increase barriers to entry and operating costs for new and existing retailers.”

“Critical market processes, such as customer switching, meter reading and maintenance of data quality, also rely on there always being an active retailer responsible for every customer premises in the market.”

According to Ofwat, while high levels of competition and innovation among retailers will benefit customers, it also needs to balance the promotion of competition with the need to ensure that customers remain adequately protected, including in the event of a retailer failure.

However, Ofwat’s intention is that the interim supply arrangements should only be used as a last resort once it has become clear that there is no realistic prospect of a failing retailer being able to continue to supply retail services to its customers, or of an alternative retailer being secured through alternative contractual arrangements.

Underlying reason for retailer failure event will typically be insolvency

The consultation paper states that the underlying reason for a retailer failure event will typically be insolvency, with the retailer potentially ceasing to trade at very short notice.

The proposed arrangements are intended to be temporary and time limited, minimising any unavoidable distortion to the competitive market and giving customers protection until they have had reasonable opportunity to choose an alternative retailer.

Commenting on the prospect of retailer failures, Ofwat said:

“While we do not anticipate that retailer failure will be a regular occurrence, we cannot predict with any degree of certainty the frequency upon which this may happen.”

Interestingly, Ofwat has flagged up that a necessary feature of the interim supply arrangements is that the terms and conditions under which an interim supply is made may differ from those under which a customer was receiving services from the failing retailer, “particularly where those terms may have been unsustainable and contributed to the retailer failure.”

Ofwat is now seeking views on its proposals regarding the extent to which retail licensees should be permitted and/or obliged to participate in the interim supply arrangements, and the process for electing to be an eligible licensee -  opt-in - for this.

The consultation is also inviting comment on the basis upon which an eligible licensee should be able to exercise a right to temporarily suspend its election to be an interim supplier  - opt-out - or signal its willingness and capacity to be allocated affected customers on a case-by-case basis.

Ofwat has also set out the next steps it is proposing to take to confirm the policy and legal framework for the interim supply arrangements.

The consultation paper says that while opening the new market is “a complex challenge” it is currently still on track to open in April 2017. The paper is intended to be read in conjunction with Ofwat’s separate consultation on deemed contracts (‘Customer protection in a retail market: Deemed Contracts – a consultation’) which has been published alongside the document.

Deadline for submissions to both consultations is Monday 30 November 2015.

Click here to download: Interim supply arrangements in relation to the opening of the non-household retail market– a consultation

Click here to download Customer protection in a retail market: Deemed Contracts – a consultation