Water industry regulator Ofwat has moved swiftly to address the issue of potentially “inefficient and drawn out negotiations” between wholesalers and retailers in the competitive non-household water market.

Last week Ofwat announced that it had stepped in with proposed changes to the retail market codes to make sure that wholesalers act in good faith in their negotiations with retailers, especially new entrants, following concerns that “some negotiations between wholesalers and retailers were not going as smoothly as they should.”

The Code Panel, the senior industry group which oversees the operation and evolution of the water market has now accepted Ofwat's proposal to change the provision in the Wholesale-Retail Code (WRC) between wholesalers and retailers which governs Alternative Eligible Credit Support.

The Code Panel, on which Ofwat sits as an affiliated member, is made up of elected members from wholesale and retail water companies, plus 3 independent (non-water industry) members appointed by market operator MOSL.

Credit arrangements to open the business retail market were included in the WRC. The arrangements include six regulated credit options which retailers can use to provide the required credit support, along with a seventh option which allows for eligible credit support to be provided on an alternative, negotiated basis between retailers and wholesalers.

Ofwat proposed the change to address what it described as ambiguity around Alternative Eligible Credit Support which could potentially lead to inefficient and drawn out negotiations.

Setting out the reasons for the change, Ofwat said:

“Concerns have been raised that some of the key terms and templates associated with some of the credit options may not be practicable in some instances and might prevent retailers from entering and operating in the market.

“Some retailers have therefore approached wholesalers in an attempt to negotiate and agree Alternative Eligible Credit Support …so far without success.”

According to the regulator, the main cause of this appears to be ambiguity around the extent of wholesalers’ obligations in considering and responding to Alternative Eligible Credit Support proposals. Although contracting wholesalers must give”due and proper consideration” to proposals”, Ofwat said the circumstances have demonstrated that it is not clear what is meant by “due and proper consideration”.

The regulator is particularly concerned that the lack of clarity is an unnecessary barrier to retailers and other trading parties, because it “limits access to and the scope for parties to develop new and innovative credit support options.”

In its recommendation report, the Codes Panel said that in its view the Change Proposal reinforced wholesalers’ obligations to act reasonably, without delay and in good faith, commenting:

“The current obligations on which wholesalers agree Alternative Eligible Credit Support are not specific and can lead to inefficient and drawn out negotiations. The reinforcement of the obligations should address some of the inefficiencies in how wholesalers and retailers agree arrangements in Alternative Eligible Credit Support.”

In Ofwat’s view the proposal promotes “the efficient, economic and innovative operation of the water and wastewater sector by removing ambiguity …which could assist parties by expediting negotiations so that mutually acceptable solutions can be reached in a more efficient and timely manner.”

“We want to send a clear message to the industry of our expectations with regard to the behaviours of both wholesalers and retailers, “ the regulator added.

Ofwat also drew attention to the need for retailers to also make their proposals “transparent and cogent” so wholesalers can engage constructively in negotiations and consider proposals reasonably.

Without the obligation applying to both parties, the regulator said there would be “a risk of retailers submitting spurious proposals” and retailers should be incentivised to ensure that their proposals are sufficiently developed.

Ofwat believes that the change will also reduce a barrier to entry: 

“The proposed obligation also helps to address the differences in bargaining power between wholesalers and new entrants by requiring wholesalers to act reasonably, in a timely manner and negotiate in good faith. In absence of this proposal, wholesalers may not always have an incentive to do this and that could restrict the ability of retailers to enter and expand in the market,” the regulator concluded.