Ofwat has agreed to what is described as a “major change in policy” to the credit arrangements put in place in the Wholesale Retail Code (WRC) for retailers in the competitive non-household business market.

The proposal to change one of six regulated credit options available to retailers which relates to the use of an unsecured credit allowance to reduce the required credit support amount to be provided to wholesalers.

The WRC included a provision for retailers to access an unsecured credit allowance based on the credit strength of a parent company. At present, a retailer can use its parent company’s credit worthiness to reduce the amount of credit support it needs to provide However, the risk of default for any given entity does not change merely because of its Parent Company’s credit worthiness

The proposed modification to the WRC was put forward by Thames Water – in the water company’s view the current provisions relating to the unsecured credit allowance could unduly increase the risk borne by wholesalers and inadvertently cause a competition issue between retailers. Thames also believes that the current drafting of the WRC is potentially confusing and ambiguous.

Market operator MOSL ran two separate consultations on the issue earlier this year.

Ofwat has now agreed to the proposed change to the wording of Schedule 2E of the Wholesale Contract Schedule 1, Part 2: Business Terms, so that a parent company credit rating cannot be used for the purposes of accessing an unsecured credit allowance.

The amendment will see the reference to the parent company credit rating removed with the aim of clarifying that a parent company credit rating cannot be employed by a retailer to gain access to an unsecured credit allowance.

A number of wholesalers and retailers currently have arrangements in place for an unsecured credit allowance which is based upon the credit strength of a parent company.  

Several retailers who responded to the MOSL consultations expressed concern that the proposed three-month period to implement the change was not an appropriate timescale, with a six-month period being more reasonable.

One retailer estimated that it would take at least three months to put new credit arrangements in place if the parent company agreed to extend the current parent company guarantee to cover the unsecured credit allocation. However, if this was not forthcoming, then the retailer would have to review its financing strategy and potentially seek funding from elsewhere - a process which would take an estimated six months to complete.

The water regulator has concluded that the implementation period should be extended from three months to six months.

Ofwat commented:

“Given the complexities associated with corporate financing, structures and governance, or failing that obtaining alternative credit support, we think that it is possible that it could reasonably take retailers up to six months to transition to new credit arrangements.”

“In addition, we recognise this is a major change to policy that affects a number of retailers who entered the market on a legitimate basis, and we acknowledge that the consultation period carried out was a short one and as a result only three retailers directly engaged in the consultation.”

“We are mindful that there are other retailers who are utilising the current provision who will also need time to regularise their credit arrangements. As such, we consider it appropriate to allow additional time for implementation to ensure that all affected retailers have sufficient time to make alternative arrangements.”