Water industry regulator Ofwat has launched a consultation on its proposals and preferred approach to setting payment terms between wholesalers and retailers in the water and wastewater markets in England and Wales – which is running on a very tight timescale.

The regulator has already confirmed the broad approach in its methodology statement on setting price controls for 2015-20 and expectations for companies’ business plans that:

• retailers should be required to pay wholesalers in arrears;
• there needs to be a consistent billing and settlement period across the non-household market, which should be based on appointed companies’ current billing and settlement practices to minimise any impacts on wholesale cash flow and credit risk;
• retail entrants should be subject to proportionate credit requirements and consistent financial checks; and
• the detail on billing, settlement and credit requirements should be proposed by the Open Water programme by the end of October.

Ofwat said it was publishing the consultation which sets out what it describes as its ‘minded to’ approach for setting payment terms because Open Water has not yet produced proposals.

The regulator is now inviting views from market participants and stakeholders on whether these terms are appropriate, otherwise Ofwat intends to formalise them for the purposes of setting prices in 2015 and defining the non-household market arrangements. The terms are as follows:

• We are setting standard payment terms between wholesalers and retailers.
• We recognise that it may, on occasion, be appropriate for parties to agree to vary these terms. In the event that a bilateral agreement is reached that differs from these terms the default position is that these arrangements will be published on the wholesaler’s website. This is intended to increase transparency and address level playing field concerns. If a party is concerned that publication could lead to a competitive disadvantage, it may apply to Ofwat for non-publication. Where parties are within the same integrated or group structure, we would be very unlikely to agree to non-publication of payment terms.
• These payment terms will apply to all products and services in the market, regardless of whether settled bilaterally or with the involvement of the market operator.
• The settlement period shall be one day. This does not form part of the payment terms, but is defined alongside as the payment terms and settlement period need to be compatible.

The standard payment terms are as follows.

• The billing period is one calendar month.
• The payment period is the latter of 30 days after the end of the billing period, or 15 days after the invoice is received.
• Retailers will need to provide a letter of credit from a guarantor with a minimum investment grade credit rating. If collateral requirements deviate from the standard terms, the following rules must be adhered to -  the credit and collateral arrangements offered must be proportionate; and the rationale for credit decisions must be clearly explained in a formalised format.

The consultation document says that Ofwat welcomes comments on any of the issues covered, but is particularly interested in receiving responses to the following questions.

Q1 Is our proposal to set standard terms, but to allow companies to agree to vary these terms, appropriate?

Q2 Are our proposals around publication of non-standard payment terms appropriate?

Q3 Is a settlement period of one day appropriate?

Q4 Is it reasonable to apply the same payment terms to all products and services in the markets?

Q5 Are the details of the standard payment terms – billing period, payment period and collateral requirements – appropriate?

Ofwat described the terms as “consistent with many of the payment terms arrangements found in the Scottish retail market.” However with a deadline for response of 28^th October the consultation is running on a very tight timescale – so stakeholders who want to comment will have to move quickly to get their comments formulated and submitted in time.

Commenting on the short timeframe, Ofwat said:

“This consultation period is short so that we can provide a definitive position on payment terms quickly. This will enable water companies to take payment terms into account when they submit their business plans for the 2014 price review to us. We aim to publish a statement on payment terms shortly after the end of the consultation.”

Responses should be emailed to This e-mail address is being protected from spambots. You need JavaScript enabled to view it