Water sector adapts quickly to COVID-19 crisis

The GB water sector, like almost every sector in the UK, has not escaped from the pressures posed by the COVID-19 crisis. In this article, we present the approaches taken by the respective regulators in England & Wales (Ofwat) and in Scotland (WICS), and MOSL (the market operator for England and Wales) to protect the retail market and businesses.

Ofwat CEO Rachel Fletcher and MOSL CEO Sarah McMath each published letters to the sector on 19 March, in anticipation of dramatic disruption. This happened four days before the government-instructed lockdown on Monday 23 March. Fletcher sent a letter to all water company CEOs, setting out expectations for how companies should support vulnerable customers and assist retailers facing immediate cash flow constraints. McMath outlined measures undertaken by MOSL to support market participants and their customers. Another joint letter on 20 March explained that an urgent Authority Timetabled Change Proposal to the Market Codes would postpone the levy and collection of charges for market performance standards for a time-limited period commencing 1 March.

Ofwat quickly sought to address the impact of the crisis on reduced demand and late payments in the retail market. A Change Proposal allowing retailers to change a premises’ occupancy status to “vacant” within the Central Market Operating System was approved on 27 March. This temporarily aims to ensure that future primary charges more accurately reflect actual levels of reduced consumption during the COVID-19 crisis. Another Change Proposal, which was also approved on 27 March, enabled retailers to temporarily defer up to 50% of wholesale charges for the months of March, April and May.

In April, Ofwat made amendments to the Customer Protection Code of Practice to offer additional protections to customers affected as a result of the COVID-19 crisis. These changes ensured that retailers would not enforce non-payment of invoices, charge interest or impose late payment charges, or disconnect non-household customers.

Also in April, Ofwat turned its attention to providing liquidity and managing bad debt in the retail market. After a consultation, Ofwat decided on 1 May that retailers that opt into deferred wholesale arrangements are required to pay a minimum of 60% of primary charges due to wholesalers, or 94% of the cash they have collected from their customers. Wholesalers can charge interest on deferred payments (set a maximum interest rate of 5.98% nominal). Retailers were asked to bear bad debt costs to a level equivalent to 2% of their retail market turnover.

The latest retail market switching figures from MOSL, which were updated on 11 June, showed that demand dropped precipitously at the start of lockdown, with supply volumes in April and May being around 20% down on this figure at c.110,000Ml/month (see Figure 1). This will exert further financial pressure on retailers due to the volumetric element of their charging bases shrinking.

Water and COVID-19 - Graph showing contestable retailer demand between 2018 and 2020 (MI/month)

North of the English border, the Scottish Government, Scottish Water and WICS (the Water Industry Commission for Scotland) agreed a £60mn package of measures to help licensed providers and their customers on 23 March. Scottish Water agreed to suspend pre-payment charges for licensed providers for two months, beginning with the April payment. Performance Standard Charges under the Market Code were also suspended.

WICS followed this up with the launch of two Charges Relief Schemes in May. The Prepayment Refund Scheme compels licensed suppliers to repay to their customers any prepayments that they have accepted in respect of those customers’ wholesale charges. The Wholesale Charge Deferral Scheme compels licensed suppliers to apply for a deferral of volumetric charging for water and sewerage. At the beginning of June, WICS announced that it may offer licensed providers an alternative option to access this scheme.

We will be discussing all the changes above as well as the responses from other water sector participants in our UK Water Sector Response to COVID-19 Crisis in a free-to-attend webinar on 18 June.

Alternatively, contact n.mearns@cornwall-insight.com for a free trial of Cornwall Insight’s Water Weekly publication, which delivers need-to-know news and analysis of UK water sector developments.

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