Ofwat consulted on proposals to address liquidity challenges and increases in bad debt in the business retail market on 16th April, and last night published a number of proposals in light of responses to the consultation. The decision is set to be published on Thursday 30th April. Liquidity – Ofwat is recommending that retailers should receive liquidity support to the end of July. This period could be extended by further review and consultation. Support will be provided by requiring retailers to pay wholesalers a minimum of 60% of wholesale bills, or a proportion equivalent to the proportion of invoiced amounts recovered from customers, whichever is the higher. The percentage is lower than the 70% set out as a minded-to position in the consultation. These will be deferred payment arrangements, and the expectation is that deferred wholesale charges should be paid back by end March 2021. This is later than the ‘end of 2020’ set out in the consultation. Interest can be charged by wholesalers, but capped at 5.98% nominal. Retailer bad debt exposure – bad debt levels in the business retail market normally sit at around 1% of annual turnover, and Ofwat has proposed that retailers should absorb, in full, incremental bad debt costs equal to 1% of their annual turnover. If it looks like bad debt across the market will exceed a 2% threshold, Ofwat will provide regulatory protection for a proportion of the exposure. The 2% threshold is in line with that set out in the consultation. Wholesaler bad debt exposure – Ofwat is also proposing to cap wholesaler exposure to bad debt, with the level of the cap to be published in its decision document. In the consultation, Ofwat had alluded to the possibility of protection for wholesalers, and sought further information as to whether a cap was needed. In our opinion, the lower threshold in the deferral proposals hints at a higher risk of delays in customer payments to retailers, and/or heightened bad debt risks vs. initial expectations. Although repayments of deferrals by March 2021 would still be within the current financial year for water companies, the lower threshold will impact cash flow phasing, and the introduction of cap on wholesaler bad debt exposure is therefore a positive for the industry.