Ofwat refutes Castle Water’s credit appeal grounds

Ofwat has responded to the grounds cited by Castle Water in its appeal to the Competition and Markets Authority (CMA) over the regulator’s decision to reject CPW132 –  a change to the Wholesale Retail Code that Castle proposed in light of wholesaler financial resilience jeopardy.

The regulator rejected ground one, that it had not had sufficient regard to the statutory consumer objective to protect the interests of consumers wherever appropriate by promoting effective competition. It said this was expressly considered when the code change was weighed up and that it is addressing wider issues concerning retailer/wholesaler risk allocation via its broader credit review. Moreover, Ofwat argued that a wholesaler’s financial weakness does not have a discernible impact on the cost of security instruments issued to a retailer, and therefore there is no higher cost to fall disproportionately on independent (as opposed to vertically integrated) retailers as Castle argued.

On Castle’s second ground, that Ofwat was wrong to say an illegitimate drawdown on credit support by wholesalers is highly unlikely, the regulator repeated previous statements that legal and contractual consequences would deter this.

And to Castle’s point that Ofwat was wrong to say a wholesaler’s financial position would not impact the availability or cost of financing to a retailer, Ofwat said financiers focus on retailer creditworthiness; that rates paid by retailers had declined over time against a backdrop of increasing wholesaler fragility; and that Castle’s own rates “appear to be influenced by an intra-company loan at a fixed rate of 8.75%”.

The statutory deadline for the CMA’s decision is 2 May.