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Credit Arrangements. Rob McDonald Group Regulation Manager Scottish and Southern Energy plc. Principles of Good Credit Arrangements. Minimise costs overall (target costs on those who fail). Facilitate supply competition. Protect DNOs from bad debts. Maintain incentives for efficiency.

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Credit arrangements

Credit Arrangements

Rob McDonald

Group Regulation Manager

Scottish and Southern Energy plc


Principles of good credit arrangements
Principles of Good Credit Arrangements

  • Minimise costs overall (target costs on those who fail).

  • Facilitate supply competition.

  • Protect DNOs from bad debts.

  • Maintain incentives for efficiency.


Current position on duos
Current Position on DUoS

  • Credit rating above BBB-, no credit cover.

  • No credit rating or qualifying guarantee, 60 days use of system in cash or equivalent.

  • No guaranteed, mechanistic process for pass-through of bad debt.

  • Remedies exist for breach of DUoSA.


No credit option
“No credit” Option

  • No supplier posts any credit.

  • Full pass-through in all circumstances.

  • Resulting costs are smeared across all suppliers and their customers.


No credit option1
“No Credit” Option

  • Targets costs on those that fail X

  • Facilitates supply competition ?

  • Protects DNOs 

  • Encourages efficiency X


Full security option
“Full security” Option

  • All suppliers provide security for maximum possible exposure, regardless of credit rating.

  • At least 4 months DUoS in cash deposits.

  • No pass-through for DNOs.


Full security option1
“Full security” Option

  • Targets costs on those that fail X

  • Facilitates supply competition X

  • Protects DNOs ?

  • Encourages efficiency 


An alternative proposal
An Alternative Proposal

  • 3 levels of credit worthiness:

    • “gold”; “silver”; “bronze”

  • Use of credit ratings and some cash deposits

  • Supplemented by mechanistic process for determining pass-through

  • Clear remedies for supplier non-compliance


Example credit rating changes standard poors lt foreign issuer credit
Example Credit Rating ChangesStandard & Poors LT Foreign Issuer Credit

  • TXU Europe Group

    • 09/10/98 BBB+

    • 10/10/02 BBB- *-

    • 14/10/02 B+ *-

  • Enron Corp

    • 08/12/95 BBB+

    • 01/11/01 BBB *-

    • 09/11/01 BBB- *-

    • 28/11/01 B- *-*- = under review, negative implications


3 levels of credit worthiness
3 levels of Credit Worthiness

  • “Gold”- credit rating A- or above or PCG from such an entity - no security.

  • “Silver” - credit rating from BBB+ to BBB-or PCG from such an entity - tapered security.

  • “Bronze” - no credit rating or qualifying guarantee - 60 days cash or equivalent security.


Pass through process
Pass-Through & Process

  • 100% pass-through vital for remaining bad debts.

  • Requires firm commitment from Ofgem in advance.

  • Agreed mechanistic process for DNOs setting out billing & debt recovery.

  • “Tick box” approach.


Remedies
Remedies

  • Agreed process would also need to include remedies.

  • Suspension of registrations remains appropriate:

    • Prevents growing exposure;

    • Proportionate response.

  • Disconnection?


Other alternatives
Other Alternatives

  • “Bronze” status costs could be reduced by:

    • Prepayment of DUoS;

    • Weekly payment arrangements.

  • Not in favour of:

    • credit insurance;

    • Mutualisation;

    • reliance on past payment record.


Summary
Summary

  • Targets costs on those that fail 

  • Facilitates supply competition 

  • Protects DNOs 

  • Encourages efficiency 


Conclusions
Conclusions

  • Credit arrangements requires solution to several trade-offs.

  • Cash credit cover, parent guarantees and ratings agencies are still important.

  • Firm commitment to pass-through also required.

  • Same principles could apply in gas and wholesale markets


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