Wholesaler/Retailer Risk Allocation Model

Undertake modelling work and produce quantitative models of the costs and risks of different credit and collateral arrangements in the business retail market, together with supporting documentation.

The Supplier shall provide the following Deliverables to the Customer as part of the Services:

(1) Review the 2016 model of credit support costs to understand principal inputs, outputs and parameters, taking into account any relevant feedback Ofwat may have received regarding that modelling and updates to the modelling documentation. This shall be a Word document.

(2) Develop and produce an understanding of prepayment and post payment timelines regarding Retailer payments to Wholesalers, as specified under the Wholesaler Retailer Code The Supplier shall provide the following Deliverables to the Customer as part of the Services:

(1) Review the 2016 model of credit support costs to understand principal inputs, outputs and parameters, taking into account any relevant feedback Ofwat may have received regarding that modelling and updates to the modelling documentation. This shall be a Word document.

(2) Develop and produce an understanding of prepayment and post payment timelines regarding Retailer payments to Wholesalers, as specified under the Wholesaler Retailer Code (WRC) business terms (WRC Schedule 1 Part 2 Business terms §9 Billing and terms of payment - Available at: Market Codes - MOSL).

(3) Develop and produce a quantitative model of impacts on and costs for a Retailer of providing different levels of collateral, under the payment timetables established in step (2). Principal costs should include the costs working capital and collateral. Modelling work should include sensitivities to four credit options. This shall be an Excel model.

(4) Develop and produce a quantitative model of risk exposure and costs for a Wholesaler under different credit options. Sensitivities should include Retailer collateral provided as a proportion of a Wholesaler's total exposure, probability of Retailer default, and four credit options. This shall be an Excel model.

(5) Write guidance documentation to explain and accompany both models, with a view to enabling external stakeholders and interested parties to understand and comment on the models and modelling assumptions. This shall be a Word document.

Modelling work is to be carried in collaboration with Ofwat and relevant interim support. The quantitative models must be of a sufficient standard and robustness to be published on the Ofwat website.