Water Bill

Lord Moynihan Excerpts

Tuesday 8th April 2014 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)]

My Lords, government Amendments 1 to 12 and 18 address the subject of retail exits. The question of whether an incumbent water company should be able to exit the market for retail services to non-household customers has been discussed at all stages of the passage of the Bill through your Lordships’ House and another place. Most recently, it was raised in debate on amendments tabled by my noble friend Lord Moynihan and the noble Lords, Lord Whitty and Lord Grantchester, at Report.

Having listened extremely carefully to the thoughtful and well informed contributions to the debate on retail exits, I undertook to consider the matter further, with the aim of bringing back government amendments to respond to the views of the House. The proposed new clauses are intended to do just that.

The attached provisions reflect the key policy objectives of the previous amendments on this subject. They offer incumbent water companies the option to exit voluntarily from the non-household retail market, subject to the consent of the Secretary of State. I said before that this was not a simple matter, and indeed it is not. Enabling exit will require a number of changes to the Water Industry Act 1991—for example, to address issues around the incumbent’s duties to supply and other statutory obligations to customers.

In making this commitment, I put on the record that the only practical way of delivering this objective would be to take wide-ranging powers, and that is what the amendments seek to deliver. Although the enabling powers are, of necessity, broad, we have sought to provide as much detail of the nature of the changes to be made as possible. I recognise that your Lordships have limited time in which to undertake detailed scrutiny of these clauses. However, as I said, the broad policy has been widely discussed throughout the passage of this Bill.

Further work will be needed to consider the practical implications of exits and to develop the detailed policies that will underpin the use of these powers. Broad consultation will, therefore, be essential. Following these detailed discussions with all interested parties, there will be a further opportunity for parliamentary scrutiny under the affirmative procedure.

Several key policy issues about how an exit policy should be shaped and delivered are still to be resolved. For example, discussions in your Lordships’ House and elsewhere have mooted a number of different models for the transfer of customers from the exiting incumbent to a retail licensee. One model suggested is the transfer of customers to an associate licensee within the wider structure of a parent company. Others have suggested that incumbent companies which no longer wish to provide retail services may just want a simple route out of the retail market. Some have identified customers as an asset to be sold for profit, while others see them as a liability to be transferred. Ongoing dialogue with the industry, customers and others will be essential to inform the decisions about how exit will operate in practice. Our guiding principle must be to ensure that customers are protected and that they are no worse off as a result of the exit.

These provisions are therefore intended to provide government with the flexibility necessary to respond to the views of industry and its customers about the best way to deliver the new regulatory framework for the sector. They provide the Secretary of State with powers to put in place, through regulations, a framework which enables exits. This will entail a restructuring of the key provisions in the Water Industry Act 1991, the regulation of the industry and suppliers’ relationships with their customers.

The purpose of these provisions is to permit incumbent water or sewerage companies, with the consent of the Secretary of State, to stop providing any retail services to current or future non-household customers in their areas of appointment. The services will then be provided by one or more retail licensees. This is likely to lead to a consolidation of retail businesses. Exit will be irreversible and result in the incumbent divesting itself of some of its statutory supply duties in relation to non-household premises. However, incumbents will retain all their current responsibilities for household customers.

In summary therefore, these proposed new clauses enable the Secretary of State to make exit regulations, which would allow any incumbent water company whose area is wholly or mainly in England to apply to exit the non-household retail market for that area. The regulations may include grounds for refusing an exit application and provide for the transfer of customers to an eligible licensee. The regulations may also make provision for what happens in the area from which the company has exited after the exit has taken place. The powers make provision for the protection of both household and non-household customers affected by the exit.

Throughout the debates on this matter in both Houses, there has been a clear consensus that exit must be undertaken voluntarily. We have stated on a number of occasions that any suggestion that a provision could be used to force exit and drive legal separation of an incumbent’s retail and wholesale business risks undermining investor confidence in the sector. Amendments 7 and 9 ensure that the regulations can provide for important checks and balances as regards the conditions under which divestment and exit may, or may not, be required by the competition authorities.

We all agree that we must ensure that customers are protected. The regulations must ensure the protection of both those non-household customers that are subject to a transfer and the household customers who would remain with the incumbent. There is currently a range of statutory protections for customers in place. These are being reinforced by protections for the reformed competitive market in the Bill. For example, we are reforming the interim supply duty, or supplier of last resort, in Clauses 31 and 32. The statutory protections in the current retail market generally rest on the duties of the incumbent. These new provisions on retail exits are therefore required to enable regulations to rework the relevant statutory duties and obligations, in the event of a transfer of customers to a licensee. For example, we have provided for price regulation to be introduced for licensees, as well as regulation over the terms and conditions that they can offer to customers. We have provided for incumbent companies to be relieved of the interim supply duty, which currently requires them to serve customers when their previous supplier defaults. This role would then have to be taken up by the licensed market.

In addition, Amendments 1 to 12 and Amendment 18 enable the Secretary of State to make regulations which put in place safeguards requiring the exiting incumbent to take certain steps prior to making an application, such as, importantly, consulting its customers. The regulations may also set out the grounds on which such an application may be refused: for example, if the company could not demonstrate that exit was in the best interests of its customers. These provisions will enable us to put in place a stable and transparent framework within which exits can take place. I beg to move.

[Lord Moynihan (Con)]

My Lords, I am grateful to the Minister for providing a comprehensive solution to the issue of exit, for tabling these amendments and for his clear explanation of the Government’s intent. While the legislative drafting is more extensive than some of us had anticipated, these amendments achieve the desired effect of facilitating a clearer framework for competition. Additionally, the greater transparency on cost allocation that such a voluntary transfer mechanism brings will help to ensure that the incumbent companies are less able to adjust their cost allocations to the detriment of household customers.

This transparency is fundamental to effective economic regulation and the policing of effective markets. It will allow companies to organise their businesses in the way that they consider to be in the best interests of their shareholders and indeed their customers. Allowing exit to occur voluntarily, as confirmed by the Minister, will allow transfer mechanisms to enable more competitive third parties to enter the non-household water and sewerage retail market to the benefit of business customers, as has proved to be the case in Scotland. Above all, as demonstrated by both Oxera and Macquarie, exit will save customers unnecessary cost.

I am very grateful to the Government for confirming today that they will now consult fully on safeguards, consulting particularly with those who represent the interests of the customers, given that the powers granted through these amendments confirm the opportunity, not the obligation, for incumbent water and sewerage companies to propose transfer schemes to the Secretary of State for his consideration.

As tabled, the amendments place a considerable degree of power in the hands of Ministers, notably to adjust the powers and duties of key industry stakeholders, including Ofwat. While this could be problematic were the powers to be used to their full extent, I am confident from what the Minister has said that there is absolutely no intention to undermine the freedom of manoeuvre of the regulator.

With the clauses soon to be in the Bill, I hope, it will be important to enter into constructive discussion and engagement in order to consult widely and urgently to meet what I hope will be the reasonable deadline of market opening in 2017. I also agree with noble Lords who emphasised at an earlier stage that it is also very important to secure customer protection on retail exit.

I hope that the amendments will be welcomed on all sides of the House and by all those who have taken part in the debates over exit, with the request that the Government will give a firm and unequivocal commitment to using their new powers to facilitate efficient and orderly market entry and exit. If so, the benefits will be considerable for business customers. Once this House, in future legislation, has the opportunity to review the working of the market for business customers, I hope that it will not subsequently hesitate to move forward to deliver competition to the household sector as well.

[Lord Haskel (Lab)]

My Lords, has the Minister seen the report from the Delegated Powers and Regulatory Reform Committee? It is quite critical of these amendments. The committee found that the amendments were prepared in a hurry, and was particularly concerned that the procedure should have a strengthened affirmative procedure. I was not sure from the Minister’s introduction whether he was giving an undertaking that this would be so, or indeed whether he accepts this recommendation from the committee. The committee also found that the powers are conferred in rather permissive terms and, where regulations must make provision, the committee suggested that the regulations should be required to make provision. Again, I did not quite gather from the Minister’s introductory words whether he had taken these recommendations on board.