Water Bill

Lord Whitty Excerpts

Tuesday 4th February 2014 Lords Chamber

Moved by

[Lord Whitty]

98: After Clause 15, insert the following new Clause—
“Retail exit
(1) The Secretary of State may by regulations make provision about the transfer of an undertaker’s assets and liabilities associated with its non-household retail business into a separate company.
(2) Regulations under this section are to be made by statutory instrument.
(3) Regulations under subsection (1) may, in particular, make provision for any such transfer to be subject to—
(a) approval by the Secretary of State; (b) any such safeguards as may be specified in the regulations;(c) the transferee company holding a licence containing a retail authorisation pursuant to section 17A of the Water Industry Act 1991;(d) the provision of any information or other such assistance from the relevant undertaker as may be required by the Secretary of State for the purposes of approving the transfer.”

[Lord Whitty (Lab)]

My Lords, at Second Reading there was bemusement on all sides of the House as to why the Government were being resistant to the concept of exit in the new retail market. I am not sure that the Minister’s words, either on that occasion or in any briefing since, have convinced me as to why, uniquely in this market—or almost uniquely—we should not allow exit.

It is a funny market in which we are trying to encourage new entrants by designating the area in which they should operate, and designating the terms and regulations under which they should operate. We envisage benefits to business and other non-domestic consumers within that market as a result of that competition, and we are assuming that it will bring benefits to a wider part of the whole water structure and water consumers. However, to maximise the effect of a market, there have to be winners and losers; and we are talking about competition and different companies with different forms of experience.

There is not only bemusement around the House about why the Government were resistant to the concept of exit. Out there, many bodies—including Ofwat itself, which I would have thought is fairly significant—are saying that we should allow exit. Although some of the incumbent companies are opposed to it—Water UK has said that, on balance, it is not really convinced by it—some of the major companies are in favour. I have not declared many interests so far, but my current interests are that I am a consumer of two water companies, Thames and Wessex, both of which have written to me and said that they are in favour of providing an exit clause.

Why would you allow a situation to continue in which somebody is supplying part of the non-household retail market but not doing well at it? Remember that there is an obligation on the regulator to ensure that everybody who wishes to be connected to the water supply will be connected to the water supply, so nobody is going to be stranded despite some of the things that have been said. Why should a supplier who is losing customers and presumably losing money, or certainly not making as much money as they had hoped, be prevented from leaving when Ofwat can arrange for somebody else to take over those assets and that market? I do not know of a serious precedent in any other field. We are trying to encourage a degree of churn, with new entrants, new competition and new drive for reducing costs, yet failing companies, or relatively failing companies, are not allowed to pull out.

This is odd, but even odder is what seems to be the Government’s main objection. The Government were kind enough to send us a further explanation, and although there are some other points in it that we do need to take seriously, the main point was that providing for exit would create uncertainty and put off investors. I tried to downplay investor panic when speaking to the last but one amendment, but there are arguments about that. Investors are getting a good return, but why would they want to persevere in an area in which they were not getting a good return, where they were failing, and where on their own internal economic analysis they were being advised to get out? Investors see the UK water market as a pretty good return, a steady return and one that will last a long time. However, there may be a part of that market they are supplying and where they are failing. Customers may be pulling away from them and going to rivals or they may be getting a high level of complaints—one way or another they are failing, and that will show up in their balance sheet eventually. Why would international investors say we absolutely will not invest in England unless we are forced to remain in an unprofitable market?

There seems a fair degree of absurdity in the explanation. That argument for the Government falls. Maybe some strange investor has told somebody in the department or a government adviser that that is the case, but logically, that cannot possibly be the reason. The problem is that the department has got stuck on this. The reality is that it was a bit untidy to allow for exit. New rules and procedures would have to be invented and safeguards built in, and that was not the priority. The priority was to get new people in, not to get people out.

Fair enough, but we have moved on, because a range of people have, as I have said, raised this issue. The Government now have to think again. There are some objections to providing for exit and some concerns about it, but those concerns are covered by the safeguards that are built into the amendment. The Government may want to elaborate on it, but it provides that for exit, Ofwat has to approve it, ensure that there is a substitute supply and make sure that there is no disruption as far the business consumer is concerned, and Secretary of State approval is also needed. That might appear a bit draconian to some investor who desperately wanted to get out. However, it provides a safeguard to counter for example the objection that comes—rather quietly, but nevertheless it does come—from the Consumer Council for Water, which is a bit worried that they would have people left literally high and dry. That could not happen under this system: Ofwat must supply. In a strange situation, the Secretary of State could block it if there was a real reason for thinking consumers might be in danger, whether they are consumers in a competitive market or other consumers affected by the knock-on effect.

--- Later in debate ---

[Lord Whitty]

My Lords, I am slightly baffled by the Minister’s reply, which seemed to repeat the main arguments that noble Lords all around the Committee have knocked down. I am very grateful for their interventions, particularly the forensic analysis by the noble Lord, Lord Moynihan, of why this is a misunderstanding of markets.

I tried to do a relatively simple thing. We are creating a market in the non-household retail sector and my amendment addresses only that. We are encouraging entry and improvements, and we surely have to recognise that that will drive some people out in normal circumstances. I cannot see what the creation of a market means if you cannot have that churn. The Government seem fairly stuck on this. Some of the things the Minister said really relate to wider considerations and there is nothing in these amendments—certainly not in my amendment—that means forced separation. This is voluntary withdrawal by incumbents from a relatively small part of the market. Their new rivals coming in already have that right so it is not a level playing field. Really, what does this market mean? I know it is small and that we are making changes that are quite new within the water sector, but surely we ought just to be bold enough to allow this. I hope the Minister will recognise that there is a lot of experience in this Committee and in the industry with a consensus for allowing this, subject to the kind of safeguards written into my amendment, which give Ofwat and the Secretary of State huge powers to prevent any catastrophic effect on consumers of any sort.

Just before I stood up, I tried to find the quote from Cathryn Ross of Ofwat that the noble Lord, Lord Moynihan, used. I will just end on that point. If we took the Government’s line—I have lost the quote again now—we would effectively provide for failing companies and bake in cost. The Government do not really want to do that, do they? I hope they will think again. Meanwhile, I will withdraw the amendment.

Amendment 98 withdrawn.