Question to the Department for Environment, Food and Rural Affairs:

To ask Her Majesty’s Government on what criteria water company retail arms can use regulated money to take over the customer base of water companies that have exited the market place.

The Government is committed to enabling exit for the non-household part of a statutory water and sewerage undertaker’s retail business. Since the Water Act received Royal Assent in May 2014, we have been working with the water industry to develop the secondary legislation necessary to enable companies to exit at the opening of the new retail market in April 2017. We consulted on the proposed policy approach in December 2014 and will be publishing a further public consultation on the draft retail exits regulations shortly.

The Government has always been clear that exit must be voluntary. Our approach will enable each water and sewerage undertaker to decide whether or not they wish to exit the market for non-household retail services. Undertakers will also have the choice to continue to provide retail services to non-household customers within their area of appointment, under the existing licence of appointment. However, an undertaker can only exit to a retailer that holds one of the new Water Supply and Sewerage licences (WSSL). An undertaker cannot exit to another undertaker because undertakers will not be eligible to hold one of the new retail licences. An undertaker could not, therefore, take a transfer of customers from outside of its area of appointment.

The only exception to this rule would be in the case of a merger between undertakers. To cover this eventuality, there is a special merger regime that explicitly considers the impact of the merger on Ofwat’s ability to regulate effectively for customers and either prohibits mergers or seeks to extract remedies for customers from company shareholders to make up for any detriment. We assume that ‘regulated money’ refers to the revenue allowances that water undertakers are allowed to recover from customers under their price limits, most recently set by Ofwat in December. In this scenario it would not be possible for such ‘regulated money’ to be used to take over another water company except where that company had already outperformed the price settlement through efficiencies.

The companies holding one of the new ‘retail’ WSSL licences are expected to include both new entrants to the market that have no association with any existing water company; and ‘associate licensees’ that form part of an undertaker’s wider group business but are nevertheless required to be established as a separate legal entity. These licenced retailers will operate in the competitive market and may therefore opt to use their own working capital to acquire customers through a transfer following an exit. In this scenario it would therefore similarly be impossible for ‘regulated money’ to be used to take over another water company’s retail arm because these companies are not subject to price limits set by Ofwat through the price review process.

There are already requirements in the water and sewerage undertakers licence of appointment that ensure that all transactions with an associated licensee must be conducted on a fair and non-discriminatory basis and companies are subject to rigorous transfer pricing rules that ensure transactions are conducted on an arms’ length basis. Ofwat’s recently published consultation on the proposed form and content of the new retail licences for the expanded retail market proposes that similar requirements should also be placed on to holders of these new Water and Sewerage Supply Licences (the new retail licences). These checks and balances mean that it would not be possible for the retail arm of a water and sewerage undertaker to use regulated money to take over the customer base of water companies that have exited the market place.