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Water and Sewerage Undertakers (Exit from Non-household Retail Market) Regulations 2016

Volume 773: debated on Tuesday 5 July 2016

Motion to Consider

Moved by

That the Grand Committee do consider the Water and Sewerage Undertakers (Exit from Non-household Retail Market) Regulations 2016.

My Lords, these regulations will enable the implementation of important reforms from the Water Act 2014 to extend competition in the market for water services. The development of these regulations has been a very thorough exercise. We have consulted widely, as there are intricate elements. We are confident that we have taken the time to secure regulations that are fit for purpose to meet the objectives of the Water Act 2014.

From April 2017, all 1.2 million non-household customers such as businesses, charities and public sector organisations will be able to switch to a new provider of retail services for their water and wastewater. It is estimated that this will deliver a net benefit of around £200 million to the UK. These new “retailers” will be responsible for all customer-facing services such as billing, meter reading, call and complaint handling and the provision of all water efficiency advice. These customers will get the same water from the same pipes and have their wastewater taken away as they do now, but they will be able to choose their retailer in the same way as they can choose their energy or telecom providers. Non-household customers are keen to have this choice, and the Government’s decision to expand retail competition was made in response to clear demand from business customers. Our reforms will mean that they are free to negotiate for the package that best suits the needs of their business.

Currently, the law requires water and sewerage companies to provide both wholesale and retail services to all the premises in their area of appointment. During the passage of the Water Bill through Parliament, the Government brought forward amendments designed to enable such companies to decide they want to stop offering retail services to their non-household customers once the new market opens. The amendments to enable retail exit reflected a strong cross-party consensus that competition would deliver better results for customers if, as well as new retail businesses being able to enter the retail market, existing water companies were able to withdraw. Providing choice is a key driver for our retail competition reforms. Just as customers will be able to benefit from increased choice over their retailer, so, too, will water companies benefit from being able to choose whether they wish to compete in the new market. Enabling exit will allow water companies to make informed choices about their retail strategies. The Government are not seeking to require companies to exit, nor are they seeking to shape the market in any particular way. The purpose is to put in place a framework that will allow the competitive market to evolve as effectively as possible.

The Water Act 2014 includes a power for the Secretary of State to make regulations allowing water companies to apply for permission to exit voluntarily the non-household retail market. Today we are considering the regulations that make retail exit possible. The Water Act 2014 enables the extension of retail competition to non-household customers only. The Government have more recently committed to review the costs and benefits of extending competition to household customers. The regulations before your Lordships today, however, have no implications for householders.

I should also point out that the powers in the Water Act 2014 allow only those water companies that operate wholly or mainly in England to exit. That includes Severn Trent Water, which operates mainly in England but also partly in Wales, and its customers subsequently will be able to switch their water and wastewater provider. These regulations do not allow companies that operate wholly or mainly in Wales to exit, although the current market arrangements already allow their non-household customers who use 50 megalitres of water a year to switch to a new water supplier, and this will not change.

As I said, the draft regulations have been through a very thorough process of consultation. We are confident that there is clear support for these regulations from across the water industry, consumer groups and Ofwat, and that they are fit for purpose. A first consultation informed the development of the policy on exits and built consensus around our approach; a second focused on the detail of the draft regulations themselves. A draft of the regulations was provided to the House of Commons Select Committee on the Environment, Food and Rural Affairs to ensure that its members had an opportunity to comment on our intentions. Indeed, earlier this year I also wrote to eight noble Lords who I knew had taken an interest in retail exits policy at the time the Water Bill was being debated, again to ensure that all those who wanted to comment on the draft regulations had every opportunity to do so.

These regulations have two main objectives. First, they set out the process those companies wishing to exit the market for non-household retail services must follow. This process, which we are committed to making as light-touch as possible, provides for companies to apply to the Secretary of State for permission to exit the non-household retail market in their area of appointment. On approval, the company would transfer its non-household retail business to one or more alternative retailers. The Government have produced a simple application form, along with guidance, to help companies with their applications to the Secretary of State. This has been consulted on and a draft is available to help water companies plan ahead of the application process that is set to open on 3 October 2016.

Secondly, the regulations provide a lasting regulatory framework for customers and companies following an exit. Safeguarding customers is a key concern. We expect competition to deliver higher levels of service, keener prices and greater innovation in the provision of retail services. The Government also want to ensure that customers retain access to the same standards of protection, whatever their water company chooses to do. These regulations will ensure that no customers should be worse off because their company decides to exit. This principle of equivalence, therefore, underpins a number of safeguards within these draft regulations. They ensure that all customers will have access to good contractual terms, be protected by Ofwat and be assured of access to a retail service even if something were to happen to their new retailer.

Customers who are transferred as part of an exit and do not have formal contracts in place will be subject to a deemed contract with the new retailer. The terms and conditions of those contracts must comply with a code produced by Ofwat. All retail businesses accepting a transfer of customers will be water supply and sewerage licensees. Ofwat is responsible for the licensing process, which opened in April this year. It closely examines the business plans, management resources and financial viability of all applicants before any licences are issued.

Before applying to the Secretary of State for permission to exit the market, a water company will need to reach agreement with a licensee willing to take on its non-household customers and fulfil the requirements of the exit regulations. Of course, in the new competitive market customers will have the ultimate protection of choice. Should any retailer fail to meet their expectations of customer service, they will be able to take their business elsewhere. Customers will be informed of their company’s intention to exit well in advance, and will be free to switch to the supplier of their choosing.

It is important that we deal with these regulations now to enable them to come into force in time to allow any water companies that wish to exit this market to do so when it opens in April 2017. The regulations will need to come into force by 3 October this year to allow us to open the exit application process six months before the market is due to open. This will provide certainty to those water companies wishing to exit and enable them to make the necessary preparations and communicate with their customers, as required by the regulations.

I express my department’s thanks to all those who have contributed to the development of the draft regulations, including noble Lords here today. I and the department are most grateful. The regulations are the result of detailed work with the water industry, prospective entrants and customer groups. They give choice to the industry, protect customers and put in place a framework that will allow the competitive market to evolve effectively. For those reasons, I commend the regulations to your Lordships and beg to move.

My Lords, I commend the Minister for his opening speech. The draft statutory instrument before us reflects many hours of debate in your Lordships’ House. His words were not exactly in sync with the Minister at the Dispatch Box when we began this journey, and I note with interest that he mentioned that the pressure for these changes came from business customers. It would be fair to say that on the question of timing there was pressure from noble Lords from all sides of the House, who together recognised the importance of these measures for customers. Without that concerted effort, I do not believe that we would have met the timetable that the Minister has set out today. I echo his thanks to other noble Lords from all sides of the House who worked so diligently to ensure that retail exit was in the then Water Bill.

One key point that my noble friend has raised is the issue of timing. I am grateful to him for keeping us informed—he referred to a letter that he had written to a number of noble Lords—and for ensuring that we had every opportunity to contribute to the debate and the deliberations on this issue. In his letter of 23 March he mentioned that there was only one final step to take: the finalisation by lawyers of the then regulations. We have moved a significant time forward since 23 March, and I am very concerned and interested to hear from him that we will meet the April 2017 deadline. This is a complex issue, as my noble friend has mentioned; it is a thorough exercise. Meeting the April 2017 deadline is vital.

In that context, exemplary work has been done by Ofwat, by Cathryn Ross and her team, to achieve the objectives that the Government have set out and that deadline. There is no doubt that we have a first-rate regulator who is keen to ensure that everyone involved—those companies that choose to implement the changes, while others are putting in place deemed contracts and the changes necessary to ensure that the market works—has the full attention of Ofwat to ensure that that process takes place.

It was not an easy start to the year in that context. There was the abandonment of the decision to appoint WICS, led by Alan Sutherland, then we moved on to the election of Market Operator Services Limited—MOSL—the delivery body to keep the programme on track and create a non-domestic water market ready for April 2017 implementation. Alan Sutherland deserves thanks from all sides of this House. There is no doubt that his experience and input were significant at the time, and that has subsequently been shown to be the case. Can the Minister absolutely confirm that in his view the market is ready for the April 2017 deadline? Can he let us know what action will be taken against those who are unable to make that deadline, and who is mandated to take such action?

The Minister also mentioned the restriction of this initiative to non-domestic customers. There was no interest during the passage of the Act to extend these measures—in other words, retail competition—further than major industrial, non-domestic customers. At the time Defra gave an explanation of this approach in one of its briefings, stating:

“The Government does not intend to extend retail competition to householders at this stage. There is no evidence to suggest it would provide enough direct benefits for householders, given the low margins involved in water pricing. The circumstances in which business customers are most likely to benefit from retail competition are not relevant to householders (unlike multi-site business customers, for example, who would benefit from one national bill).”

Then, even to the surprise of those of us who follow the water industry closely, the Government announced in November last year that they intended to begin a transition to extending retail competition to domestic customers before the end of this Parliament. This formed part of the wider Treasury plan to look for new ways to promote open and competitive markets, as set out in its report A Better Deal: Boosting Competition to Bring down Bills for Families and Firms. This meant that while domestic water customers will not have the opportunity to switch their water supplier as early as the non-household sector in 2017, the Government intend to extend retail competition to domestic customers in due course. I would be grateful if the Minister could comment today, with a little more clarity than was in the Treasury document, on the timing and approach necessary to achieve that objective within what will be a tight timetable if legislation is to be passed by both Houses within this Parliament. What work is moving forward on that front, not least on the consultation exercise that will be necessary?

I conclude my opening remarks by welcoming the decision by the industry to take action in the context of the measures before the Committee today. It was good to see Portsmouth Water’s announcement in January, and only last month Southern Water was the second water company to announce its plans to exit. The deal it struck with Business Stream was of sufficient magnitude to create the third-biggest company in the UK non-domestic water market, with a combined market share of more than 10%. It set out in its statement, which I will not repeat today, many of the virtues and the benefits which the Minister rightly outlined in his opening remarks. It is important to recognise that other companies are ready and willing to move in the same direction—Southern Water will certainly not be the last.

Again, I emphasise in closing the vital importance of keeping this as an absolute priority for the department and the Minister, making sure that we do not lose any time. I hope that the companies and everybody involved will not focus on starting work on 3 October 2016, when this comes into force, but that if they have not already started detailed work they make sure they do so now. The support of all sides of the House, which I hope will continue on this subject, and the statutory instrument before the Committee today give them the opportunity to get going now, to see the detail and to make sure that the implementation of a wide range of important measures is prioritised in their planning and boardrooms.

With those remarks, I again thank my noble friend the Minister and his officials, who worked exceptionally hard to face a significant addition to their workload at the end of the Bill’s process through this House a couple of years ago. I was not their favourite Member of the House of Lords at the time for being so proactive on this, but I respect them and place on record my thanks to them for the enormous amount of hard work that they have done so far. I ask that the Minister and his officials make sure that both the impetus and priority for this legislation continue right the way through to the market’s successful opening—as I believe it will be—in April 2017.

My Lords, I too thank the Minister for the thoroughness with which he introduced these regulations and for the way that he has opened up consultation to Members of this House and elsewhere on this matter. That was in stark contrast to the way that this initiative was introduced during the passage of the Water Bill, which has been somewhat glossed over this afternoon—at the time, my noble friend Lord Marks of Henley-on-Thames referred to it as being introduced not at the 11th hour but at one minute to midnight. It was poorly done, but it is encouraging that since that time both the department and outside stakeholders have worked hard to ensure that the consultation and parliamentary scrutiny that I and others insisted on have happened. I thank the Minister and the department for that.

While I accept the comments of the noble Lord opposite that there was cross-party support for the proposal, it was not unalloyed support. Although my party was not against the proposal in principle, we were concerned about the complexities, the way in which the proposal was introduced and the need to protect the rights of customers—and I want to touch a bit on that. The Minister said that these regulations will have no implications for householders, but we must be concerned not only with those in the non-household market who will be affected but those households who will remain with incumbent providers that cannot divest themselves of their household customers. Such people could be stranded, and therefore these regulations will have implications for household customers.

Secondly, although at the time we in the Liberal Democrats welcomed the potential to innovate in retail services, which these regulations should provide, we were very concerned about ensuring that we should not lose the water-saving initiatives, which up until then had been delivered by water providers working together with their retail arm. The potential for such water-saving initiatives must not be lost, given the very severe water shortages that we face in certain parts of the country. For those two reasons—the need to protect all customers, both household and non-household, and to ensure that water-saving initiatives would not be lost—we asked for the fullest parliamentary scrutiny. I am pleased that the department has delivered on that.

I have just two questions for the Minister. Under “Monitoring & Review”, which I think is a fairly standard exercise for all such regulations, the Explanatory Memorandum talks about monitoring whether the regulations have “met their intended objectives”. However, the intended objectives make no reference either to the need to protect those household customers who will in effect be stranded or to the need to ensure that there is no diminishment in the opportunities for water-saving initiatives. That concerns me, so I ask the Minister to give us a reassurance that a full review of these regulations will be undertaken before any decisions are taken to extend their effect to the household market.

My second question is, given that the Government have now asked Ofwat to look at the cost-benefit analysis of extending the provisions to the household market—which suggests they are increasing the priority they are giving to this area—can the Government confirm that, in terms of new legislation and issues for the future, water abstraction regime reform is the top priority for this department, given that it will have significant constraints on its time over the forthcoming months and years because of the impacts of the Brexit decision? Given the fact that CAP accounts for 40% of the budget, there will have to be an awful lot of changes in the department. Can the Minister reassure us that water abstraction remains the priority, not extending to the household market provisions that are still unclear and untested and over which a number of us have serious concerns? Will that happen before the initiative to split the retail arm from the wholesale arm is extended to the retail market?

My Lords, I thank the Minister for introducing the regulations today. I very much endorse the thanks that he and others who have been involved in this—the noble Lord, Lord Moynihan, and the noble Baroness, Lady Parminter—have extended this afternoon.

As has been said, we support in principle the extension of competition into the retail market for non-household water and sewage service so that charities, businesses and public sector organisations can switch their supplier. We accept the corollary of this new flexibility, which is that providers should also be able to exit the market, provided that the public interest test is met. For the scheme to work well, though, a number of practical guarantees have to be in place. I therefore have a few questions that I hope the Minister can answer.

First, in the submissions to the consultation there was a bit of a running theme about the incomplete asset location records making it difficult to accurately specify which undertaker is currently providing which service. Is the Minister confident that the proposed measures address that issue effectively? In other words, will there be, if you like, a land and business register that we can all have confidence in regarding who is supplying to which address and what that supply is? Is it intended that those records will be kept on a national IT system? Does the Minister have confidence that that system will be comprehensive and robust enough to store all those data properly?

Secondly, although actually I think the Minister has answered this, is he proposing that domestic business users will have a guarantee that an alternative provider will always be available, and is he saying that that will be underpinned by the public interest test that will always guarantee that? Thirdly, what requirements will be placed on companies to ensure that their customers are always made aware of their plans to exit, and that those customers are given sufficient time to find an alternative provider?

Lastly, I want to tease out what the Minister said about no company being worse off. I am thinking of isolated communities, particularly isolated businesses, that might have been on a longer-term promise that they would have expensive upgrades of water and sewerage provision in future, such as the laying of new pipes or whatever. You could imagine that an existing supplier might think in retrospect that they would rather not have that rather expensive outlay on their books. Is a guarantee built into the scheme that those expensive businesses, which a lot of suppliers might not consider economically viable, will nevertheless maintain a supplier? In other words, is there a guarantee that they will not just find that they are dumped on another supplier who is not prepared to make that longer-term investment and provide the upgrades that they might have been expecting from their original supplier? If the Minister could confirm that that longer-term investment would be guaranteed, as well as the initial supply of water and sewerage services, that would be reassuring.

Apart from that, both the noble Lord, Lord Moynihan, and the noble Baroness, Lady Parminter, raised important questions and I look forward to the Minister’s response on those matters.

My Lords, I thank your Lordships for what I think is a broad range of support for the regulations that the Government have brought forward.

I am conscious of the many hours of debate to which my noble friend Lord Moynihan referred. If I was not sufficiently fulsome, may I be even more fulsome in recognising the assistance of your Lordships—particularly some of those here, but also some who are not present—in making a significant contribution to where we are now? As a supporter of your Lordships’ House, it would be fair to say that this is precisely the reason why I try to persuade people, when I am out and about, that this place can get down into all the detailed, hand-to-hand fighting. I hope that we will come to a result that is undoubtedly in the public interest. If I may, I will put on the record even more fulsome praise of Members of your Lordships’ House. It is also entirely appropriate, and we do not do this often enough, to thank the officials who have to implement what we have all wrestled with and decided on. I am delighted to add those points, which pick up what my noble friend said.

I want to deal with some of the points that your Lordships raised, particularly my noble friend Lord Moynihan’s point about teasing out the household customer situation. Let me set out our stall: we want to have good evidence on the potential for household competition and the benefits that it could bring for customers. We have asked Ofwat, as the independent economic regulator, for an analysis of the potential costs and benefits for household customers, and we believe it will be due in September. Obviously the introduction of household competition would require amendments to be made to primary legislation and, indeed, changes to Ofwat’s price review process. There would also need to be an agreed practical timetable for delivery. We are moving in the direction of understanding more about this but, as we have done for non-household customers, the whole purpose is to ensure that the customer has the best choice and the best outcome. All I can say is that we will look at that very carefully, and I am confident that noble Lords will assist us in that when we come to do so. That work is in hand.

My noble friend mentioned the timetable and asked whether we would meet the April 2017 deadline. There is a clear plan for working towards market opening. Exit applications open on 3 October—companies will have exit decisions to make—and we are on track to open the market in April 2017. My understanding of all that is going through and of the work being undertaken is that we are on track to achieve what we hope to by the April 2017 date. As to what action we will take against companies that are not ready for next April, Ofwat is putting in place a licence condition requiring water companies to make all necessary preparations for market opening in April 2017.

The noble Baroness, Lady Parminter, asked about stranded household customers. It is obviously important that all customers are looked after. Household customers will remain with the incumbent water company and will continue to be protected through five-yearly retail price controls, which will ensure that bills remain fair and affordable. Information relating to costs and efficiencies obtained by Ofwat from the competitive market will help to inform its decisions on setting appropriate price limits for the household market. There will also be crossover benefits for household customers as innovative services are developed for the non-household market and adopted by household customers. Clearly, the whole purpose is to ensure that the customer is well protected. I am mindful of what the noble Baroness said, and it is something that we should always have uppermost in our considerations.

The noble Baroness asked about legislative priorities and review. I hope that all noble Lords will understand that I am really not in a position to comment on the future legislative timetable—it is fair to say that that is way above my pay grade—but obviously I understand what she is saying.

There will be a review of the exit regulations, which is all part of a normal process. We are committed, as we were during the passage of the Water Bill, to report to the House on progress towards abstraction reform before 2019. I am well aware that although, with our weather, most of us farmers do not see water shortage as a problem—I can tell the Committee that there is no haymaking at the moment—I can say that this is obviously something that we need to have in place. The supply of water for households, industry and non-household customers is imperative.

I turn to some of the points raised by the noble Baroness, Lady Jones of Whitchurch. The database is being developed by MOSL, with the intention of being fit for purpose. It is currently being tested by market participants, ready for the next phase beginning in September. The noble Baroness asked whether there was a guarantee that all customers would have a supplier. Yes, because the exit regulations secure that all non-household customers will continue to have access to a supplier for retail services.

I am just looking to see whether other points were raised by your Lordships that I have not covered. I shall look at Hansard to see whether there are detailed points that would be more helpful. I am mindful that sometimes when matters begin here, they need some digesting. I sense, because I was not here at the beginning, that what has happened has been a success story of people who know a lot about this industry contributing to this process. As my noble friend said, it may involve considerable work for officials and others, but in the end this is what we are here for. We want to get the right solutions, particularly when we have intricate regulations such as these.

We want to get it right. After all, we are dealing with customers who want to be protected, and indeed we want to inform and enable companies to do their best for the customer. That is the whole essence. While I was not involved in the Water Bill proceedings, I think your Lordships offered up to the Government that this was about competition, and we were looking to provide encouragement for customers. That is why, after this lengthy work—I hope noble Lords will understand that I have made my best endeavours to ensure that they have been kept in the loop of what we are trying to do, and have given them the opportunity to comment—I feel confident that we are in the best position we could be. That is why I commend these regulations to your Lordships again.

Motion agreed.