Water undertakers are in the process of devising their internal structures in readiness for the implementation of business retail reform in April 2017. A key part of this business planning activity centres on whether to remain vertically integrated with functional separation, or whether to seek consent for retail exit and cease (within the appointed business) to perform retail services for non-household customers.

Defra has published (23 July 2015) 2 further documents relating to retail exit –

  • a summary of responses to its December 2014 consultation on proposed policy approach;
  • a consultation on the draft regulations for retail exit.

Each of these documents adds further detail to the way in which retail exit is intended to operate.

Summary of responses

The majority of responses submitted were from water companies, although other stakeholder groups were also represented. A broad consensus was reached on a number of important principles.

  1. Customers that have been transferred as a result of retail exit by their incumbent water company should not be disadvantaged, and will receive equivalent customer protections as if they were still charged by the water company.
  2. All respondents agreed that customers should following transfer be supplied under the terms of a deemed contract, covering both price and non-price terms. The price will mirror that charged by the water company prior to transfer. For the majority of customers this is expected to achieve equivalence of treatment pre and post transfer.
  3. The need for inclusion of supplier of first resort provisions received general support.
  4. Water companies gave support for a clear and predictable application and approval process.

Areas where differing views were expressed include the period of time for which an equivalent price should apply, the extent of non-price terms which should be included in the deemed contract (including whether the supply should be subject to guaranteed service standards or to the water company’s standards if higher), whether different customer protection requirements should apply to retailers taking large-scale transfers of customers compared with retailers looking to operate on a smaller, niche basis, and the length of time for which the deemed contract should run.

Government has confirmed its policy view that licensees operating in exit areas should publish a deemed contract scheme on their website; the content of deemed contracts will be regulated by Ofwat, and Ofwat will consult on deemed contracts including any associated draft code provisions or licence conditions; a customer will stay on a deemed contract until choosing to switch supplier.

Consultation on draft regulations

The consultation incorporates the draft regulations (the “Water and Sewerage Undertakers (Exit from Non-household Retail Market) Regulations 2016"), the key points from which include the following:

  1. The draft Regulations apply to undertakers whose area is wholly or mainly in England; an application for retail exit must cover both water supply and sewerage services.
  2. An application must set out reasons for wanting to exit the non-household retail market, and must specify the licensee or licensees to which the retail function is proposed to be transferred (which can be an associate company). The consultation acknowledges that a number of companies may wish to exit on market opening in April 2017. To accommodate this the application process is expected to open on 3 October 2016, subject to approval by Parliament. To be effective from April 2017 an application must be submitted by 1 November 2016. The process will be “light-touch”.
  3. In assessing an application, the Secretary of State must grant consent unless it would be contrary to the interests of the public to do so (or the applicant has failed to comply with a requirement to publish notice of its application).
  4. The draft Regulations set out requirements for the applicant to notify affected customers of its intention to withdraw from the non-household retail market, and for the acquiring licensee to notify each affected customer within 2 months that it has taken over the supply.
  5. An undertaker proposing to exit will need to transfer property, rights and liabilities to the acquiring licensee, and will do so by means of one or more transfer schemes. For a scheme to be effective the acquiring licensee must consent to it and Ofwat must approve it (and may modify it).
  6. Outstanding customer complaints will also transfer to the acquiring licensee which will step into the exited undertaker’s shoes and continue dealing with the complaint.
  7. When exit takes place the undertaker is thereafter prohibited from supplying water or providing sewerage services to non-household premises (other than its own premises). The consultation paper emphasises that the prohibition applies only to the provision of retail services; an exited undertaker will continue to have a duty to provide wholesale water and sewerage services.
  8. Ofwat will have power for a period of 1 year after exit to modify the undertaker’s conditions of appointment as it considers necessary or expedient in consequence of the transfer, including incidental or consequential modifications. Equivalent powers apply to the licence conditions of the acquiring licensee.
  9. Licensees that provide or propose to provide retail services to non-household customers in a retail exit area must publish on their website and submit to Ofwat details of the deemed contract terms which will apply in the absence of agreed terms and conditions.
  10. Provision is made within the draft Regulations for a supplier of first resort (SoFR) pool, i.e. a list of licensees able to take on new customers. The process by which customers will be allocated a supplier if they do not identify one for themselves is set out. The licensee directed to serve the new customer will do so on the deemed contract unless a negotiated contract is concluded. All acquiring licensees will be required to join the SoFR pool unless they self-supply only, or have good reason not to join.
  11. Subject to the same exceptions all acquiring licensees will also be required to join a supplier of last resort (SoLR) panel; this requirement will be incorporated into the final version of the Regulations.

Not covered in the draft Regulations

The draft Regulations do not address the possibility that an exited undertaker may seek to merge with an un-exited undertaker. In particular, such a merger would create issues in relation to Government principles that exit must be voluntary, requires consent from the Secretary of State, but also that exit is irreversible.

The consultation paper states that the Government’s current view is that a merger of exited and non-exited undertakers cannot be allowed to proceed, but seeks views on how these issues might be dealt with.

The consultation paper confirms that Government intends, in conjunction with Ofwat, to produce a code on mis-selling. Such a code was referred to in Ofwat’s June 2015 consultation on licensing and policy issues in relation to the opening of the non-household retail market.

Next steps

The consultation closes on 15 October 2015, following which Defra will review the responses, amend the draft Regulations and submit them to the Environment, Food and Rural Affairs Select Committee for comment. The Regulations will be laid before Parliament in May 2016 and subject to Parliamentary approval will come into force in time for the application process to commence on 3 October 2016.