Royal Assent

The Water Bill received Royal Assent on 14 May 2014, and has become the Water Act 2014.

Retail exit

Some 10 months after the Water Bill had its first reading in the House of Commons, and despite previously strenuous opposition to the idea, the Government latterly included within the Bill a number of empowering provisions which will enable the Secretary of State to allow for retail exit.

Although many water companies, Ofwat and other water sector stakeholders have long been in favour of allowing businesses to choose not to provide retail services to  business customers, Defra’s view was that such an option would put at risk the provision of retail services of sufficient quality to customers that choose not to or are ineligible to switch supplier. In the face of maintained pressure, Government relented whilst the Bill was undergoing its passage through the House of Lords.

A total of 12 new clauses dealing with retail exit were added to the Bill. The overall aim of these clauses is, understandably, to ensure that customers remain protected. Retail exit will be possible only by application to the Secretary of State. Exit will take place on a voluntary basis only, and will involve non-household customers only.  In the final House of Commons debate on the Bill, Government reiterated its concern to avoid risk of damage to investor confidence.

Areas for which provision may be included in regulations include:

  • the transfer of specified parts of a water or sewerage company’s undertaking;
  • making a transfer scheme;
  • the form of application;
  • payment of a fee;
  • grounds for refusal;
  • imposition of conditions;
  • requiring Ofwat or the CMA to obtain consent from the Secretary of State before seeking to require an undertaker to exit;
  • publication by the Secretary of State of directions for Ofwat and the CMA in relation to exercise of their functions which might bring about an exit application;
  • provision for Ofwat to require licence modifications where necessary.

The Act will require the Secretary of State, before making exit regulations, to consult Ofwat, the CMA, the Welsh Ministers, water undertakers in England, water supply licensees, and representatives of investors in the water sector.

A consultation on the content of draft regulations is to be launched by the end of 2014.

The inclusion of investors in the list of consultees demonstrates Government’s commitment to avoid undermining confidence in the water sector regulatory regime.

What might this mean for the water industry?

Clearly, it creates scope for change to the shape of the water industry in England, if water businesses decide not to remain in the market for provision of retail services to business customers.

Those companies that apply to the Secretary of State will presumably do so on the basis of a strategy of focussing principally on the wholesale part of their business, at least so far as business customers are concerned.

Such a radical change of direction by a water company will require the approval of its owners, possibly in order to comply with its internal constitution and certainly to avoid undermining the confidence in the business of its investors.

At this early stage however, when none of the detailed provisions of retail exit have yet been published, it is speculative to seek to predict how these provisions may play out in practice. Market opening is not scheduled to occur for 3 years, and many water sector operators are yet to fully develop a business strategy for the business retail market, let alone make decisions on whether to exit that market. At least now, the option exists for inefficient or unwilling participants to play to their strengths and apply to exit the non-household retail market.