Utility Week expert view: Karma Ockenden

“Even before we dig into the detailed provisions that will follow in regulation, departing the business retail water market looks difficult and uncertain.”

This is my last week at Utility Week, after more than 14 years following the twists and turns of the water industry week in, week out. So it seems fitting that when the Water Act received Royal Assent last week, it contained provision for incumbent water companies to quit one of their long-standing responsibilities: providing retail services to in-area, non-household customers.

“Exit” immediately suggests to me the ubiquitous sign with the little green stick-man bounding urgently through an inviting, wide-open door. You know the one. But retail exit from the water market looks distinctly more Escape from Alcatraz. Think high walls, barbed wire and a passage that is far from certain.

Nearly a year after the Water Bill’s debut in Parliament, an exit amendment was introduced by the government on 9 April during the final Lords debate. When the bill became law last week – at 6.59pm on 14 May, to be precise – water companies unable or unwilling to compete for business customers once the market opens on the 1 April 2017 were offered a way out.

The government has had a long-standing opposition to exit (its volte-face on the issue came out of the blue, late in the day and only because of sustained pressure from a broad-based pro-exit lobby), so any incumbent wishing to leave faces a real assault course. The enabling measures set out in the Water Act are complex and run to pages. In fact, 12 new clauses dealing with retail exit were introduced by Lords amendments 53-64.

Among the key features are:

•    The secretary of state will make exit regulations after broad consultation. These will let a water undertaker operating wholly or mainly in England stop providing retail services to non-households in its area.

•    Incumbent undertakers wishing to exit will have to apply to the secretary of state for permission. The request could be refused. Grounds for refusal could include: public interest; customers’ (non-household or domestic) interests; costs; or issues with the licensee receiving the customers – for example, its market share or capacity to take on new business.

•    The secretary of state could impose transfer conditions – for instance, a share of transfer proceeds to be apportioned to affected customers.

•    Prospective quitters could have to specify in their exit applications to whom their business customers would be transferred. The recipient would have to agree to be specified in this way. Ofwat could be required to publish a code on licensee eligibility to take on new customers.

•    Licensees could be required to produce schemes governing terms, conditions and prices for transferred customers (which Ofwat may modify). Ofwat could issue service provision codes for licensees.

•    An undertaker should exit voluntarily; its conditions of appointment should not be manipulated to force exit. Ofwat and the CMA will have to seek the secretary of state’s consent before exercising their functions in a way that might require an undertaker to make an exit application.

•    Ofwat may require licence condition modifications to facilitate transfers; it could also make consequental changes after these modifications for up to a year.

So even before we dig into the detailed provisions that will follow in regulation, departing the business retail market looks difficult and uncertain. A company’s chances of quitting will hinge as much on the suitability of the licensee to which its business customers will be transferred as on its own desires and capabilities as a retailer. And even if both parties pass muster on paper, the exit could be turned down on grounds – such as “the public interest” – that could be variously defined to suit a desirable, or politically expedient, outcome.

On one hand, these obstacles to exit are sensible. The government is clearly trying to safeguard against the risks that caused it to oppose exit for so long. Moreover, on the grounds of possible unintended consequences, Water UK welcomes “that the amendment provides appropriate opportunities for full engagement and consultation with all interested parties, and for consideration of all potential implications”.

On the other hand, if companies are going to have to make it their life’s work to leave, all the benefits of exit that have been cited – a more dynamic market, better deals for customers, more innovation, room for successful retailers to grow and so on – could be lost.

Those who argued powerfully for an exit clause – Alan Sutherland and Mark Powles spring particularly to mind – should be proud that a seemingly intractable government has listened and that there is now an exit option on the table that opens the door to a significant recasting of the industry. But a lot clearly rides on yet-to-be-published details. A quick read of the Water Act may well leave reluctant retailers feeling a soft exit – not officially withdrawing but not actively competing for customers – is the most palatable option.

From now on, Karma Ockenden will be working as a freelance writer specialising in the water and energy sectors. Email: karmao68@gmail.com