Asked by: Lord Whitty (Labour - Life peer)
Question to the Department for Environment, Food and Rural Affairs:
To ask Her Majesty’s Government what assessment they have made of whether, following the coming into force of the Water Act 2014, income from regulated water markets has been used to set up new businesses in the deregulated sector.
Answered by Lord Gardiner of Kimble
In the 2014 Price Review, Ofwat has set separate price caps for household and non-household customers, together with wholesale and retail services. This stops cross-subsidy between household and non-household customers, and between the wholesale and retail parts of companies’ businesses. Furthermore, regulated water undertakers are already subject to rigorous transfer pricing rules, requiring any new venture to be established at arms-length to the regulated business.
Ofwat is also proposing licence conditions for new retail licensees that prohibit discrimination and cross-subsidy. These will mirror conditions that already exist in the licences of water and sewerage undertakers.
For additional detail, I refer the Noble Lord to my previous reply of 6 July 2015, asked by Lord Moynihan, as follows:
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. [HL802]
Lord Gardiner of Kimble: 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.
Asked by: Lord Whitty (Labour - Life peer)
Question to the Department for Environment, Food and Rural Affairs:
To ask Her Majesty’s Government whether, following the coming into force of the Water Act 2014, any work has been done to promote new entrants to the deregulated parts of the water supply sector.
Answered by Lord Gardiner of Kimble
The Water Act 2014 will allow all 1.2 million businesses and other non-household customers in England to choose their supplier of water and wastewater retail services from April 2017. Retail services include things like billing and customer services.
The Open Water Programme, involving Government, Industry and Ofwat, is preparing for market opening and is in contact with a number of businesses which are considering entering the new retail market when it opens in April 2017. These prospective entrants are playing an important role in helping to shape delivery of the programme and ensure a level playing field for all participants in the market.
For additional detail, I refer the Noble Lord to my previous reply of 7 July 2015 asked by Lord Oxburgh [HL826] as follows:
To ask Her Majesty’s Government what is the estimated number of new entrants expected in the deregulated water marketplace. [HL826]
Lord Gardiner of Kimble: We expect the number of new entrants in the expanded Anglo-Scottish market for non-household retail services to grow over time ahead of the extension of choice to all non-household customers in English in April 2017.
At this point it is not possible to give a definitive number of new entrants likely to be in the market in April 2017. However, there are currently 12 new entrant companies who are licensed to operate in the existing retail market in England and there are 18 licensed providers in the Scottish retail market. Eight of these companies are currently licensed in both jurisdictions.
There are 18 water and sewerage undertakers some of whom have already established separate retail companies and all of which will have the opportunity to exit from the non-household retail market at market opening which may also increase the number of entrants to the market.
The Open Water Programme, involving Government, Industry and Ofwat, is preparing for market opening and is in contact with a number of additional businesses that are considering entering the market. These prospective retailers are playing an important role in helping to shape delivery of the programme and ensure a level playing field for all participants in the market.
Asked by: Lord Whitty (Labour - Life peer)
Question
To ask Her Majesty’s Government how long it would take Ofcom to undertake a review of the impact of the increase in end-to-end competition on the universal postal service.
Answered by Baroness Neville-Rolfe - Minister of State (Cabinet Office)
Ofcom has set out its approach towards carrying out a full assessment of end-to-end competition in its Guidance published in March 2013 (“Final Guidance on Ofcom’s approach to assessing the impact on the universal service”). Although it has not set out a specific timescale for a full review, Ofcom has in place a continuous monitoring regime and access to key confidential data from Royal Mail and other postal operators which would enable it to anticipate any potential threat to the universal service.
Ofcom has said that they are keeping market developments under close monthly review and if this monitoring identified cause for concern they would be able to carry out a review very quickly.
More information about Ofcom’s regulatory framework can be found on Ofcom’s website (www.ofcom.org.uk).
Asked by: Lord Whitty (Labour - Life peer)
Question
To ask Her Majesty’s Government whether Ofcom has conducted any analysis of regulatory options to protect the universal postal service in the event of a significant increase in end-to-end competition.
Answered by Baroness Neville-Rolfe - Minister of State (Cabinet Office)
The regulatory options to protect the universal service are set out in the Postal Services Act 2011.
Parliament has given Ofcom the primary statutory duty to secure the provision of the universal service and the powers and tools its needs to do so.
Ofcom has carried out a consultation on end-to-end competition in the postal services sector and published a Guidance paper on the use of its regulatory options and the circumstances under which it would intervene to protect the universal service from any serious threat from competition. More information about Ofcom’s consultation on end-to-end competition and its Guidance (“Final Guidance on Ofcom’s approach to assessing the impact on the universal service”) can be found on its website (www.ofcom.org.uk).
Asked by: Lord Whitty (Labour - Life peer)
Question
To ask Her Majesty’s Government what is their calculation of the percentage of United Kingdom addressees needed to be reached by end-to-end postal delivery companies other than Royal Mail before there is a threat to the financial sustainability of the universal postal service.
Answered by Baroness Neville-Rolfe - Minister of State (Cabinet Office)
Ofcom as the regulator for postal services has the primary statutory duty of protecting the universal service and the regulatory powers to intervene if the universal service is ever at risk.b
Ofcom has set out the circumstances under which it would intervene to protect the universal service from any serious threat from competition in their publication: “Final Guidance on Ofcom’s approach to assessing the impact on the universal service”.
Ofcom’s assessment would consider the financial sustainability of the universal postal service and the need for the universal service provider to be able to earn a reasonable commercial rate of return in connection with the provision of the universal service.
The percentage of addresses covered by end-to-end competitors to Royal Mail would clearly be a factor that Ofcom would consider, but as a part of a wider range of factors. Ofcom has therefore not set a threshold of end-to-end delivery coverage by alternative postal operators to determine a threat to the Universal Service. At the present time, end-to-end competition accounts for less than 0.5% of letter volumes in the United Kingdom.