I certainly was not seeking to suggest that the market is not working in Scotland. My point was that some people have chosen to stay with their incumbent, and they may wish to do so rather than to have an incumbent abandon them and walk away.
An Oxera report commissioned by WICS and published in November 2012 predicted that incumbents would lose some 40% of their non-household customers in the first year of the opening of the retail market, with a 5% loss of profit. However, arguments that make an economic case for exits seem to be based on incumbents losing all their public sector and multi-site customers in the first year of market opening. The Oxera view is bolder than that of the rating agency Moody’s which, in February 2012, said that a worst-case scenario would be incumbents losing 25% of their non-household customers in the short to medium term, with a much smaller loss of 0.69% of profit. Although no doubt all incumbents will lose some customers, we can suppose incumbents will take steps, such as those that Business Stream has taken, to retain customers.
Anecdotal evidence from business customers suggests that incumbents are already upping their game, even though retail competition reform is some years away. Large business customers have suddenly discovered that they have a named customer service contact, and some have been offered improved metering services. The idea
of incumbents sitting around while customers disappear is therefore, in our view, an unlikely scenario. In addition, water-only companies will be able to apply to Ofwat for a sewerage licence, which will allow them to compete with licensees and other incumbent sewerage companies by offering both water and sewerage services to their customers.
My point is that this is evolution, not revolution. Many non-household customers may choose to stick with the incumbent supplier because the incumbent supplier will improve its services to them as a result of the reforms. The benefits of that may in turn be passed on to household customers. Forcing or even allowing retail exit ignores such points. Where customers choose to switch, we anticipate a growth market in which innovation and competition lead to benefits, both environmentally and in customers’ bills. Allowing partial retail exit would open the door to forced separation if individual cases of discrimination were discovered, and we have made clear our position on that.
As I have said, any decision on separation should be made by Ministers and Parliament. We are not prepared to take the risk of forced restructuring, or even the potential for it as provided for in new clause 2, destabilising investment or increasing costs to customers. The new clause envisages the Secretary of State permitting exits, but that may not reduce the risk of a competition authority forcing an incumbent water company to make an application to exit. I therefore urge hon. Members who tabled new clause 2 and amendment 12—led by the Chair of the Select Committee, the hon. Member for Thirsk and Malton (Miss McIntosh)—not to press them to a Division.
The hon. Lady raised other issues about the industry in general, particularly in relation to upstream reform. We know from experience that setting out how markets should work in primary legislation is very inflexible and can stifle innovation. I know that she is keen for us to do more in that regard, but our view is that that was one clear lesson from the last attempt to extend competition through legislation in 2003. That is why the framework in the Bill sets the scope and direction of reform, without being overly prescriptive. We are working closely with Ofwat, customers and the industry—through the high-level group and the Open Water programme—to ensure that new markets work effectively, and we know that the industry does not want to constrain the market unnecessarily with too much detail in primary legislation, any more than the Government want to do that.
On new clauses 11 and 14, the hon. Members for Dunfermline and West Fife and for Hayes and Harlington (John McDonnell) have raised important issues about how the sector is run. As the hon. Member for Dunfermline and West Fife pointed out, we had a previous debate on this set of issues in which hon. Members from all parties were keen to put on the record their concerns about the past operation of the industry. I fear, however, that we have been talking about things as they were, not as they are and will be. Ofwat is already taking action to improve standards of corporate governance across the sector. It recently consulted on principles relating to board leadership, transparency and corporate governance, and it is putting pressure on water companies to strengthen audit arrangements, board member appointments and governance. The response from water companies has been positive and I welcome that. I do not want to
belittle the issues that the hon. Member for Hayes and Harlington set out, but Ofwat has listened and is providing leadership to deal with them.