My Lords, in moving Amendment 115, I wish to speak also to Amendments 116, 138, 139, 140, 141, 142, 143, 144 and 145.
This set of amendments brings us back to the central issue of creating through this legislation a clear, unequivocal market framework for competition. The amendments would provide a duty to facilitate competition. All participants must have access to clear and accessible prices, clearly defined and common levels of service and standard terms and conditions. As I have mentioned before to your Lordships, the Bill is based on the premise that parties within the retail market should conclude bilateral relationships subject to industry codes that will be developed. This could require some negotiation between market participants on service and price. It is this element of negotiation which I believe, if not addressed by us, will lead to the inefficient operation of the marketplace with unintended consequences.
The Bill is about regulated access and should not be blurred by a heavy dose of negotiated access. Allowing parties to negotiate could open the door for a current incumbent to discriminate against new retailers by offering them less preferable terms or poorer service levels or simply by being slow to respond to requests. This would limit the effectiveness of the market and increase costs for new entrants and customers. In my view, the relatively minor clarifications that I propose could usefully be made to the Bill. These are designed to ensure that the market can be opened in a timely way and that, once open, customers will enjoy benefits that are the same as, or greater than, for example, those which have been achieved in Scotland.
Amendments 138, 139, 140, 141, 142, 143 and 144 would ensure that Ofwat’s implementation licence modification powers are fit for purpose. In Scotland,
the Water Industry Commission had a power of direction to ensure that activities that needed to be done were completed in time for market opening. For example, WICS was able to say to Business Stream, Scottish Water’s retail subsidiary, that the market would open irrespective of whether it was ready and that its customers would be reallocated to new entrants. I propose that Ofwat’s licence modification powers are made available for at least three years after Royal Assent to ensure that the entire period up to market opening is covered. I also suggest that they are clarified and strengthened, including by referring explicitly to market opening, as proposed in the group of amendments I have mentioned.
Amendment 145 would allow Ofwat to make common licence amendments in a single process. The potential retail market in England is much bigger than in Scotland. There will be more wholesalers and more incumbent retailers. The difference principally relates to the handling of the interests of the incumbent companies. In Scotland, the relevant people now have significant experience of dealing with a large number of—there are 12—active retailers. In their view, it would be sensible to ensure that Ofwat can make licence amendments that cover all companies if that is, in its judgment, the best approach. That has certainly been helpful in Scotland. However, there may also be circumstances where a more targeted approach to an individual company or a small group of companies would be better.
Amendments 115 and 116 would place a clear duty of non-discrimination on the wholesale businesses of the incumbent water suppliers. Clause 23 obligations to ensure no undue preference or discrimination would be carefully extended by these amendments. It seems to me that profit maximisation could be put forward as a reason to discriminate between suppliers. It may be worth looking at placing duties to help facilitate competition directly on incumbent businesses, making them also subject to a duty to ensure no undue preference or discrimination. This would make it easier to enforce competition law provisions, including the prohibition on margin squeeze. That would help ensure that new entrants are generally able to count on there being a level playing field.
As I had the good fortune to be the Minister responsible for taking the original privatisation Bill through the Commons, along with my noble friend Lord Howard of Lympne, I anticipate that the Minister will respond to my amendments by saying that Ofwat already has a duty to promote competition and therefore we do not need another duty. He may also say that Ofwat is the relevant competition authority for the sector and therefore we need to ensure under another piece of legislation that there is no anti-competitive behaviour in the sector, so we do not need another duty. He may have in mind the Competition Act and the Enterprise Act in that regard.
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My noble friend may also say that the rationale for economic regulation should make all economic regulators want to pursue effective competition, deregulate the sector, roll back the monopoly and replace it with competitive markets, as we have in the rest of the economy, and gradually render economic regulators’ jobs redundant—a sort of exit strategy for economic
regulators, in which case we do not need another duty. If he does say that, it would be wise to consider amending the Bill through Amendment 145 to allow Ofwat more flexibility to make licence amendments. I believe that we can do this.
Introducing competition will effectively require some changes to the existing licensing framework for the sector. New licences will need to be written for potential new entrants and existing incumbent licences will need to be updated with new conditions required—for example, to ensure a level playing field in the market for both entrants and incumbents. Licences will need to be the same as far as possible so that entrants and incumbents are not facing different obligations, and therefore costs, and incumbents, who will remain vertically integrated, will need to ensure that they treat new entrant retailers the same as, or in an equivalent manner to, their own retail arms.
Similarly, once the market is up and running, new issues are likely to emerge. Will we need new forms of consumer protection from the mis-selling practices that we have seen in energy markets, for example? Will we need to introduce new requirements on companies with respect to the information they provide to customers about switching opportunities and marketing? Until the market is open, it is difficult to say precisely what will be required and Ofwat will need flexibility to introduce those provisions that are necessary without long and inefficient processes for licence amendments.
In this context, the Bill already helpfully includes a provision for Ofwat to make necessary and expedient licence changes where these are consequential to the legislation, but the time limit on this provision, which is two years after each element of the Bill is activated, is not helpful when there may need to be some further changes which become clear only once the market is up and running—in real time, as it were. It would be helpful if the time limit could be extended to five years, perhaps, although I fully recognise that there should certainly be a time limit.
The Bill does not include a power for Ofwat to make licence amendments where the majority of companies accept those amendments. Such provisions are common in other regulated sectors and were recommended by the Gray review in 2011. If, in addition to extending the consequential licence amendment provisions, a collective licence amendment procedure could be introduced, this would improve the effectiveness of the market arrangements as well as saving cost and time in unnecessary legal fees arising from the current amendment process.
Amending the Bill to remove all references to negotiated access is something I would dearly like to see. New entrants to the sector will want clarity on the terms and conditions that they will be subject to in entering the market and, in particular, the contracting arrangements with the incumbent wholesale monopoly suppliers. The provisions in the Bill can probably be made to work but they are not ideal. It would be better if some minor changes could be made to remove the idea of “negotiating” from those provisions to make it clear that the legislation allows for a form of regulated access.
There is a need to open the closed upstream market to ensure greater benefit to customers and, above all in this context, the environment. At present, paragraph 5 of Schedule 1 to the Water Bill has the effect of restricting the market to the trading of water between existing water companies. It does not allow new entrants such as farmers, or other companies that may have a source of water to trade, to introduce water into the system unless an identified person will be taking that water out further down the line to a customer. That makes it difficult for anyone who is not a vertically integrated water company to trade. This is a restriction on effective competition and could be addressed through a simple amendment.
I do not expect the Minister to answer today my latter reflections, which are based on what I anticipate his response will be. Of course, I may be wrong and he may be fully in favour of my amendments, which, he will have noticed, reflect the experience in Scotland. On that point, we should sincerely welcome the outstanding contribution made by WICS, not only in opening up competition but in providing a clear set of criteria for us to discuss, consider and use as first-rate experience from which we can amend the Bill. In the light of those comments, I look forward to hearing the responses from other noble friends and the Minister. I beg to move.