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UTILITY WEEK | 4Th - 10Th AprIL 2014 | 19 Policy & Regulation Analysis L ord Moynihan describes the govern- ment's volte-face on retail exit as "a pleasant surprise". He may be understating his position. It does not happen oen, the Tory Peer tells Utility Week, but he felt so strongly about retail exit that he defied his own party – the first time he has rebelled in 30 years. He spent weeks lobbying to get an exit clause added to the Water Bill and his efforts have paid off. In a hitherto uneventful passage through Parliament, there was a significant develop- ment last week when the government agreed changes to the Bill that will allow incumbent water companies to exit the non-domestic retail market. This is in light of the opening of that market to competition in 2017. Moynihan, who tabled an amendment to that effect, is putting principles before poli- tics here but that is perhaps unsurprising, given his role in overseeing the privatisation of the water industry 25 years ago. The idea of privatisation was always to introduce competition, he says. "In those days it was comparative competition to max- imise efficiency between the water compa- nies. Now we are talking retail and I think it is sensible to do it for the non-household sector first, see what lessons can be learnt, and keep the door open for the household sector in due course." Fundamental to this is an option for water companies to exit the market, he argues, because it makes for a more efficient sector, allowing unwilling or under-resourced com- panies to get out and grow other parts of their business. Jerry Bryan, chief executive of Albion Water and vocal campaigner for the exit clause, was unable to suppress a cry of joy at the development. Many, it seems, had given up hope so late in the day, with the Water Bill expected to gain Royal Assent by the end of the summer. Bryan says: "I'm delighted. It probably shows that [water minister] Dan Rogerson and his team have actually got a grip on the issues and are identifying what is important in this process." Bryan points out that the government had been "adamant in the face of pretty over- whelming arguments" on retail exit. So why the sudden change of heart? He believes it wasn't a "ministerial point of principle" that accounted for the change in direction, "but that certain individuals within the civil service got it into their mind that this was a die-in-the-ditch principle". Bryan continues: "It was bonkers from the start, but that became increasingly apparent as more and more arguments were presented." Moynihan has a simpler explanation. He believes that had the amendment been put to the vote, exit would have been accepted by the Lords, leaving the government little choice but to change tack. Whatever the reason, the arguments in favour of retail exit are well documented. As Moynihan points out, while the amendment garnered cross-party support, it also had the backing of industry and regulators. Even Lord de Mauley, who announced the government's U-turn last week, conceded that there was "widespread support" for an exit clause. Ofwat chief executive Cathryn Ross told the Water Bill Committee that exit was a "critically important element of a function- ing, effective retail market". She argued that if incumbents were not allowed to exit, the regulator would be "essentially mandating inefficient retailers remaining in the market". Expert opinion has also been in favour. Consultancy Oxera published a study which claimed that the passing the Bill without provision for exit could cost the industry £190 million over ten years. And what of the government's previ- ous argument that exit would risk "a bad outcome for household customers"? Dan Rogerson had told the House of Commons: "Were a company to exit and to leave house- hold customers on their own — without the non-household element — customers would not only be le with a company that had limited incentives to focus on improving cus- tomer service, but would be at risk of having higher bills." Moynihan says that evidence to the con- trary can be found in Scotland, where an exit clause has "had the opposite effect". "All the evidence is that the incumbent had to raise its game. The empirical evidence is that householders also indirectly ben- efit. We'll have the opportunity to see that, and the secretary of state will also have the opportunity to put into place a whole range of consumer protections as well," he says. Bryan is equally dismissive. "It's not a case of milking the poor domestic customer to make up efficiencies on the retail side – they won't be able to do that. The risks are manageable under a decent regulatory sys- tem," he says. Does the option of exit risk a mass exodus? Moynihan believes there is a strong chance a number of firms will go. "I think there has been a real momentum change in the industry," he says. "Companies won't commit to exiting until they have gone through internal processes and got board approval. But the indication is that there was a strong wish to have that option." So who's likely to leave? Received wisdom has it that the smaller, water-only companies are most likely to jump. However, debating the Bill last week, Moynihan said the large water companies might also consider their options. "If, hypothetically, the board of Thames Water and its investors wanted to exit the retail business and specialise on the very dif- ferent skill sets required for their core busi- ness – major infrastructure projects covering over 90 per cent of the current business – they would not be allowed to do so [as the Bill stands]," he said. Perhaps it is not beyond the realms of possibility that some of the big players may give up the ghost on retail competition. The government has won praise for finally heeding advice on exit and chang- ing course, but until the Bill is passed and competition draws closer, it is difficult to predict just what effect this last-minute amendment might have on hopes for a competitive market. Leave anytime you want to The government had set itself full-square against allowing water companies to exit the non-domestic market when competition is introduced – then it changed its mind. Conor McGlone reports.