Jonson Cox, speaking at the Utility Week Forum, noted the tensions relating to sector ranging from “annoyance” at restrictions during the drought to outrage at pollution in rivers. Cox said the sewage issue meant the industry’s reputation was “trashed” in the eyes of billpayers even if not all companies were at fault. “When customers get angry, and that is felt by parliamentarians, that is when irrational things have happened before now,” he added.
He set out the trilemma for water as: affordability and customers; investment and resilience; and, environment, but maintaining customer support was the key to the three elements. The water sector in England and Wales, as well as the energy sector in Great Britain, “have or are at risk of” losing customer legitimacy, he said.
“Both need to rethink rapidly and rethink their propositions for customers,” Cox said. “In my experience, loss of customer support can lead to irrational, poor decisions being made on-the-hoof.”
“I can’t see nationalisation coming back on the agenda, but I do see threats to companies that don’t win customer legitimacy. The threat I would worry about is the 25-year rule to remove a licence. That’s not exactly a strong tool for a regulator to have a 25-year notice period to remove a licence.”
Cox said over the summer, with the anger that has surrounded the sector, he had observed political reaction carefully. He reflected that measures taken by Ofwat in recent years relating to pay, dividends and aligning corporate behaviour with performance “maybe hadn’t gone far enough” in the public mind.
Despite such regulatory tools being in place, Cox noted a “glaring gap” relating to the difficulty of removing a licence.
“I’m not advocating it, but I think this may come if this sector does not respond adequately,” Cox said and mused that this may happen by a change in the licence period to, for example, a five-year notice rather than 25 year notice. “It’s the one thing that a parliamentarian might decide to do to give the sector a shock, by saying ‘you’ve got five years to clean up the mess and get this sorted, or we put in a shadow operator or auction your licence.”
In answer to a question, Cox indicated that if a failing licence holder was given five years to shape up or face the auction of their licence, incentives and recognition of progress would be preserved.
Cox acknowledged changing the security from 25 years to five could raise the risk level for investors and might increase the cost of capital. But he argued that in most parts of the world, private operators operate on franchises which can be removed at much less notice and achieve success.
“I’m not arguing for this, just making the point that parliamentarians looking toward the 2024 election could see this as the one thing that will make the industry sit up and take notice. It’s probably a disaster for everyone, but when Ofwat discovers data that shows six companies may have cases to answer on wastewater treatment discharges, you can’t not accept there is a legitimacy problem,” Cox said. “It could be exactly one of those perverse things that comes about by not meeting the standards society expects – if customers flip from an acceptance of a situation to anger at it, then irrational things happen.”
He urged companies to win legitimacy by solving the performance problems – partly through investment and partly by “running businesses better” and noted that one-third of sewage overflows arise because of poor maintenance of sewers.
During his tenure at Ofwat, Cox pushed for alignment of bonuses and dividends to operational performance to boost transparency.
Furthermore, he told companies to be much more active helping consumers engage with consumption, via smart meters; for real-time water quality data to be available for swimmers and waterway users ; and continue to drive down leakage. “Embrace customer legitimacy, win the support and you may avoid some politically undesirable interventions.”
Cox stressed his views were his own, not reflective of his former role at the water regulator, or any of his current positions.