As a former water company chief executive, Cox is a classic poacher turned gamekeeper; but on the appointment, his former peers among the water companies were rubbing their hands in glee at the prospect of a regulator after their own hearts. A cynic would say they expected a member of the club; a more generous commentator would say that they were looking forward to having a regulator who understood what kept them awake at night.
All the more interesting, then, that he has chosen the vexed issue of gain-share on which to hang his hat. On the current AMP cycle, the assumption is that water companies will pay 5 per cent of their asset value to shareholders annually in dividends – but some are paying five times that. Cox argues that these companies are benefiting from good fortune over and above management efficiencies, in the form of high bond rates and RPI, and that they should be sharing the cash with customers as well as shareholders.
Perhaps this is a case of “be careful what you wish for”. Cox is using his inside knowledge here to say “do as I do” – in 2006, when running Anglian Water, he invested a £50 million windfall in water resilience measures rather than hand it out in dividends. “It didn’t endear me to investors, but it was the right thing to do,” he tells Utility Week (see feature, page 16).
That it was the right thing for Anglian Water to do in 2006 does not mean that it is the right thing for other water companies to do in 2013 and beyond. Industry lines will be split on this one: some companies will take up the challenge, some will hold up cost of capital as sacrosanct. The latter point of view is understandable – and sensible – given the huge level of gearing at which many of the water companies operate. Moreover, it’s not just business as usual over the next few years – companies will be asking investors to hand over tens of millions more. It would be helpful to be able to sweeten the deal.
That said, Cox is simply doing his job here. As regulator, it behoves him to ask the difficult questions. The real test will be how he responds when he gets back the answer he doesn’t want – which, from some of the companies at least, is inevitable. Can he really risk another Section 13?
Ellen Bennett
This article first appeared in Utility Week’s print edition of 22nd March 2013.
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