When Utility Week thrust out a hand to Jonson Cox at his first public appearance as Ofwat chairman last November, he looked startled before making a hasty getaway. Nearly four months later, he has acceded to his friendly industry mag’s persistent interview requests but still looks wary. He comes armed with a copy of his recent lecture at the Royal Academy of Engineering, in which he expounds his priorities in the new role. At one point, he recites a section rather than risk a spontaneous answer. He is keen to stress how well the lecture went down, too, quoting a glowing review from an audience member.
His anxiety is not entirely without foundation. Cox knows the industry inside out, from two decades at first Yorkshire Water, then Anglian. Yet this is his first role at a regulator and he must adjust to the higher burden of diplomacy as the head of a public body.
He spent his first weeks in the job resolving an entirely avoidable breakdown in relationship between
Ofwat and the industry, which he must attempt to explain without causing embarrassment. And he has a complex set of interwoven priorities that he is reluctant to simplify, which sows the potential for misunderstanding.
However, he is ready to overcome that apprehension and set out his agenda for the sector. On one level, it is a reassuring vision of stability: he plays down the role of competition and says water companies should be “dull and boring” to their investors. On another, it is a call for some serious soul-searching in an industry he implies is failing in its moral duty to customers.
Cox initially thought he was “unappointable” to the job, given his industry past. However, he was persuaded to have a go after the government failed to find a suitable candidate first time round and expanded its search beyond the usual suspects.
He was thrown in at the deep end, arriving as he did at a time Ofwat was at loggerheads with the industry over its controversial Section 13 licence change proposals. Ofwat had just published a second version of the plans, which it turned out water companies found only marginally less alarming than the first. A referral to the Competition Commission looked likely. A few days before taking up the post, he tagged along as Ofwat addressed a gathering of water company chief executives. “It was not an inspiring meeting,” he admits. The way he sees it, the two sides were talking at cross purposes. Ofwat was engaging at the level of principle, with “inadequate signposting” on the details, while companies saw it as a contractual issue.
Cox chose to take a pragmatic view rather than play the blame game. He split the problem into three chunks. “The first step was what PR14 might look like. Then let’s try and land what might be needed to enable changes to abstraction reform. And then let’s look at how we are going to review the whole process so we don’t get in this mess again.” Cox didn’t decide how far he wanted to push the matter until the day of the board meeting just before Christmas, he says. “We had a very constructive board meeting and I think we all believed it was time to draw a close to the first part of the issue.”
While the Ofwat leadership wrangled with water companies, discontent was growing in its own ranks. In December’s staff survey, 49 per cent of employees expressed no confidence in the executive team. Cox starts with a neutral response: “When you sit outside, you see Ofwat as a sort of leviathan. When you sit on the other side of the table, you see you have some really hard-pressed, really committed people from top to bottom.” He attempts to put the figures in context: “This hasn’t been an easy time in the past couple of years to be a public servant. There haven’t been pay rises for the past three years,” he says.
In fact, satisfaction with pay was cited as one of the most improved elements of the survey. There was a 15 per cent boost in the number of staff who thought pay scales were fair, compared with the previous year. Cox changes tack: “It was done before my time, I can’t comment on it. When you talk about leadership, you are talking about direction and strategy. I think you can see I am putting huge emphasis on strategy and direction.”
When we get on to Ofwat’s board, which apparently sat back and allowed the executive to alienate staff and industry, Cox reaches for his pre-approved wording. “Many have raised with me the importance of reviewing how the board of the Water Services Regulation Authority operates and I accept that challenge. That’s all I want to say about it.” The government is recruiting three non-executive directors and Cox is “absolutely delighted by the strength of the shortlist”.
Once he has his house in order, Cox can get on with the real task at hand: sorting out an industry he thinks is “stuck in a rut”. He has six priorities (see box, overleaf), which he declines to place in order of importance. “All six are important – this is a complex industry,” he says. When pressed to start with one, he chooses the customer.
People are fed up with companies trotting out the line that water costs less than a pound a day, he says, as though bills aren’t going up while incomes stagnate or drop. Nor do they share the industry’s high opinion of its customer service. Cox keeps hearing complaints he says simply “shouldn’t happen”.
He also urges companies to think long and hard about their corporate behaviour. He cites complex holding structures and media reports of minimising tax through the use of offshore accounts. “What happens is, you lose legitimacy. You go from a warm feeling about your water company to a hostile one. I don’t want to see that happen in this sector,” he states.
Perhaps most controversially, he argues that companies should curb their generous dividends and give something back to customers (see feature, page 20-21). At the last price review, Ofwat assumed companies would pay out 5 per cent of their asset value to shareholders each year of the asset management plan (AMP) period. Some have issued dividends nearly five times that. “Some have tried on the argument with me that this is the distribution of efficiencies. I don’t think many companies would distribute efficiencies in the first two years of the AMP period. There are lots of risks to plan for – a good company would hold back. These are to do with things that are out of management control: bond rates and RPI being very high. Is it unreasonable for customers to say: let’s share some of that?”
Before you ask, Cox has practiced what he’s preaching. In 2006, there was a drought and Anglian Water outperformed its revenues. Cox reinvested an extra £50 million in water resilience. “It didn’t endear me to investors, but it was the right thing to do,” he says.
However, many water companies have so far resisted the idea. Cox cites a Utility Week article in which Yorkshire Water’s Richard Flint says that giving all profits back to customers would harm investment. “It spoiled my Saturday morning,” says Cox. Nobody is saying they should give all profit to customers, and to attack the concept on that basis is “scaremongering”. As if to underscore Cox’s argument, a reader commented on that story on the website: “So, the pigs with the noses in the trough don’t want to share their swill; no surprises there then!”
More welcome to water firms keen to protect their monopolies will be the notable absence of the word “competition” from Cox’s agenda. He thinks the term has been misused and the threats exaggerated. Plans are in train to introduce competition for business customers at the retail end. Sludge treatment and water resources could follow. However, Cox emphasises that these activities account for less than 5 per cent of the sector’s assets. As for water and sewage treatment, which Ofwat has labelled potentially contestable, in the short to medium term Cox says: “I see no way they are anything other than a natural monopoly.”
This playing down of competition marks a firm shift in emphasis at the regulator. Chief executive Regina Finn is wont to enthuse about innovation and is perceived by many in the sector as fixated on competition for competition’s sake. When at Anglian, Cox was quoted as saying water should be a “dull and boring sector” to its investors, and he stands by that.
He does not trouble himself to counter the industry’s perception of Finn, but he does protest at any hint of ideological differences. “I joined believing it is time for a refresh of direction and strategy and that’s what we are doing, and Regina and I are working effectively together on that. If I’d arrived and said nothing about all this, you’d probably attack me for doing nothing. If I come and I say I do think it’s time for a refresh in strategy and direction, I get all these divisive questions.”
How Cox will drive forward his agenda depends on the industry, which he clearly hopes will take it up without compulsion. Ofwat’s relationships with companies range from adversarial to constructive, he says. “We will regulate as we find, whereas companies are able to make a more positive decision about what they want that relationship to be.”
On past price reviews, he says companies have asked for everything they could think of and then left Ofwat make the hard decisions. Increasingly, the regulator wants to be less intrusive, but the industry needs to step up. “Good companies aim to put in a proposition that makes all the difficult choices themselves.”
Cox’s priorities
· Getting a fair deal for customers, who have been hard-pressed by price increases at a time when incomes have stagnated or fallen.
· Managing water resources more efficiently to protect against drought and floods and planning for long-term environmental sustainability.
· Promoting better financial transparency by water companies and sharing unexpected gains with customers as well as owners and shareholders.
· Evolutionary reform of water regulation.
· Having a set of demanding criteria for companies that want to achieve a less intrusive form of regulation, with greater incentives, in the 2014 price review.
· Stronger board leadership and governance of water companies – and their holding companies – at least to the full standards of the UK Corporate Governance Code.
This article first appeared in Utility Week’s print edition of 22nd March 2013.
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