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Ofwat chair Jonson Cox opened the door to “radical” restructuring of the water market, calling for “dynamic and differentiated” approaches to any merger and acquisition activity that follows the conclusion of PR14.
He said: “If there is going to be M&A, as I read daily at the moment in the press, I really hope we will see some very much more dynamic and differentiated approaches.”
Speaking in a personal capacity at a Utility Week reception to mark the 25th anniversary of the privatisation of the water sector, he hinted that changes in the market could see the disaggregation of water companies. He said: “We see the opportunity to find benefits from thinking differently on who owns the regulated network business and who owns the customer facing business which is a retail business. Is there any reason why retailers and networks should necessarily be under common ownership, with all the difficulties that brings?”
He added that the traditional approach to M&A, that “bigger was better”, was redundant. Asked by Utility Week editor Ellen Bennett how many companies should be operating in the market, he said there was no right answer – but that he expected M&A could result in more, rather than fewer taking account of new entrants, upstream opportunities and potential spin off of retail businesses. He added that smaller companies were often the most innovative.
In his comments at the reception, Cox praised the sector for its response to PR14, but said: “As a regulator we worry that over the last eight years the drive for operational performance has been blunted by the easy generation of higher returns from higher gearing and associated financial outperformance. The importance of strong operational performance is that it delivers new frontiers…. I still worry if we’ve seen enough of what good management skills can do to improve a network business.”
He added that water companies which wished to “maintain trust and confidence” must ensure their financial returns were seen to be reasonable.
Cox was speaking alongside founding director general of Ofwat Sir Ian Byatt and sector analyst Robert Miller Bakewell. Utility Week’s reception to mark the 25th anniversary of the privatisation of the water sector was held in association with EC Harris, and a full report of the event will appear in Utility Week magazine on December 12.
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