Cox calls for more ‘granular’ water regulation

For the next price review, a move away from “lighter touch” regulation towards a more “granular” approach could be necessary to address challenges faced by the water sector, according to former chair Jonson Cox.

Cox, who stepped down from his role at the regulator in June after 10 years, told the House of Lords Industry and Regulators Committee the public do not find current approach to regulation acceptable in relation to investment schemes.

“The nature of public policy has been to drive regulators to be lighter touch,” he said. “Were I doing the next price review, I would no longer be happy that we look in aggregate at performance in terms of investment schemes companies undertake. There will be a need for the regulator to become more granular – under the pressure of better regulation it had stepped away from that and I think we’ve seen what the public has to say about that.”

The inquiry into the work of the water regulator questioned the ex-chair on whether regulatory powers were sufficient to manage the pressures of the sector and public expectations.

Cox also reiterated to the parliamentary inquiry his worries about the impact of rising inflation on the value of water companies’ asset bases and shareholder returns, which he said could challenge sector legitimacy.

“How the water sector maintains its legitimacy in the face of big returns and very material increase in capital values will be a big question coming at the industry over the next few years,” Cox said.

While he was still chair, Cox raised the concern in April, at which stage the Bank of England was reporting a 7% increase in consumer prices when compared to a year before. In August, the bank revealed prices had risen by 10% over the previous 12 months and forecast annual inflation to hit 13% over 2022.

Cox told the committee Ofwat had since communicated with firms about the impact of inflation on returns, and how that will be perceived by customers, to which several responded with accelerated plans for addressing combined sewer overflows with funding from shareholders.

Asked whether the regulator had previously been too heavily focused on keeping bills low, as opposed to bringing forward investment, Cox said he “rejected very strongly” that this objective had overridden others and denied that it had felt pressure from electoral cycles or government.

“The regulated model is very attractive to investors because of the independence of regime,” he said, adding that this attractiveness has meant there is plenty of money available from international investors to pay for infrastructure improvements: “The model is fantastic for pension funds looking for long-term investment, so I see no shortage of capital investment.”

He said he has “no doubt” that storm overflow reduction plans could therefore be funded without turning to the public purse.

Cox also praised the work undertaken by the Regulators Alliance for Progressing Infrastructure Development (RAPID) to advance major interregional infrastructure schemes.

He expressed great disappointment that RAPID did not receive attention in the debates and discussions over the summer around resilience and drought: “I have never seen a cooperation like that come together. There are 18 major schemes coming together that are interconnected transfers at scale.”

Cox will be among the headline speakers at the Utility Week Forum on 8-9 November in London. Find out more here.