Cox sets out five year vision for ‘diverse and differentiated’ water sector

Ofwat chairman Jonson Cox has set out a vision of vertical disaggregation, non-traditional consolidation and "de-consolidation", and an end to the indexation of Regulated Capital Value (RCV) to the Retail Price Index (RPI).

In a speech to a London audience yesterday, Cox reflected on the past two years and set out his agenda for the next five, following the recent conclusion of the price review. He looked forward to a more fragmented, diverse and differentiated water sector.

In reference to the upcoming opening of the water market to competition for non-household customers in April 2017, Cox said: “The logic of vertical integration no longer works.” 

He emphasised the importance of service delivery in a fragmented structure, and looked ahead to upstream reform.

Cox acknowledged that at this point in the regulatory cycle, speculation arises around mergers and acquisitions.

He indicated that Ofwat would be looking for more than efficiency savings if asked to approve any such activity, and said that size was not necessarily an indicator of efficiency. He called for more creative approaches to M&A, and speculated as to whether a merger between two companies of their wastewater businesses and, separately, their retail businesses might be a better model than a traditional, vertically integrated acquisition.

Cox said he was putting the controversial issue of whether companies’ RCVs should continue to be indexed to RPI “back on the table”. He pointed out that salaries and pensions are no longer linked to RPI, and suggested the industry and regulator would need to work with the investor community to find a new model.

Cox’s speech emphasised the importance of dialogue within the sector and with the regulator, and of Ofwat’s strategy of maintaining “trust and confidence” in water.

He reflected on the progress the water sector has made since he gave a speech setting out his vision of reform at the Royal Academy of Engineering in March 2013.