Jonson Cox: Putting my head above the parapet

Jonson Cox will step down as chairman of Ofwat at the end of this month after a decade in the role. He talks to Utility Week about the challenges he has faced and the lessons learnt over this time – from Section 13 to the CMA appeals – as well as sharing his view on the shape of the next price control.

“Be brave,” muses Jonson Cox, the outgoing chairman of Ofwat, when asked if he has any advice for his successor. “It’s not easy, putting your head above the parapet. You do get shot at – but what I’ve learnt, is it just goes with territory.”

Brave is a good word to sum up Cox’s ten years at the helm of Ofwat. From the midst of the Section 13 debacle when he joined the water regulator, through the financial reform of the sector, the bruising Competition and Markets Authority (CMA) appeal and the current row over the state of UK rivers, Cox has never shied away from controversy. Some would say he’s even courted it – and we’ll ask him about that later. Today, Cox is in a reflective mood as he sits down with Utility Week at the regulator’s Bloomsbury office, recalling the reforms he’s achieved as well as the ones that got away and asking what’s next for the water industry as it shapes up for PR24.

First, let’s rewind ten years. Cox joined Ofwat in one of the most difficult periods of its history, with battle lines firmly drawn between the industry, its investors and the regulator. The ‘Section 13’ row was over the regulator’s attempted license modifications, and it was so cataclysmic that then-chancellor George Osborne found himself fielding personal calls from well-known international investors demanding he sort out this rogue regulator.

Into this febrile atmosphere stepped Cox, not an uncontroversial choice given his own background in the water sector (he’d been chief executive of Anglian Water and managing director of Yorkshire Water). He came under immediate pressure from the higher echelons of government and the City to make the ‘Ofwat problem’ go away – but he knew that capitulation could spell the end for the regulator.

“If I’d just done what everyone wanted me to do, I would have nuked Ofwat,” he recalls, straight talking as he looks to get his message across. Instead, he negotiated a compromise – “a sort of halfway settlement.” Regina Finn, the regulator’s unloved chief executive, departed shortly afterwards, leaving Cox with another tricky situation on his hands when a hole in the regulator’s finances sent him “cap in hand” to the water companies to raise the millions necessary to fund the PR14 price review . “You can only do that once,” he says wryly.

Cox set out his stall as a reforming chair from the very start. His view of the water sector was shaped by his own ringside seat as the industry went from public to private ownership, often diversifying beyond all sense and reason in the process. In 2008, at Anglian, he made headlines by pronouncing water companies should be boring. Does he still believe that? “Water companies of the past believed the sexy thing to do was to go off and buy water companies in other jurisdictions… I meant, they should focus on the regional franchises they had, and make the best of it, and do it calmly, quietly and reliably – and I still hold to that.”

A few months into post, in early 2013, he used a lecture at the Royal Academy of Engineering to set out a wide ranging programme of activity centering on six points: put briefly, customers, water resources, financial transparency, regulatory reform, less intrusive regulation, and stronger board leadership (see box below).

Cox is particularly proud of his record on customers. When he arrived in post, inflation had boosted companies’ values (shades of today), and water companies were seen by the City as assets where financial wizardry could yield high returns: “You could make so much more money out of thinking of it as a financial asset than you could out of thinking of it as operations – and I really wanted to get back to operations.” Cox drove this agenda hard, and points to a renewed focus on performance – performance commitments, ODIs, a clutch of eye watering fines – as evidence of success.

Tackling the real heart of investors

The environment also ranked highly among his six points – of which, more later – but perhaps the one closest to Cox’s heart, and most associated with his chairmanship, is financial resilience. Cox freely admits that his robust public pronouncements on financial resilience – by which he broadly means, not over-gearing the companies – have made him “very unpopular” over the years: “If I’m critical of myself, I should have gone harder and faster on the financing issue. If I’m more generous, I would say this is tackling the real heart of investors.” He points to the recent restructure of Southern Water, which bears Ofwat’s “fingerprints”, though it was conducted under the radar, as a success story. However, the job is far from finished: “There’s a couple [of water companies] who have got some way to go,” he says with careful significance. You fill in the blanks.

Cox has also been vocal on board leadership, firmly believing that investor representation on boards should be balanced with independent non executives. “Every chief executive was saying to me in 2012, this really is difficult, we have far too many people round the board table.” Under Cox’s guidance, companies have restructured their governance with a higher proportion of independent non executives, and Cox believes “there’s been a definite increase in the quality of non execs.”

From the start, Cox’s willingness to air the industry’s dirty laundry in public has proved controversial. In 2017, he made waves in Utility Week with a high-profile attack on Thames Water for failing to get its house in order – an attack that led to a management overhaul, the installation of well-respected industry grandee Ian Marchant as chairman and ultimately, arguably, the arrival of Sarah Bentley as chief executive and her subsequent programme of reform. But it’s a very different approach to the gentle whispers exchanged in the dusty corridors of power by which things more often get done.

Does he regret it? “The answer to that is around heat and light – how much has it achieved versus how much frustration has it caused?,” he replies, ever thoughtful. “It’s got issues on the table, it’s got them considered.” A long pause. “It comes at quite a high personal price. Anyone who wanted to have a dig at me has had a dig at me. That’s not been easy.”

Cox is the first to admit that his vigorous views and public pronouncements have made him “personally very unpopular” in some quarters. But by no means all. One senior Ofwat figure recalls the mission shaping Cox’s actions: “He was trying to bring about a fundamental change – to be a regulator that made a difference and pushed the sector. He was trying to reassert the legitimate authority [of the regulator], not just crank the handle.”

The former colleague remembers how Cox was “hugely generous with his time,” regardless of rank: “He’s non-hierarchical, willing to invest in people and their capability.” They acknowledge that Cox’s uncompromising approach can ruffle feathers: “He occupies a lot of space, but he delivers a lot.”

Cox’s real world knowledge of the water sector and its investors “crashed through the economic models”, says the former colleague, and enabled Ofwat to achieve something really quite unique – a sort of pre-emptive raft of pragmatic reform. Compare its performance to Ofgem over the same period and the consequences for the energy sector, hauled over the coals since then-Labour leader Ed Miliband’s seminal speech in 2013, and the water sector, which has escaped quite such heights of political attention, Jeremy Corbyn’s nationalisation agenda notwithstanding: “The industry needs a strong regulator – it got a strong regulator.”

Cox has been characteristically robust on the issue of river health – not high on the agenda when he came into post in 2012, it has become front of mind since the pandemic drove more people out into nature. Cox pronounces himself “shocked” at the scale of the problem, both at which the extent to which storm overflows, meant for occasional use, have actually been deployed; and the extent of unpermitted sewage discharges from wastewater treatment plants, which emerged last year. Fixing it will cost the industry billions, though Cox is “delighted” that some companies have “risen to it.” Continued pressure on the rest will follow.

The impact of the CMA appeals

Looking back at it all, perhaps the most difficult episode has been the highly public row with three major water companies – Anglian, Northumbrian and Yorkshire Water – which took the regulator’s PR19 settlement to the CMA (Bristol Water appealed too, but on a separate, and smaller, matter). The resultant year-long inquiry played out against the backdrop of the pandemic, and while the companies walked away with some gains including a 0.2% increase in their cost of capital, the episode was brutal all round.

Cox insists that the companies didn’t ‘win’ and is quick to point out that one of the gains, which saw two of the companies receive higher returns, was made only because the CMA had an additional year of data at its disposal which changed the outputs of the financial models: “The CMA upheld our cost models, it upheld our focus on performance commitments and ODIs. People will make a lot of that small increase in the cost of capital but that aside, our model was vindicated.”

That’s fighting talk, and industry observers mutter darkly that Cox and David Black, then acting and now permanent chief executive, took the whole appeal very personally. Did they? “The companies went into it imagining that we would just do a data dump to the CMA and would take no further part in it. Well, when you’re having your homework marked and you’re really interested to learn, of course you’re engaged. Of course we had to explain why we did what we did.”

We seem to have hit a nerve – “do I sound defensive?”. As he reflects, Cox recalls the peculiar difficulties of the timing of the appeal, in early 2020 as the pandemic struck: “You’d connect to people at home and they’d be sharing a room with the children either needing to be occupied or doing their school work. I can still visualise some of those calls.” Black, he says, did an amazing job of “holding [the team] all together,” and the little snatch of insight into the homes and families of Ofwat provides a glimpse of why it did, perhaps, feel personal.

Cox has words of praise for all three chief executives since Finn – Cathryn Ross, Rachel Fletcher and now Black. He speaks highly of Ofwat’s first director general, the renowned Sir Ian Byatt. Speaking to Utility Week, Byatt is scathing about the outcome of the CMA (the increase in the cost of capital was “a silly thing to do”) and has high praise for Cox: “I would rate him as a very good chairman of Ofwat – good for customers.” Byatt, no stranger to controversy in his own time at the helm, says Cox was “good at dealing with ministers, getting prices down, looking after customers,” and praises him for not being “frightened of the City.”

Looking ahead to PR24

It will take time for memories of the CMA appeal to fade, but all eyes are now firmly on PR24. Cox won’t be around to see this price review through, but will he offer any insight into what’s ahead? He comments early in the interview that one of the surprises of his time in post has been the relative lack of weight the non-listed water companies placed on the reputational benefits of enhanced status, and says now: “You’ll see further build towards the longer term, towards more incentives for really ambitious companies and even more weighting on operational and performance outcomes.”

Does water face its own version of the energy industry’s ‘trilemma’, balancing affordability, sustainability and resilience? “We have a four part-er, a quadrilemma,” exclaims Cox, leaning in and listing affordability; the need for investment in net zero, water resources, and cleaning up rivers; the ‘phenomenal’ impact of inflation on company values and subsequent need to maintain legitimacy; and environmental pressures, as public expectations around river health rise. “You can’t ignore affordability for customers because it goes to legitimacy, to how they think about you. You’ve clearly got to invest, you can’t ignore the environment. You’ve got to deliver all four of those things. And after all, why should it be easy, running a water company?”

And there it is – the question that sums up Cox’s time at Ofwat. He doesn’t believe it should be easy to run a monopoly water company, because he believes it’s a privilege and the companies should be driven, hard, to deliver for customers. Unusually for a regulator, this creed has been shaped by his own leadership in the regulated industry. It’s also an ethos he applies to himself – as he occasionally pauses and searches for the right words to recall painful times, it’s clear that his tenure at Ofwat has been far from easy. But even his detractors would admit that it’s been driven by principle. He’s lived up to his own advice – “be brave” – and left the water sector in better shape than he found it. Utility Week wouldn’t be surprised if he made a return to the sector one day, perhaps on the board of a forward-thinking water company  – though he dismisses the suggestion of any such move and pronounces himself looking forward to a break and to his new role as chairman of the Port of London Authority. We’re not convinced – he’ll be back one day. But until then, he’ll be missed.