PN 04/13 Water industry should put customers and shareholders on an equal footing
Chairman of water regulator challenges the sector to be more open, transparent and to share gains with customers
Water companies should treat the interests of customers as at least as important as those of shareholders, according to Jonson Cox the recently appointed Chairman of the Water Services Regulation Authority (Ofwat).
In a lecture at the Royal Academy of Engineering, Mr Cox highlighted the growing pressures on customers, with the price of water going up at a time when household incomes have gone down. Jonson Cox – a former CEO of two water companies – was speaking publicly for the first time since his appointment in November 2012. His lecture followed a period of extensive discussions with customers, investors, companies and other groups.
Jonson Cox said:
“The last few years have been very kind to the owners of water companies, at a time when life is very challenging for customers. Cash distributions from water companies to shareholders in the first two years of AMP5 have been running at an annual rate of up to one-quarter of shareholders’ equity in the regulated water companies.
“In the context of this shareholder gain, I am surprised that companies have not taken more steps to recognise customers’ pain as bills go up. I think it is the right time to challenge Boards to put their customers’ concerns on at least an equal footing as their shareholders and over the rest of this AMP period.”
Looking forward to the next price review, Mr Cox emphasised that the water companies’ reputations and their legitimacy with their customers cannot be taken for granted. He also highlighted the perceived risks in some of the highly complex, highly leveraged, holding companies in the sector.
Jonson Cox continued:
“Public trust is vital to the water industry. Trust is hard-won and can easily be lost if companies lose the respect of their customers.
“I want us to move to a less intrusive form of regulation, but to do this we need to see strong, open leadership by the Boards of water companies, and their holding groups, in the interests of customers and the public as well as shareholders. It is a great shame that we have had to point out the disparity between the current returns enjoyed by owners and a tough time for customers. Balanced regulation is a two-way street.”
The lecture reflected Mr Cox’s initial observations on six priority areas to be addressed. He had found broad consensus that these six areas were those on which the regulator should focus.
Jonson Cox concluded by thanking customers, the water companies, debt and equity investors and other interested organisations for their constructive engagement since his appointment.
Chairman of the Water Services Regulation Authority (Ofwat), Jonson Cox, gave his lecture to an invited audience at the Royal Academy of Engineering on Tuesday 5 March.
Jonson Cox’s lecture highlighted six priorities for his tenure:
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 who want to achieve a less intrusive form of regulation, with greater incentives, in the next price review (PR14) in 2014.
Stronger board leadership and governance of water companies – and their holding companies – at least to the full standards of the UK Corporate Governance Code.
AMP 5 is the regulatory period 1 April 2010 to 31 March 2015. The water industry price control and investment periods run in five year Asset Management Periods.
Jonson Cox’s full lecture report “Observations on the regulation of the water sector” can be downloaded: http://www.ofwat.gov.uk/mediacentre/speeches/prs_spe20130305jcrae.pdf