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UTILITY WEEK | 20TH - 26TH MARCH 2015 | 7 Policy & Regulation Analysis T wo years ago, there were "howls of protest" (his words) when incoming Ofwat chairman Jonson Cox set out a vision for the water sector that included companies sharing financial pain and gain with customers, tightening up governance, and reforming regulation. This time round, at the packed Ideas Space in London's West- minster last week, the audience of chief executives, analysts and policymakers was more friendly, though once again, there were tough messages in store. Cox's speech deliberately echoed that of two years ago, in which he threw down the gauntlet to the industry with a six-point plan for reform. Twenty-four months later, what once looked radical has now become the common wisdom, as water companies focus on affordability and transparency throughout their businesses. But, as PR14 finally comes to an end (unless you're Bris- tol Water), the message is clear: "Reform isn't over. In fact, it's just beginning." In 2013, Cox focused on six areas of reform. Last week, there were seven: cus- tomers and affordability; the strategic role of information; regulated capital value (RCV) and indexation to the retail price index (RPI); vertical integration; service in a fragmented structure; mergers and consolidation; and managing the unexpected. First up were customers, service and affordability. The regulator's focus here has been clear throughout PR14 and, to bor- row Cox's words, "I don't need to say much more." He added: "I look forward to seeing significant differentiation in all services – a real frontier shi." Next on the agenda was the strategic role of information. From this summer, Ofwat will publish "a suite of data that enables third parties easily to see how the company is performing compared to its commitments". This information will also form the basis of Ofwat's decisions on enhanced status. On the "difficult issue" of the indexation of RCV to RPI, Cox indicated a determination to change, while acknowledging it would be hard: "Our industry is index-linked to RPI, which systematically over-counts inflation by up to 100 basis points above CPI (con- sumer price index). We recognise and are aware of the quantum of index-linked debt in the market. Financial markets are nothing if not adaptable but we realise that change may take some time, innovation and poten- tially 'grand-fathering' of some elements." On vertical integration too the mes- sage was clear: "The logic of vertical integration no longer works. The money investor in this sector seeks the asset base. The capital-intensive nature is largely con- fined to the network and treatment busi- nesses. It's very clear now that the argument which was decried by management two years ago, of retail separation, is catching on in water companies." Cox also looked forward to the further disaggregation of the value chain through upstream reform. He acknowledged that he had "started off sceptical", but now saw "we have to allow the innovation that results from having a choice of sources". He was careful to emphasise that the fragmentation of the value chain should not affect service: "We and companies need to think about how customers will be directed to get the quickest possible resolution in an area where different corporate entities will provide different parts of the service." On mergers and consolidation, Cox reiter- ated that Ofwat is open to such activity, but that the traditional model of putting two companies together to achieve efficiencies of scale would not be enough to satisfy the regulator. He said: "We're interested in differ- ent ideas. Why do water companies need to be water and wastewater companies? Would there be more efficiencies available by two companies putting together their water busi- nesses and their wastewater businesses as two separate entities?" Finally, Cox warned there would be unex- pected events in AMP6, as there were in AMP5. He said the regulator would strike a balance between reacting to events and pro- viding regulatory stability: "The overriding principle for us is the maintenance of trust and confidence in the sector. If we see unex- pected events that challenge the trust and legitimacy of the sector in a material way, we will continue to raise that with the industry." Throughout the speech and following question and answer session, Cox was care- ful to emphasise the importance of dialogue, and the continuity of his vision with Ofwat's strategy of maintaining "trust and confi- dence" in water, launched by chief executive Cathryn Ross at a similar gathering earlier this year. He reflected on the "Section 13 debacle" he had walked in on when joining Ofwat in 2013, when a lack of dialogue and trust caused a near-catastrophic breakdown in the relationship between the water com- panies and the regulator. There is no doubt that relations between the industry and the regulator have improved out of sight over the past two years, from breakdown to a solid working relationship. Still, the iron fist behind the velvet glove was quietly in evidence – Cox repeated several times: "Dialogue is not negotiation." This, like the reforms in his speech, did not come as a surprise, and as PR14 draws to a close, it's clear the real work has only just begun. Reform will run its course Ofwat chairman Jonson Cox made clear in a speech to water industry bosses last week that the process of reforming the industry had only just begun. Ellen Bennett reports. Cox sets the agenda Ofwat chairman Jonson Cox set out a seven- point agenda for the water sector: • Customers and affordability: "I don't need to say much more on this." • The strategic role of information: "We have a strategic role in making sure companies provide accurate and useful information for us and for all customers and stakeholders." • The indexation of regulated capital value to the retail price index: "We cannot continue to ignore the question of RPI." • Vertical integration: "The logic of vertical integration no longer works." • Service in a fragmented industry: "We mustn't lose customer confidence." • Mergers and consolidation: "We're inter- ested in different ideas." • Managing the unexpected: "The overrid- ing principle for us is the maintenance of trust and confidence in the sector."