Q72 The Chair: Good morning, and welcome to our witness, Jonson Cox, who has just finished a 10-year stint as chair of Ofwat and will share with us his insights to help this inquiry looking into some of the particular issues around Ofwat. We have been looking at the underinvestment in the infrastructure, which has led to significant spillages, and the weather over the last three months has rather pointed out the need for a more robust system whereby water could be moved around the country from places that have a lot to those that do not have very much. There is a significant requirement now for investment.

Perhaps we could just start off with that. You have had 10 years in the industry, and you will be well aware of the frustrations of the remit of the industry and the benefits of that remit. I think that, to the public, the industry has not functioned satisfactorily over the last decade. Why do you think that is? Are the powers of Ofwat sufficient to enable it to pursue its objectives? Are its objectives as well drawn up as they should be? It would be good to have your reflections on that question. Thank you.

Jonson Cox: Lord Hollick and members of the committee, good morning and thank you for inviting me to be here. I just need to say, as you are all well aware, that I am here in a personal capacity. If I occasionally slip into saying “we” when I refer to Ofwat, that is just a lapse because I have retired from Ofwat.

I will start then with your point about the powers and the duties of Ofwat. It is important to say that the powers were designed in the 1980s and have been amended since. Inevitably, and Ofwat is not the only organisation where this is the case, if you read them they sound a bit arcane. That is the language. But the view I have had throughout my tenure, and I expressed this to the Select Committee when I was appointed, is that the job Parliament gave me was a very simple one.

My simple mantra was that Ofwat is there to hold companies to account, in conjunction with other regulators, and we will come to that, to protect customers and consumers, to allow a rate of return that is sufficient to raise capital in the capital markets but no more than that, to compel the duty to invest that goes with holding a licence—if you hold the licence you have a duty to invest—and to meet both the long and the short-term needs of society and customers for clean water and a clean environment.

That may sound wordy. That is what I have regarded and have expressed many times as being the job, and I do not think I have ever been challenged on that.

The Chair: What stood in the way of you no doubt reaching the objectives that you had set and to pursue companies to achieve the statutory objectives in detail? What stood in the way of Ofwat being able to exercise its powers to significantly affect and improve the performance of the companies?

Jonson Cox: Forgive me if I disagree slightly with that premise, but I set out at the beginning of my tenure six key objectives that I wanted to see Ofwat achieve. They related to protecting customers and the environment, to the financial resilience and duty of the companies to maintain prudent capital structures, and to the need to evolve regulation. I will not go into all six of them.

Although I fully recognise the enormous frustration, disappointment and anger about, for instance, sewage in rivers, I would point to a number of material achievements. I could do them now or perhaps I can point to them as we go through.

The Chair: Let us do it that way. One area that I did just want to press you on is that the statutory objectives as an economic regulator set out in the 1991 Act require water companies properly to carry out their statutory function. The legislation would not have listed what those statutory functions are, but I presume Ofwat agreed those. Investment in the infrastructure, sewage spills and all those things must form part of that. I am interested in why, over the 10 years of your chairmanship, it was not possible to get the companies to do all that they should have been doing. Was the bar set too low by Ofwat?

Jonson Cox: I should have just indicated a context. There are the duties Ofwat has, which are expressed. There is also the licence, which Ofwat polices. We will come to this, but the licence controls corporate behaviour. I indicated, in fact in my first seven weeks in the job, that the licence was wholly inadequate, and I am very pleased that the Government gave us, at the end of last year, powers to simplify and improve changing licences. I am sure we will come to that when it comes to corporate behaviour.

As to the job, the regulation is unfortunately complex for this industry. The economic regulator, Ofwat, has the duties that are expressed, but please also recall—I do not think it is an issue today—that the protection of clean water is protected by the Drinking Water Inspectorate. Of course, environmental regulation, as in the holding company, setting the permits under which companies can both extract from the environment and discharge to the environment, is not Ofwat’s role. That is a role fulfilled by the Environment Agency. Clearly, I do not wish to point any fingers or do anything like that, but I am here speaking from my experience in Ofwat.

Q73 The Chair: One of the main issues is for you to balance the affordability of water to the consumer and the need to invest. Presumably that is one of the issues at the heart of your relationship with the water companies. How do you approach that? How do you see that and are you satisfied that the balance has been correctly struck?

Jonson Cox: Let us start with the duty to propose investment: what is needed to make sure the assets are robust and the service is robust sits with the companies. Bear in mind, particularly when we are talking about wastewater, these are big FTSE 100-scale or large FTSE 250-scale entities. Their duty is very clear: to maintain their assets and their service. They set out every five years to Ofwat but in the context of the long-term plans that they have to hold—Ofwat first required them to set out a 25-year plan back in 2008—what their investment and operational needs are to provide that service.

We do not operate a central planning economy; Ofwat is not there to scrutinise every single element of that. But Ofwat is there to assess whether those proposals are reasonable and, with the Environment Agency, to assess whether they meet what is required by the Environment Agency; and to ensure that the expenditure plans are efficient to deliver those outcomes. So we start with the companies setting out their plans.

I would also mention that every year the companies have to certify to Ofwat that they have the resources, the processes and the systems to fulfil those legal obligations. It is a very important provision that the world of regulation relies on from companies. Where there are failures—clearly we have seen a lot about that—where they relate to individual environmental failures it is for the Environment Agency to take those on, whether they are systemic or individual. Ofwat’s remit in relation to failure is that, if there is what I would call a systemic or a large-scale failure to fulfil a duty that you referred to, Ofwat has the powers to investigate. They are not criminal powers, but they are robust powers and they can lead to fines of up to 10% of turnover.

During my tenure in Ofwat we really upped the game on this enforcement. We brought two very large cases, one against Southern Water and one against Thames Water, and we fined the companies under our powers, or we imposed penalties—not all of it is a fine—of £126 million and £120 million respectively. Those are material and they focus the companies, and they are the sort of event that not least leads to major management change and potentially more.

I am sure we will get into the two different aspects of wastewater—storm overflows and wastewater treatment plants—which have different issues. When we became aware last October, and it was the first time we were really aware, that there was a major failing by most of the nine English and the two Welsh companies on wastewater treatment discharges, within one month of being made aware of that data, which is collected and policed by the Environment Agency although we got it through co-operation, we had announced serious enforcement action—that is, investigations—against five and then six of those large companies.

I cannot talk about those because I left the board of Ofwat in June, and anyway enforcement clearly is carried out in confidence until the outcome is known, but I would not want you to think there was any lack of rigorous enforcement against companies.

The Chair: At some stage it would be interesting to hear from you why it was only in the last year or so that this information became available.

Jonson Cox: Yes, I understand that.

The Chair: If you were to go back to the start of your term in office, you would probably want that on your desk on day one.

Jonson Cox: Absolutely. I cannot begin to describe how all of us in Ofwat felt last October when we were made aware of that data. I am sure, by the way, that that sentiment is shared by my colleagues in the Environment Agency, but certainly I can only speak for Ofwat. We were absolutely dismayed by that information and it galvanised very swift action.

I think the frustration from a public point of view is, of course, that the public do not see those enforcement cases until they come to a conclusion. An enforcement case can easily take two years. When I arrived in Ofwat, we had quite lengthy processes over enforcement. Those were largely not because of Ofwat failings; as you can imagine, these companies employ the very best of City solicitors to fight every step of the way. We sped up the process. I referred to cases that were, from memory, in the 2017 to 2018 period against those two companies. Those took several years to come to fruition, but they were rapid by most standards.

Baroness Taylor of Bolton: To follow up on that precise point, why were you not aware of information that is pretty critical to the proper operation of water companies in this country? Who was withholding this information? Who should have been telling you 10 or five years earlier? Clearly, the problem did not suddenly arise overnight.

Jonson Cox: This related to the operation of wastewater treatment works and there started to be a concern around 2015 about this. That is why at the time we as Ofwat funded the rollout of monitors in every company and every works over a certain size. Starting in 2015 it took a while for those to be implemented. Clearly, the technology and the requirement to report sat with the Environment Agency.

You could look at both regulators and say that they started the programme of rolling this out in 2015. Why did that data only suddenly become available in 2021? You can imagine that I have spent a lot of time thinking about that. I cannot avoid the conclusion that it was not quite a whistleblow, but it was put on the table as it became very clear that the rollout of these monitors was going to show very significant non-compliances with the regulations and permits relating to wastewater treatment works.

In my mind, there are two ways of approaching it, and I have thought about both. One is why we did not get data earlier. As I have said, Ofwat does not collect that data or normally receive it, but I praise the Environment Agency for sharing it with us rapidly when it had it. On the other hand, companies did not necessarily need these monitors to know that something was awry.

I have to come back to this: where does the legal obligation to meet a permit sit? It sits with the company. Did companies not know anything about this? I do not find that credible. I find it interesting that as the rollout reached a critical scale the data was put on the table.

I do not think it is for me to say why we did not have the data earlier, because the data normally does not go to Ofwat. What I can say is that, with regret for not having it earlier, as soon as we were aware of it we acted on a scale that we have never acted on before.

Q74 Lord Reay: Good morning, Mr Cox. Some witnesses to our committee have said that Ofwat has traditionally focused excessively on keeping bills down in its price reviews, at least partially due to the timing of the electoral cycle. Do you agree with this characterisation, and is there sufficient political cover for Ofwat to allow bill rises to fund sufficient investment to rectify the storm overflow problems and other infrastructure resilience issues?

Jonson Cox: I will have a go. Please remind me if I do not answer all parts of the question.

First, I would reject very strongly any suggestion that Ofwat, under my tenure, had an objective for bills that overrode other objectives. It categorically did not. I referred earlier to the balance of duties that I felt that I expressed in the job, and I believe we held to that very firmly.

Secondly, as to the electoral cycle, I cannot think of any moment where I felt that anything we did had any deference to electoral cycles. I cannot remember any moment where I or my officials came under any pressure from government to do anything. There were times early in my tenure—in 2013, 2014—when there was a lot of pressure about investment, but at the same time as the world became aware of the then energy crisis, which is clearly nothing by comparison to today, Ministers started talking about prices. At no point was there ever any direction to me, and nor did I ever feel lent on, to do one thing or the other.

I realise the problem we are in at the moment, but the UK model of independent regulation is very widely respected in the investment world. For all that investors and companies will protest loudly to Ministers and others about regulators when we do things they do not like, actually the investors behind them know that we are attracting some of the lowest cost of capital for investing in infrastructure because of the independence of the regime.

That is one part of your question. I would also like to deal with your point about investment. There are two drivers for investment on the part of the company. One is the absolute legitimate requirement to invest capital to improve the quality of services and to wholly support that. The second one, which we cannot ignore, is that companies are valued by their investors on the regulatory capital value, the asset base. The global attraction of the UK water industry has been so great over the last 15 years that investors are paying a premium to those values to acquire UK water. Those premiums continue today, even in the midst of having been accused of setting the lowest ever return to investors. In that sense, if you can put more investment on the balance sheet and then that company is worth some multiple of that, there is a driver there for investment that is not healthy, in my view. A lot of my focus over the last 10 years has been seeking to redress that.

My last point about investment and bills is that I cannot think of a single proposal put forward during the two price reviews I went through where a company put in a good, necessary investment scheme and Ofwat rejected it. I can think of moments where Ofwat said, “You could probably find a way of delivering that for a bit less”, but that is the proper job of making sure that things are done efficiently.

The only times I can think of where investment has been turned down is when the company has done a sloppy and poor job of justifying it. If I might give you an illustration of that and how we reacted, in the last price review in 2019 Thames Water put in—there is no other way to say it—a very poor quality plan, with investment that was just not properly justified or thought out. We turned that down, but we also said to Thames Water, “We’re convinced you need to be spending this and more in London. It’s just that you’ve not done the job that you should do as the largest company in the sector, of properly scoping those investment schemes. We’ll give you some money. It’ll come a year or two down the road, but meanwhile you have to produce a proper justification”. In that sense, yes, we did turn down one scheme, but we allocated the money and gave it a second chance at it. I know that over the last year or two we have progressively approved that.

It is a very easy jibe, is it not? If you are a company that has had your scheme questioned, qualified or, in the extreme case I have given you, turned down, it is terribly easy to say, “Ofwat’s just concerned about bills”.

There is one other reason why criticism might arise about bills. There is an old model of this industry, which probably goes back to before my time as a regulator but there were still elements of it, which is that companies say what they need, Ofwat gives it to them, it sets a few efficiency targets and off we go again. That completely diminishes the role of Ofwat.

I am sorry, I am slightly losing my way, but it is easy under that model.

Lord Reay: How challenging will it be for Ofwat to allow for bills to rise at a time of a cost of living crisis, given the significant amount of investment that is required to sort out the issues we have in the system?

Jonson Cox: Ofwat, under my tenure in the past, and I am sure it will in the future, has faced into what is needed to provide investment. It is not a political organisation. It does not react to, “We can’t do this investment because of bills”. That said, the point I want to make—sorry, this is the point I was making not very articulately before—is that on a number of occasions we have had to say to companies, “When you put forward your five-year plans, we need to see that you’ve taken into account what your customers think”. That means listening to customers about affordability. It means thinking about customers who are vulnerable, and we know that over half of water customers at some point in their life in a transitory sense are vulnerable.

That message could get misconstrued as, “Keep bills down”. That is not the point of it. The point is to say, “Customers pay the bills. They need to retain confidence in the system and in the company in order to pay those bills, so do not think you can just walk in the door and say “I need X billion of investment” and it will just automatically roll into bills. Think about what it means for customers and what your customers want, being very conscious the whole time of what should be paid by this generation and what should be paid by future generations.

Q75 Lord Reay: Regarding future planning, Ofwat has recognised the need for greater long-term planning than the five-year price review in its proposed methodology for the next price review, which encourages companies to set their business plans within a long-term delivery strategy over the next few decades. How important will this be to the price review process? Can this genuinely change the mindset of the companies and the regulator by incentivising true long-term investment rather than incremental changes over a five-year period?

Jonson Cox: I answer that by saying that it is vitally important, but also that I do not recognise that characterisation, which again I think is quite convenient for some companies to make, that Ofwat only looks in five-year periods. Many investment schemes in this industry, before now and in the future, go well over five years. It might take 10 to 15 years to go from there being a need to sort out a problem on a particular catchment through to implementing it all.

In fact, Ofwat sets out the requirement for companies to base their plans on a strategic statement from back in 2008. Two things have always been implicit. One is that the companies must base their plans on a long-term requirement. Secondly, there probably need to be true-ups or waymarks along the way, because needs, priorities, options and technologies change.

None the less, we recognised a couple of years ago that there was this criticism that people were not looking beyond five years. Although I disagreed with it, the important thing was to face into it. The way we faced into it was to set out a requirement that for the next review there is a strong, adaptive 25-year plan. I underline “adaptive”, because one of the learnings from the 2008 plan was that companies would set out a 25-year plan—as if any management could ever project with accuracy 25-year needs.

That is why, this time around, Ofwat has said that we want an adaptive plan, which is a bit like a scenario-planning exercise. What do you see as the ranges of outcomes? What are the no-regret decisions? How do you adapt and maybe qualify, change or modify the programme as you go through each five-year period?

Q76 Lord Reay: I have one final question. Over the summer there has been criticism over the lack of reservoirs commissioned since privatisation and the charge that Ofwat and its companies have an overreliance on groundwater supply. Is this criticism justified, and are the net zero commitments of the water companies, and indeed perhaps Ofwat, such that these days reservoirs are not encouraged due to the carbon footprint?

Jonson Cox: Where shall I start? When I came into the role in Ofwat I set out six core themes. One was environment, and the two key elements in my environmental challenge at the time—this was before I knew about the wastewater side—were long-term water resources for the country and net zero, or climate change adaptation as we knew it then.

We were very conscious that there were schemes going well back to Victorian era in the country where authorities back in the day, municipalities even back then, jointly invested in schemes that transferred water from one region to another. The Ladybower reservoirs in Derbyshire are well known; they feature a lot in photographs. Yorkshire has access to part of that water. We were aware that that trading of water between companies to make the best use of the fact that some parts of the country are drier and some are wetter was limited to 4% of water in supply and it had not changed at least in a generation, if not considerably longer.

That is why we determined that we needed to build many more transfers of water, which would allow us to optimise water, whether it is coming from groundwater sources, which tends to be more local reservoirs, or abstraction from rivers, that would have transfers across the country.

In 2018, we launched a programme that goes under the acronym of RAPID. It was led by Ofwat but in full conjunction with Defra, the Environment Agency and the Drinking Water Inspectorate. It called for major schemes to transfer water. I am really disappointed that that has received no attention this summer, because I have never seen regulatory co-operation like that come together as it did in a year. Right now, there are 18 major schemes in development across the country, which are interconnectors of supply between parts of the country. I will give the clerk a map I would love you to see, because it just demonstrates the scale of these transfers, each of which is in planning and each of which is very importantly using the model that we perfected, or introduced, with Tideway, and brings independent capital—that is, not through the incumbent water companies—into the industry. Perhaps I could ask that those are sent round.

Q77 Lord Burns: You talked about Ofwat’s independence from government, and I would like to explore the relationship between that independence and the Government’s strategic policy statement, where they set out some strategic priorities. Then there is the question of the language that is used as to whether this is compulsory or how far you have to take notice of them. Could you describe for us how that relationship works between the Government’s priorities and your independence, and how you deal with them, and particularly how you prioritise the priorities they say they have?

Jonson Cox: As you will know about our regulatory system, Ofwat has the most directive government intervention of any of the economic regulators in how it does its job through the strategic policy statement. We have had two of those since it was introduced, and they provide very strong guidance about the importance to Ministers and Parliament of what we do. They do not go into how you explicitly do the trade-off between investment, environment and customers, long and short term; they give guidance on it.

It would be wholly inappropriate to go any further than they do in that guidance, but equally I regard it as very strong guidance and very informative in the way, for instance, Ofwat set out its requirements for each five-year price review. I come back to the fact that I would hate to see it go further, because I know the benefits that this independent regulation model has brought to the UK, particularly expressed in the way—and this comes to customers’ bills ultimately—of attracting very low-cost capital to the sector, the independence.

Forgive me if I protest a bit about this, but it is the job of people who lead the regulators, chairs, non-executives, chief executives, to do those trade-offs, to think about them and to make them. They go well beyond any single and possibly any political horizon, any parliamentary term, because they are very long-term actions. The essence of the job, as in any field, of making those balanced decisions is being able to know the costs and the benefits of the trade-offs.

Lord Burns: When people say that they would like to see greater clarity about how the Government would like to prioritise things, you would describe that as beginning to go too far. When people say they would rather the Government say you must do certain things rather than you should, you regard that as also beginning to push too far.

Jonson Cox: Yes. From where I sit and where I have sat in the past, I find the SPS, the strategic policy statement, a very firm statement of priorities, and I believe that it is our job—mine, my board’s and my executive’s when I was in the post—to interpret that. I am entirely conscious the whole time that we are accountable to Parliament in doing that.

Lord Burns: What about the Government’s storm overflow discharge reduction plan? How do you see this working? Are the targets the right targets? Are they deliverable? Is it now giving the impression of catching up because of all the press it has had? Now, as an outsider, how would you describe this particular intervention and whether it will help?

Jonson Cox: I have re-read it since I left the job, since it was published [last month]. I think it does an excellent job of setting out all the multiple issues on storm overflows. I would summarise those as saying that it recognises that there are necessary safety release valves on a sewerage network, as on any network, that the performance of those has not had the attention—either in companies, I would suggest, or possibly by regulators—that is needed, and that we need to get down to a standard that is what the purpose of the storm overflow always was. The purpose was that it should operate at a time of extreme storm. That is what a storm overflow is.

Back in June I published an op-ed with Professor Chris Whitty and Emma Howard Boyd, setting out that we need to get back to storm overflows being what they were intended for. If we put a rough number on that, about 10 times a year would be consistent with that. The Government’s strategy, set out to us, calls to get to 20 in short order, and an ultimate objective of 10 seems right. I was also pleased to see it recognised that the storm overflow issue is not simply a question of investment. This is really important.

To my mind, there are three elements behind the problem that I observed and we have all observed this summer. The first one is that the Environment Agency gave me some data recently that suggested, on self-reporting—by only some companies, you may assume some had held back—that about 30% of the storm overflow issues were caused by poor maintenance of the sewer, so step one is maintenance of sewers. That is not about big investment. That is about doing the job that a company has been paid by its customers to do.

Step two is: has regulation of storm overflows—that is, the setting of the permits and the enforcement of permit breaches—been good enough? I think that we can probably draw our own conclusions there. The third element is, of course, that investment is needed in screening and to reduce the ingress of rainwater into the sewers, which is, after all, why sewers get surcharged. It is a three-part problem, and the strategy you referred to, Lord Burns, gets into all that rather well.

Lord Burns: The way you have described it, there are three sources of things that people have been concerned about a lot this summer. One is the way in which permits operate, because people think that there should be no permits at all and that we should be able to cope with it. Then there are the people who exceed their permits; and then there are the issues about the way the wastewater treatment works operate themselves and whether they are working efficiently. Maybe there are some other categories, but between these, where is the balance of the unrest? How far is the unrest to do with the fact that there are permits for overflows when public opinion is that there should not be that many permits? Or is the problem to do with the permits being exceeded?

Jonson Cox: As I am not and was not an environmental regulator, I am treading into an area I have more of an impression of than colleagues from the Environment Agency. My impression of the matter is that there are too many permits that need to be tightened. There needs to be a rigorous tightening of permits consistent with the targets set out in the storm overflow strategy. There is little doubt about that in my mind.

The second point is enforcement, and that relies on data. I sometimes think that our pollution control regime is far too much of an analogue system in a digital age, if you will forgive the analogy. I think there is a lot more to do. The data is not sufficiently collected and used. I would like to see complete, open data for all this, shining a better light on the data and making sure we use all the data that is there since we rolled out more meters and more event logging for these things. Use that data and hold companies to account.

On wastewater, I refer to that investigation we have ongoing. I do not know where that will get to, clearly, but if that shows that companies have been certifying to Ofwat that they have systems, processes and operations fit for purpose and if it shows that they clearly were not fit for purpose, that is not a bill that customers pick up. That is a bill for the companies and their investors to pick up.

Lord Burns: When you talk about the possible need for a more rigorous tightening of the permits, to what extent should Ofwat have been in the driving seat in identifying some of these and talking to the companies about what they should be doing? The way you described it earlier was that the proposals for investment came from the companies and Ofwat looked at them and decided whether they needed to be challenged and whether they were the right ones. If there really are too many permits in place, this will obviously require correction of one kind or another. To what extent should Ofwat play a positive or proactive role in identifying those and beginning to put pressure on the companies to deal with them?

Jonson Cox: There are two parts to my answer. First, Ofwat started to do that when it started, from 2015 onwards, rolling out the funding for the meters that the Environment Agency had prescribed, so in one sense it was on it.

Forgive me if I sound a little defensive here, but this is a very distributed system. There are however many thousand storm overflows and the nature of public policy towards regulation over the last 15 years has been to drive regulators to be more and more proportionate, to be lighter touch. If I am honest, were I doing the next price review—which I am not—I would no longer be so happy that we looked in aggregate at performance and relied on companies in terms of the investment schemes that they undertake. I think there will probably be a need for the regulator to become more granular, which, under the pressure of better regulation, et cetera, it had stepped away from. We have seen what the public have to say about that. That goes to the heart of what resources—

Lord Burns: Bills?

Jonson Cox: The cost of the regulator is a very small proportion of the bill; it is in second-order decimal points.

Lord Burns: I was more concerned with the cost of the proactive work that you might identify.

Jonson Cox: It is for a company. All good companies should have in place a system to know their own compliance. You cannot avoid the thought: on some of this storm overflow, did the companies know? They had a duty to report that.

The Chair: Lord Sharkey, you had a follow-up.

Q78 Lord Sharkey: Yes. You talked about the desirability of publishing data openly on critical aspects of the system, which most people would probably agree with. What are the barriers to doing that?

Jonson Cox: To making more data available?

Lord Sharkey: Yes, in a timely and comprehensive way.

Jonson Cox: There is some progress on that. Some companies agree. For several years Ofwat has been saying to companies that it needs them to endorse the principles of open data, making that data available. We have all seen how much action follows from data being available, not only to regulators but to the public. There are great things that citizen groups have done using that data, as well as regulators, to hold to account. In my mind, the barrier is the companies accepting that open data is a good thing. I think that some do and some do not.

Lord Sharkey: The question that obviously follows from that is: are there any powers to compel companies?

Jonson Cox: I am not in post now, as you know, but I imagine my colleagues are looking very carefully at that. I think we are now at the stage where we need to see that data being open and provided. I imagine—but please ask colleagues from the Environment Agency when you invite them—that they probably have the powers to do it more than Ofwat.

Lord Cromwell: Can I pick you up at the end of Lord Sharkey’s intervention before I come to my question? The Minister for Defra in the Lords told us yesterday that it had put a record investment into monitoring. With modern technology, that data should be available in real time to everybody.

Jonson Cox: I cannot disagree with you. I do not know the context of the Minister’s statement but, as far as I am concerned, an enormous amount of monitoring has been rolled out. The cost of monitoring goes down as the technology gets better. May I come back on that? I do not know the context of the question.

Q79 Lord Cromwell: Of course. It was a supplementary on a supplementary, so forgive me.

My own questions are in two parts, one about money and the other about co-ordination. First, on money, it is my understanding that the Victorian system put in effectively reached capacity in about 1960, and with the increased emphasis on environmental performance we are pretty much looking at a system renewal. Either way, whatever you call it, it is a massive investment. Can I invite you to put a number on the cost? There are all sorts of variant numbers. I wonder what your personal opinion is. How much money will be needed to get us to a system that works well for the next 50 years or so?

Jonson Cox: I do not carry a number in my head that I could give you. I am happy to come back and try to give you a better range, but I would need to refresh some stuff I have probably got slightly out of touch with.

Let me take your question about renewal. We all recognise the power and strength of what the Victorians did. Taking the water side of the business, I believe that in the privatised period we have already renewed 40% of all water mains. I put that number there to indicate how much investment has gone in to improve and grow the system. Talking about water, it is a little unfair to just think of it as a Victorian system. Huge investment has gone in and we have large programmes to replace lead pipes. I think your question is probably more targeted at the wastewater side.

Lord Cromwell: The system as a whole has to work and, clearly, allowing sewage to go into the water system has not been a great outcome. It was perhaps a temporary fix and became permanent. We are getting away from my question and I am conscious of time.

Jonson Cox: I cannot answer the question in money. On the wastewater side, the big worry I have about wastewater treatment works is the evidence we have now seen that companies are not meeting the permit standards to which those works should be built and operated. That will become clearer as Ofwat’s investigations unfold, and I am sure the Environment Agency is taking action on that too.

On the storm overflows, I see this as a threefold problem: much better attention to sewer maintenance; a more rigorous approach to enforcing permits, both making sure that they are up to date and enforcing them; and investment is particularly needed to stop rainwater getting into sewers. I think the storm overflow strategy is very strong on that point.

Lord Cromwell: Whatever this mystery number is, and I look forward to you coming back on it, we then come to the question of who pays it. I believe the water companies already have £57 billion of existing borrowing as at March this year. This figure was given to us yesterday. I know that a couple of them are supposed to have recently had the need for cash injections, and there are credit ratings issues around some of them. Will the water companies alone come up with the money? Can they raise it or will we have to be honest about this and say that public money will be needed to achieve whatever this mystery number turns out to be?

Jonson Cox: Can I address the question in two parts? First, can the capital markets come up with the money needed for future investment? In the second part I will come back to the companies that have driven themselves to have very weak capital structures.

The model we operate for private investment in the water system in this country is hugely attractive and continues to be attractive to private capital markets. There is a very large amount of pension money looking for a home around the world; I am talking about not just UK pension funds but global funds. Have a look at the model that we operate for water. The model has a definition of the asset base. There is an index-linked asset base, so it goes up with inflation, and we might come back to that point later in the current environment. The revenues are a guaranteed sum. They are adjusted for demand, so you have a fixed revenue. You have a regulatory regime that I believe looks to the long term but, most importantly from the investment point of view, has a five-year waymark agreement, so if something has gone wrong you can get it adjusted one way or the other. It has a sharing between customers and investors of overruns or savings, and it has the ability for what I will call a sensible level of dividend. Ofwat endorsed the number of about 4% of capital base as an annual dividend.

All that is a fantastic model for a pension fund looking for long-term investment. I see no shortage of private capital funds that will invest in that. I make the point that last year or the previous year we brought about what was christened by Moody’s, the credit rating agency, as a ‘virtual special administration’ of Southern Water. This is a company that was failing on many fronts, and we had given investors notice to put more money in or we would take control of the situation. In the end we worked to get new investors in and the departing investors left, having lost a very large share of their investment. The fact that we could bring very low-cost pension fund-backed money into a situation like that speaks enormously to the strength of the UK regulatory model to attract investment. In answer to your question, I have no doubt that the funds can be found. It does not need to go to the public purse.

Unless there are more questions on that, perhaps I can turn to the point about the weak capital structures on the credit ratings. There was a very long-standing mantra in Ofwat, well before my time, that capital structure was for the companies to determine. Ofwat regulated and set its prices and its obligations on companies on the basis of a prudent capital structure, which typically was somewhere around 40% equity and 60% debt, allowing companies to have a very resilient balance sheet. In the 2000s, investment banks began to realise that there was an opportunity to acquire the water company assets and to put significantly more leverage on to those capital structures.

I was not at Ofwat at that time. I have disagreed with that approach and I think it is very unfortunate that it happened. It led to a raft of public listed companies going private, and four of those were deals led by banks bringing in investors and led to very highly leveraged companies. That in itself brings many difficult consequences, but two that I will highlight. One is that it led to the predisposition of thinking of water companies as financial assets. I would think of a water company as a public service business, and if I take you back to the six core themes I set out when I started at Ofwat, probably the top one was to get companies back to operating their business properly rather than thinking as a financial asset. It is no surprise that of those highly leveraged structures, with one notable exception, three have run into real difficulties. That led to the action we took in my latter years in Ofwat to bring about significant reinvestment into companies.

It is very unfortunate that the regulatory world at the time allowed owners to take ownership of capital structure. The intention was good. I do not wish to dismiss the intention, which was that investors are best placed to set out an efficient capital structure. The problem with it is that the risks are not symmetrical. The upsides became very great because by putting leverage in, particularly the component of it that was fixed nominal debt, you leveraged up the equity returns and it went with some very complex organisational structures. Of course, the risk on the downside was essentially for customers or the public to bear, and that is why I am so glad that we pulled off the restructuring that we did of Southern and the recapitalisation at Thames announced on my last day in the job.

Lord Cromwell: My final point on this money area, because we are starting to get into the fundamentals of capitalism here, is that water is a good investment for a number of reasons. Our regulatory system is doubtless part of it, but it is also quasi-monopolies providing something that is essential to life itself, so it is likely to be a fairly solid investment area to get into. There are a range of attractions. My question is: how active have these investors and pension funds who have come in been in picking up the problems that have now emerged and require investment to deal with? I get the impression that perhaps they have not been.

Jonson Cox: I could give you a few good examples of where I think they have done the right thing, and I could give you some examples that I can only deplore. I note that there has been a rotation of capital. A lot of those early investments back in 2006 to 2008 were closed-end funds, meaning their time horizon is different from that of a long-term public utility. There has been a progressive rotation of those out, replaced by what I think of as genuine long-term pension money, and I welcome that. I regret that there are not more public listed companies because it gives real visibility, but I welcome the very long-term pension fund money that does not have a defined end point.

There is one point I feel I should probably mention to you. May I do this?

Lord Cromwell: As succinctly as you can, because I am trying my Chairman’s patience.

Jonson Cox: We have heard a lot this summer about two words, investment and dividends. They are not as linked as seems to be the case. The investment obligation on the companies is that once you hold the licence to a company, your obligation is to invest to fulfil what that company needs. If you do not, that is for Ofwat to enforce and we are seeing that happening. It is for regulators to set out the investment requirements.

The dividends are a choice of what a company does. You have to service capital; there is no doubt about that. When I first arrived in the job I was very concerned, on the back of a period of high inflation—which is very beneficial to water companies generally, and to their asset values—about the level of dividends. Within days—

Q80 Lord Cromwell: We will have to leave it there. It is certainly a fascinating subject that has had public attention, but it is not in my grasp at the moment. Can I ask you very briefly about the co-ordination side, which I said I would ask you about? There has been criticism of contradictory schemes from the Government. I wonder how that can be improved. I am thinking also about how agriculture and housing could be integrated. Do we need some sort of national water strategy from the Government to bring all this together, or is that too big a behemoth to manage?

Jonson Cox: Yes, I agree that there are societal issues. Of pollution in rivers, 45% is agriculture, 45% is water companies and the rest is a balance. Pollution from water companies is more serious because it contains faecal coliforms. The policy on that sits probably with the Environment Agency; it is not in Ofwat’s remit to deal with agricultural pollution. On housing, yes, there is a tension that emerges from time to time. New houses need more supplies of water. I think that is generally handled well in the long-term planning, but they impose more strains on wastewater treatment plants because a household has a right to discharge. That is why we have seen some planning authorities put in place net neutral nitrate requirements. We need to see more on that.

Among the criticisms sometimes made is: does Ofwat fund growth? The answer is: absolutely. It funds water companies to be able to grow. There is always a debate about what the target for growth is. We see big housing targets and sometimes they do not come about, and that is why it is funded with a true-up mechanism for what the growth is.

The Chair: You have made a very bullish case for investment in the water industry on a couple of occasions. Is it not a fact that there will be a bonanza as a result of inflation that will inflate the asset base? As you say, the debt side of the balance sheet is in nominal terms, and the return of 4% or whatever the companies are able to get on it will now be boosted by inflation.

Jonson Cox: I am worried about that. About a third of debt is index linked and goes up with inflation, but two-thirds is not, as an average across the sector. With that caveat about the debt, yes, inflation boosts the asset value.

The Chair: What can Ofwat do to temper that? If there is a windfall profit, could it possibly put a windfall penalty?

Jonson Cox: Over the last year I was in office, we did not have powers to change that but we started to raise that issue very strongly with companies. As you know, I left in June and inflation projections were not quite what they are now, but even with those projections I put forward an analysis at an industry conference that demonstrated the huge scale of asset value increase that would go with inflation. The chief executive at the time, who is still the chief executive, was very clear that companies needed to start thinking about how they would maintain their legitimacy with customers. Was there not a case for sharing some of that gain?

I am pleased to say that—again, in my tenure; there may have been more developments since—we had some wins on that. We had four companies agreeing to bring their storm overflow discharges down to 20 per annum by 2025. That was not with customers funding it; that was at their own initiative and in the context that inflation will be a big gain. It is a very big issue coming at the water sector over the next year or two: how it maintains its legitimacy in the face of a very material increase in capital values.

Baroness Bowles of Berkhamsted: Before I get on to my question, I would like to slightly go back to the point you made in reply to Lord Cromwell about how it was a good investment for pension funds. Do you know whether a lot of those investors were UK pension funds or whether it was largely funds from the more international market?

Jonson Cox: The interests that took English and Welsh water companies private off the stock market were almost exclusively international funds back when it happened in 2006 to 2008, with a very heavy concentration of Australian and Canadian but many other nationalities too. I think it would be fair to say that UK pension funds were slow off the mark to see the investment opportunity in UK infrastructure such as that. That has changed, and I am pleased to see increasing investment by UK pension funds. Probably the most noticeable one, if it will forgive me raising it, is the Universities pension fund, which took a big tranche of Thames in 2017 and has since increased its exposure.

Q81 Baroness Bowles of Berkhamsted: Thank you. I am pleased to hear that, because we also hear a lot of comments on UK regulation sometimes making it all so difficult for pension funds to invest in such assets.

Moving on, what I am supposed to be asking about is ensuring the future water supply, not least due to climate change, which has been highlighted by recent drought declarations in parts of the country, although we have had that in the past as well. What sort of strategic solutions are needed to ensure the future water supply and to what extent do these need to be driven by the Government, Ofwat and other regulators?

Jonson Cox: The solution to our water resources needs has both a demand and a supply aspect to it. The supply side is what I referred to earlier, creating much greater interconnectivity between companies. I referred—I realise you cannot see them, but there are copies here for anyone who would like one—to our 18 schemes under development to transfer water, essentially, north to south, whether it is within a region or within parts of the country, east to west, et cetera. I think those big schemes have been, if you will allow me to say so, a triumph of the regulators and Defra working together to put that programme together. Those schemes will certainly be open to other capital than the owners of water companies. That is the supply side, and I am really encouraged by that.

Of course, I am absolutely dismayed that those schemes were not in place for this summer. One has to say that. But the encouragement is that they are under very active, rapid development, if you will excuse the pun on the programme called RAPID.

On the demand side, there are two aspects. One is that we know and have seen a lot about leakage. Clearly, the industry has to up its game on leakage. In 2018, at Ofwat, we were very worried that performance on leakage was not improving. In earlier periods it had improved, but it was flatlining. I have to say that there was vigorous protest about this, but we set out a challenge for every company to reach between 15% and 20%. The good news is that as of today about three-quarters of companies, according to my latest information, are on track with those targets. What I hope they are saying and expect to see them saying is, “Wow, we have surprised ourselves with what we can do there. We can go much further.” Maybe we will come back to upping the ante on that. Clearly, there is further to go on leakage and those who are behind, to the extent that they are not meeting the standards, have to pay for this leakage.

The second side is that we have to help customers, and I deliberately use the words “help customers”. Companies hold the relationship with their customers. They have to help customers to reduce the amount they consume, clearly without affecting their standard of living. This comes down to water efficiency and how you use water in the home. In the last price review, Ofwat set targets for reducing the per-capita consumption. From memory, the average at the time was 141 litres a day. I think the strongest target is on Affinity Water, which wraps around the north of London from Essex towards Middlesex, and that target—from memory, again—was a 13% reduction in per-capita demand.

Those are the collective ways of addressing water scarcity and water resources for customers.

Baroness Bowles of Berkhamsted: I am very interested in what you have already mentioned about the action taken to encourage more water transfers. Was that becoming possible—it was not in place this year—only because of regulatory intervention? How difficult is it to get the companies to work together to do that? Do they have to be instructed to do it?

Jonson Cox: Working as a regulator, you sometimes wear different hats. You wear a hat that is compulsion, when you have the opportunity under your powers to compel something, and sometimes you have to work under coercion or encouragement. Not long after I arrived, we started on collaborative work with companies about how to transfer water across the country. Some were more enthusiastic and some were less so. Some schemes started to come out of that and some improvements were made. Then—I am sorry if I repeat myself on this—I think it was a real success of the public sector, Ofwat, the Environment Agency and Defra working together, to put together this scheme that goes under the acronym RAPID. A lot of work in the previous five years has fed into that, which I think is why, within a year of setting that up, we have 18 schemes under development.

Baroness Bowles of Berkhamsted: It needed the regulatory intervention; that is quite obvious. I accept everything you say about working together and it being a triumph in that sense, but the companies themselves did not look around and think, “Can we co-operate and do stuff?”. They do not have that incentive to co-operate of their own volition.

Jonson Cox: Many companies would talk about the need to have more transfer of water. No one would deny that. The difficulty comes when you ask the company to give up some of its headroom in its water resources for the benefit of another company. That is never a very popular move and we can understand why that would be the case. That is why the joint action of regulators in this case— supported by industry I want to say as there was no opposition from the companies to it—was so important, to put it on a different footing.

This is the importance of opening it up to other investment. The companies have to help design this and they are very actively doing so, but the importance of opening it up to other investment is that you are not giving a company a lock in saying, “I can’t fund this”. Instead, we will put this out to competition in accordance with both Ofwat’s wishes and the government drive to make sure that all big infrastructure is opened up to competition in the way we opened up Thames Tideway to competition.

Baroness Bowles of Berkhamsted: Yes, I get that and I get the additional investment possibilities. From a commercial standpoint, the companies perhaps need some kind of protection, which they get by the regulatory encouragement route, from what otherwise might come back on them if they took their headroom down too far but for the best of reasons.

Going back to the actual water supply, I understand everything you said about trying to reduce the per-capita consumption and all those kinds of things, but is there actually a need for more water sources? Do we have enough water and we just need to move it around better and, yes, be more careful, stop leaks and watch consumption, or do we need more sources because of an increasing population? Everyone talks about personal use; there are more and more things encouraging use. We probably do a lot more washing than we used to do many years ago, and all that kind of thing.

Jonson Cox: My answer is more of an evolving one. I do not know absolutely whether we need more water resources ultimately. What I do know is that we can get an awfully long way by the sharing of resources and by some new infrastructure. For instance, in the last price review we funded a new reservoir that is being built down on the south coast, which will transfer water from north of Portsmouth across into the south coast.

Yes, there is a need for some new resources. There is optionality work going on on a new reservoir in the Thames region. Anglian is developing new options for reservoirs. All that work is going on but it must be balanced by also saying, “How much further can we get with what we have?”. It also, of course, has to be seen in the context of other competing demand for water, which, probably most notably, is agricultural demand for water for irrigation.

Baroness Bowles of Berkhamsted: Indeed, and if we want to be more self-sustaining in food, that has to increase. I take it that means that we have to plan to increase resources as well.

Jonson Cox: Yes.

Baroness Bowles of Berkhamsted: There is perhaps not quite enough emphasis on that.

Jonson Cox: We have to pursue all those options—more resources, better use of what we have, and balancing demand for water—and see where that gets us to. I encourage you to put that question to colleagues from the Environment Agency. Abstraction from water is their responsibility. I feel encouraged that, although I only wish these things had been on stream for this summer, they are in development.

Baroness Bowles of Berkhamsted: Yes. You can get water in ways other than abstraction.

Q82 Lord Eatwell: First of all, I apologise for being late. I was stuck in a Tube tunnel for about 25 minutes so I have turned up with a rather jaundiced view of public service companies. I want to ask a general question and then come to the issue of competition in Thames Tideway.

The general issue that has come to my mind, listening to you, is that you have said several times what a great success this model of independent regulation has been in attracting capital, but I must say that attracting capital when you have government-backed 4% real does not seem to me to be very hard. The point I would like to challenge is that there is great dissatisfaction, as we all know, and if there is great dissatisfaction, maybe this regulatory system does not work. Maybe it is actually a rather poor way of organising effective monopolies providing a resource that everybody needs. It is not clear to me that the regulatory system we have put in place for this sort of institution, where competition is limited—as compared with, say, financial regulation, where you have competition for almost every single asset and every single service provided—is necessarily a very good one. You said it has attracted capital; as I said, with 4% government-backed real, it does not seem to me to be very hard.

The other aspect that was raised just now—and I will get on the question that I was intending to ask—is about competition.

Jonson Cox: Can I pick up the first point before we get—

Lord Eatwell: All right, yes.

Jonson Cox: I am not sure I recognise the 4% government-backed real that you mention.

Lord Eatwell: Well, this is a utility that is regulated by the public, by a public sector company, namely Ofwat. It is allowed to have a dividend rate of 4%, you told us. Its assets inflate at the rate of inflation, which gives us 4% real. That seems to me to be an extremely good deal. It is a very nice, safe deal. No wonder pension fund money is pouring into it. I am surprised it does not have more.

Jonson Cox: I am finding it quite difficult to answer your question, because I am very conscious that I do not want to sound defensive and I am also no longer the regulator.

Lord Eatwell: It is the concept of regulation as a whole rather than the specific one.

Jonson Cox: On the concept of it, I said earlier that one of the things I was very keen to do, and I believe we made immense progress on, was to get away from companies simply taking a financial return for owning the asset. The way we have done that over the last two price reviews for which I was responsible, with my colleagues, is that we introduced performance commitments. The driving force was that if you have the privilege of owning this monopoly—I am sure you agree with me that it is a privilege to own it—you will earn your return not just because you own it but by proving that you make it work. We started off in 2014, and then again in 2019, setting performance commitments that effectively meant you could earn or lose about half your return.

Lord Eatwell: Does that include investment commitments?

Jonson Cox: The investment is an incentive regime. You are targeted to do better than what you have. Ofwat’s job is to set it at an efficient level. I was more concerned here with the operation of the business. Some of the performance commitments, to be fair, go to investment, but most of them go to how you operate that business.

The great thing about having 17 companies on water and 11 companies on waste is the comparative competition. You define, in regulatory terms, what is known as the frontier. What can the best do? The way it works is that if you move the frontier forward and you do better, you earn a reward for doing that because you are setting a new standard for everyone else to follow. If you are behind the frontier you have to pay, as the investor, to get your company up to the level that is required. Then you might earn a return.

In my view—perhaps you would say that I would say this—that performance regime, which is new over the last two price reviews, has really driven the focus back to operating the business. I referred to the restructuring of Southern earlier. I was very pleased that the deal on which we allowed that new investment in was very clear that return would be made only by making that company operate for its customers.

Lord Eatwell: I raise the issue of investment because you talked before about declining investment plans if they were badly put together. I did not hear whether you said, “The overall investment level is inadequate. Come back and tell us you will do more.”

Jonson Cox: If an individual scheme is badly put together—

Lord Eatwell: Yes, you turn it down.

Jonson Cox: Because it is an incentive regime, not only does it get turned down; if you have to, as it were, go back and do your homework again, you get a less attractive deal for the next five years than if you did a really good plan first time. The whole focus of regulation within Ofwat has been to get the company to own its plan—it owns the asset—and put its best foot forward with a really well-justified plan. You give incentives for doing that, but you match those with some pretty draconian penalties for companies that do not do a good job of doing that.

Q83 Lord Eatwell: Thank you. Now, with respect to competition, you talked about Thames Tideway just now and I would like it if you could tell us whether this is, in some way, a lead example of a way in which more competition could be introduced into the industry. It is quite obvious that there is competition between civil engineering contractors when companies hire them to do things, but how is the Thames Tideway approach changing the competitive relationship between the water companies? Or is it not, really?

Jonson Cox: It is a fantastic example of what can be done. Let me explain. It came into existence because, before its time, Thames Water would have both the obligation to effectively treat the Thames Valley waste and the right to build it. We looked at this and said, “Thames Water is not a well-performing company. We are not satisfied that it can do it. We would like to bring some competition to this.” We now see everyone calling for competition in infrastructure assets in the same way. “Let’s see what happens if we take that out, create that as a separate scheme and a separate company, and bid the investment for it separately.”

There were some very difficult battles with the then owners and management of Thames about it, but I have to say that we prevailed and took it to the market. All the plans were designed for it. It was bid for. We ended up with fewer consortia than we had hoped, but we ended up with two consortia and the level of bidding between them was so ferocious that we went to a third round, which had never been foreseen. We got to a cost of capital for construction that was about half the then level for the water industry. It was lower than anyone had believed it would get to. In terms of the financial cost of it, that went from numbers that were being talked about when it was designed of £80 per customer in the Thames Valley, down to about £20 per customer. That was great.

Then it in turn created the competition of three consortia of contractors. It is being built by three different consortia in the west, central and east sections. It is £4 billion, with a Covid delay that is completely understandable of about nine months and, in cost terms, a relatively modest, small adjustment for Covid. It is a fantastic success, and it showed us what could be done if you took big pieces of infrastructure out and said, “We will have someone focused on this and investors who understand this.”

Just as a footnote, the interesting bit was that we went to the investment market before we started and said, “Do you want a 30-year PPP to build this or would you like the utility model of regulation?”. The answer was convincingly, “We would like the utility model of regulation”. Clearly, we all slightly touch wood because I think we have 14 months to go until operation, T-14, but it is going very well.

Now, what can we do? What has that model taught us? Because it was so unheard of, that model benefited from a government underpin. You can imagine that tunnelling under the Thames created worry. We are nowhere near that government underpin being called. One can never say never, but it is a long way away at the moment. What it has taught us is that there is a demand for this.

In the last price review, for all investments over a certain size, we called for water companies to put forward why those should not be done under independent investment. The biggest one under development at the moment is the refurbishment of an aqueduct from the Lake District down to Manchester. It is about £1 billion. I commend United Utilities on the work it has done to be open to doing that. That is out in the market at the moment, being bid for. All those water transfer schemes I mentioned will all be subject to—

Lord Eatwell: This is infrastructure construction and the funding of that; it is not the ongoing operation.

Jonson Cox: No. By and large, in my experience, the model lends itself to building—I do not know what word you would use for it—a sort of passive asset. The super sewer under the Thames is not, as it were, an active asset. It is used as a very large storage for overflows. The operation of it will go to the incumbent water company because, if we take the London case, it needs to be integrated into its operations. I am confident that it will find even more opportunities out of that than were in the original case.

Lord Eatwell: I see. Thank you.

Jonson Cox: I am sorry if it was a rather lengthy answer.

Lord Eatwell: No, it was very helpful. Thank you.

Baroness Donaghy: Earlier on, Lord Cromwell teased out the issue about financial leveraging. I will not go into a lot of detail about that as it has been covered, but you indicated that when Southern was restructured, some investors lost a large share of the investment. Of course, we have had similar experiences. You said yourself that Thames Water was not a well-run company at the time you were dealing with the Tideway issue. It is no coincidence that Macquarie Bank had an involvement in both those companies. It may be that the investors lost a lot of money at that stage, but surely they made zillions before that. I am only sorry that you did not take over your Ofwat job 10 years before you did, because your pressure may have changed the outrageous behaviour of some of those companies at the time. Would you say that, overall, they did not lose very much because they had already made their fortune?

Jonson Cox: I am very conscious that I am not here as a spokesperson for Macquarie Bank or any other investor. I probably have to be a little careful what I say, but let me have a go.

In relation to Thames, yes, I was appalled at the performance of Thames under that private ownership. I did something that I do not think any regulator had ever done before, and I got a lot of criticism from the investment community and some from the regulatory community: I published a piece calling time and saying publicly, “These are the five changes we need in Thames”. Clearly, part of that was, at that time, the exit of Macquarie from Thames.

Let me be frank. When we looked at Southern, the investors in Southern were JPMorgan, UBS, the Swiss bank, and Hermes, the BT pension fund. Of course, with the first two, it was not their money; it was money they were managing for others. They are the funds that have lost a very large share of their investment. I cannot give you the numbers, because anything I know is commercially confidential. To my mind, it was a very important message: if you do not run an asset well, you will lose a big part of your investment.

I have to be a bit frank here. When we then brought about, with the assistance of the owners, an auction to bring £1 billion of new capital into Southern—and there was a competitive auction—you can imagine that there was a little bit of an issue in my mind that the top bidder for that was a Macquarie fund. I cannot hide that issue. It knows that and the world knows. The question was, “What do we do here, with that reputation?”.

What was very clear, fortunately, was that it had recognised that the way in which Thames had been run was not making it welcome and that there needed to be a difference of approach. It was by far the bidder with the best terms that brought the most into the company. In very long and difficult negotiations, we set out—it is an exchange of very detailed letters, which I made public—the terms on which it was bringing this investment into Southern. The terms are explicitly clear, learning from the past, and it has accepted them and worked with them. In fact, to give it credit, it has come up with a few ideas that others have not thought of. It will make a return out of that investment only if it makes that business succeed, and we have all seen the difficulties that business faces.

That is how we have approached that one. I hope that answers the question.

Q84 Baroness Donaghy: Thank you. Given the fact that water companies are monopoly providers, would you say that they should be held to a higher standard? How do you get the balance right for attracting investment? It has been indicated that money is pouring into this, including pension funds, but there has to be a balance, does there not?

Is there sufficient co-operation between an Environment Agency that has been slashed to ribbons and Ofwat? Are there any gaps between the workings of those two organisations that have made that balance more difficult?

Jonson Cox: I took three points from that; I will address them in turn. The first was: if you are a public utility under private ownership, should you be held to a higher standard than other businesses? Categorically, yes, and I have been vocal over 10 years on that issue. I have been very clear that a standard of behaviour is required.

Some of the most interesting things we have done with water companies have been using not the economic powers, the terms, but changing the way they behave. One of the things I did that caused the most anger on the part of some investors and some companies was that in 2014 I brought in a board leadership code that said, “You are a public utility. You have to win the confidence of the public and your customers that you can run a monopoly. You need to govern it in an appropriate way.” We brought in standards that were a bit of an adaptation of the UK’s leading code then, and that included independence of chair, independence of remuneration committee, independence of audit, et cetera. We brought that in. We started to see an increase in quality of boards.

Then in about 2018 we put that in the licences. I am really pleased that the Government have now given Ofwat a simpler way of changing licences so that Ofwat does not have to get the agreement of every company before it can change a licence. That was unacceptable. In my mind, that licence was a much-neglected aspect of regulation beforehand because how monopolies behave is really important.

I may have dealt with the second point you raised, about private capital.

Baroness Donaghy: Yes. It is a balance between the attractiveness of investment into the industry and the obligations of a monopoly provider. Who gets that balance right, and are there gaps between the Environment Agency and Ofwat that would make that difficult?

Jonson Cox: I will come to the Ofwat/EA one. To my mind, the absolute heart of the job of being chair of a regulator board—and I am really pleased with the calibre of board that I was able to build at Ofwat—is wrestling, the whole time, with those questions. Are we being demanding enough? Are we setting stretching enough performance? Are we going too far? Are we at risk of being soft? There is no perfect answer to it. You wrestle with it. You spend hours and hours, as chair of a regulator, working that and testing it with your colleagues.

If you want an assurance as to whether we got it right, four companies decided to appeal against the price review in 2019, which concluded in December 2019. They appealed on the basis that the performance targets we were setting were too demanding and that we were not allowing a high enough profit return to the companies. They embarked on a process that was a year-long appeal to the Competition and Markets Authority. That is not something that anyone would do lightly. It was a bruising process and a bruising test of whether we had got it right.

The Competition and Markets Authority disagreed with Ofwat and said that the companies should have a slightly higher profit margin—I happen to disagree with that, but that is its right to decide—but the methodology, the way Ofwat approached its job of setting performance targets, was found to be absolutely upheld. That, for me, was the acid test. In 30 years one big company had appealed a regulator—in 1994, so a long time ago. There had never been an appeal like that. That was a real test. Had we gone too far in setting the balance? I am really delighted that, for the most part, everything Ofwat had done was upheld.

Baroness Donaghy: Is it not very tempting anyway to lawyer up and see whether you can test the system?

Jonson Cox: It is completely brutal, and clearly Ofwat, as a public authority, does not have the right to go and hire magic circle law firms. It is brutal. That characterises not just what happens in an appeal but the whole decision-making.

You hear a lot about regulators needing to be evidence based, and I do not dispute the importance of evidence, but of equal importance is judgment. As you go through any regulatory process or price review, you will be bombarded with very expensive advice from lawyers and any sort of advisers at a level where you would never get the job done if you dwelt on all that. You need the ability to look at that and use your own judgment. The thing I am most frightened about for the regulatory system is if it loses the ability to make those judgments. That is when you look at what is put in front of you and you use your own business and governmental experience, and you have a board with a wide range of skills to say, “What do we think is the right thing to do?”.

You asked me about the EA and Ofwat. If we go back, the system was originally very simply set up. The EA or its predecessor determined what the standards were, and it was often said that Ofwat was there to fund those. I am pleased to say that in recent years, between me and the chair of the EA, Emma Howard Boyd, and among our executives there has been a much greater degree of co-operation. But I cannot deny that this summer, and our experience over the wastewater investigations I have described, have shown that there needs to be a better-defined system about environmental regulation, pollution control and holding to account. I cannot deny that. I imagine that my successor in Ofwat and the new chair of the EA will be having discussions about how to make sure that Ofwat is formally provided with all data about the performance of companies, which will be helped if all that data becomes open data and is in the public domain.

Q85 Baroness Donaghy: Thank you very much for that. I have a final question about Welsh Water, because it has a different financial model. Would you say that running it as a not-for-profit company, with profits reinvested for the benefits of consumers, is a better system than one that pays out dividends to shareholders?

Jonson Cox: In answering that, I am very conscious that sitting next to you is the founder of the Welsh Water model. It was an absolutely fantastic creation at the time, out of a very difficult situation where the owning company of Welsh Water was bust shortly after the dotcom boom. It is a great creation. On the face of it, what is not to like about it?

I am sure Lord Burns will come back at me if he wants to challenge me on this, but I do worry. It is a well-performing company, not an outstanding-performing company. What worries me is that there is a really important role for equity and the equity owner in a company in making that company perform. I worry a little about what happens in the absence of a strong equity owner, because I think the ownership by customers in Wales is represented by a board of about 60. I worry that that is a limitation on doing the best thing for the company. I know that might seem at odds with some of the other comments about investors. I pay tribute to what was designed then; I do not see it as a model of general application.

Q86 Baroness Taylor of Bolton: In less than 15 minutes there will be another Urgent Question in the House of Commons on sewage pollution. It is just up on the screen there. That is a response to the level of public concern about these issues, this summer in particular.

When water was privatised, one of the themes that the Government put forward was that this new system was going to make the polluter pay. That was one of the themes throughout. You have mentioned a couple of examples of very heavy fines, but do you not think that many of the water companies regard fines or slaps on the wrist as part of the price of business?

Jonson Cox: I do not want to say anything that suggests that I am not aware of the level of public anger about the failures in river pollution. I am completely there with that.

It might well be the case that fines used to be seen as a cost of business. Ofwat does not technically fine but it imposes big penalties, most of which goes to customers and a little to the Treasury. If you look at the ones we brought about under my tenure in Ofwat, those are “focus the mind” levels of fine. If you look at the latest big prosecution by the EA, also of Southern Water, which was a £90 million fine, those fines or the Ofwat penalties are ones that not only call for a rapid and immediate clear-out of management but, as you have seen, can be the tipping point to a change of ownership of the company. I think the system is responding to that.

Speaking from an Ofwat perspective, the balance is always what you do with the money you penalise the companies with. You obviously require the companies on their own—their shareholders—to put right what is wrong. That is not something for customers to pay for. Then you either return money to customers or put further money into the environment, and which to do is an interesting balance.

Baroness Taylor of Bolton: The Environment Agency would go a bit further. It says that there should be contemplation of prison sentences for directors and that directors should be struck off if you get to such dire circumstances as we have seen recently.

Jonson Cox: I am well aware. I have discussed that several times with the Environment Agency. It can make that statement because it has criminal powers. Ofwat does not have criminal powers.

Baroness Taylor of Bolton: You have a personal opinion as well now. You are not wearing the Ofwat hat.

Jonson Cox: As I emphasised at the beginning, this is a personal opinion. I look at this question of liability in the same way as I look at safety legislation. I have spent most of my life running safety-critical businesses—water is a safety-critical business, among many others—and I am not sure that threatening jail sentences is an effective way forward if you are the “guiding mind” in the company, which is recognised in safety legislation, and have run that company and set up a proper system of management, a proper safety approach and an approach that manages risks effectively. However, if as the “guiding mind” in that company you have wilfully done something that has caused that company to have a major breach of its lawful duties, woe betide you. That is my personal answer to the Environment Agency. I understand where it is coming from.

In the Southern Water case you get to a fine through the courts of about £1.8 million per incident. That has certainly set a benchmark that people should think about. While I was at Ofwat we intervened with remuneration committees. We had a number of instances in which, dissatisfied about a company’s approach to remuneration, we would call in the remuneration committee chair and say, “This is not meeting what the public expect; how do you answer that?”. Were I there, I would encourage it to think about going further on that. I hope my ramble answers a personal point of view on where I stand. Yes, there is significant liability and it needs to be felt.

Baroness Taylor of Bolton: When you were talking about Southern Water, you said it had been described that you had virtual special administrative powers.

Jonson Cox: Would you like me to explain that?

Baroness Taylor of Bolton: No, I think we understood where you were coming from, but that was one very specific, serious case and Thames has been another one. Do you anticipate that that kind of action will be needed more in the future, and do you think that there is more of a role for making the licences that the companies have up for grabs and more competitive?

Jonson Cox: There are two points. On the financially overstretched companies—I believe I was public about this at the time, when I was in Ofwat—of the four big, highly leveraged wastewater consortia, three worried me and one did not, because it took action proactively. I have indicated what we did with Southern and what we achieved with Thames. There is one more in the Ofwat documentation whose financial structure it has concerns about, and I am sure it will address that. I cannot speak to that because I am not there any more.

As I said in answer to the Baroness’s question, I think the licence powers were underused by regulators. Clearly, there are things that I wish we had got further ahead with regarding the initiatives, but a lot of my initiatives as chair of the regulator were about changing behaviour. The licence is there to control behaviour, and it is an asset. Originally—I think I have this right—it was a 25-year licence that could then be removed or reviewed at 10 years. The Government relaxed that in the early 2000s. It is a great shame. You do not want to be able to remove licences instantly, but as a regulator it would be much easier if there was a more competitive process for licences. That would help. I am not sure that the current problems right now are best answered by lots of looking at duties and licences. I think there is a much simpler way forward, which I will probably come to.

Lord Sharkey: I think the water industry has performed extremely poorly on certain environmental issues, such as the storm overflows and leakages, and that poor performance continues in certain areas. I was on the Isle of Wight during August, and Southern Water discharges reached almost every single beach on the island during the critical month of August for the Isle of Wight tourist industry. In fact, this morning there were warnings from Surfers Against Sewage about, I think, six more discharges today on the island. When do you think we will see a significant and sustained improvement in these discharges?

Jonson Cox: I hope that you have got the message that I am not here as an apologist for the water industry.

Lord Sharkey: I have got the message.

Jonson Cox: Other than the current issues we are seeing—I am not belittling them at all; I am as cross about them as you are—it is probably important, in fairness, that I reflect on the vast improvement elsewhere on discharges, including the improvement of bathing water quality. Most beaches used for swimming have ultraviolet treatment. There are some good things that have happened, but let us come to right now and the horrific issues of storm overflow. I can only express the same outrage that you feel that, I think, 40 miles of the south coast—I am not sure whether that included the Isle of Wight—had “no bathing” notices on it. It is completely unacceptable. That company has had every warning shot it can have from Ofwat to up its act, and I am sure that the Environment Agency will be looking very strongly and intensively at its performance. I wish I could say to you that I know when that will be fixed. I do not know, but I do know that if it gets to the next price review by 2024, in two years, and that performance has not shifted markedly, it will be very brutal.

Q87 Lord Sharkey: It is an irony, of course, that Macquarie was also until recently responsible for the monopolistic form of transport from the mainland to the island.

Can I change the topic slightly to talk about customers themselves? We have heard that customers have a role to play in helping to meet future water demand by reducing usage. What should Ofwat and the industry do to engage with consumers over this, and things such as disposal of wet wipes? What should be happening? Who should be talking to whom, and on what basis? Are water companies in fact the appropriate vehicle for talking to the customers about these things, since there may be a conflict of interest given the way that water companies are remunerated?

Jonson Cox: Can I split out an answer? I will deal first with water conservation, reduction and efficiency, and then with wet wipes, about which I certainly have something to say.

There is a place for standards on white goods, on water efficiency and on plumbing and new housebuilding in building codes. There is a national role there on building codes and white goods equipment. On persuading customers about the importance of water conservation and water efficiency, I cannot think of any other party that is better placed than the water company. If you start saying, “We will take away that bit of responsibility for you and put it with some other body”, you are diminishing the ability to hold a water company to its licence obligations to work with its customers. If you do that, you might as well continue to simply make it a contractor. I think it is really important that the companies up their game and get a consistent national message on water efficiency. I will come back to the consistency when we deal with wet wipes. I hope that answers the water efficiency side.

Lord Sharkey: It seems to me that, given the low reputation of water companies at the moment, it will be difficult for them to establish a meaningful and productive relationship with their customers. I wonder whether direct government intervention or direct intervention by the regulator would be a more fruitful way of mobilising these consumers.

Jonson Cox: There is one intervention that companies could make, and I am disappointed at how difficult it has been to do. It is deemed that customers own the connection pipe from the water distribution system to their house. In some cases that is very short. Bizarrely, in some cases it is quite long. To give you an illustration, in the community I live in I got personally involved with helping an elderly couple. They lived in a small bungalow, not a big, fancy house, but had a 125-metre connection pipe from where the mains was to their house, and it was leaking like a sieve. They were paying on their meter for it. I got involved to help sort it out because I live in the community. It strikes me that we know that a third of all leakage is on the customers’ pipes. I find it unsatisfactory that there is not a solution led by the water companies to take ownership. Some do a first fix free, which is great. Some, as in the case that I intervened with, helped with getting the insurance company of the householder to fix it. To my mind, that is one area where a change in who manages the network would make a vast difference to both leakage and customer satisfaction. To take my example, you cannot ask an elderly customer who does not really know about it to suddenly ante up what I think was a bill of about £10,000 to sort that out. That needs to be socialised across all charges. That is my response on water.

Moving on to wet wipes, I refer you to the op-ed that I published with Chris Whitty and Emma Howard Boyd. We were very clear that wet wipes are a major hazard to the system. First, a very large proportion of wet wipes are still not biodegradable; they congeal with fat in the sewers. They therefore lead to these gross fatbergs that you sometimes see pictures of; that leads to blockages; that leads to storm overflows operating more often. It is absolutely gross and unacceptable, both visually in watercourses and in its impact on sewers. The point we made in our op-ed is that this is for companies to step up and own, persuading their customers and working as a big, powerful sector, with the manufacturers and the retailers, to say that we will no longer accept non-degradable wet wipes, while also persuading people not to flush them. I am on the record as saying, at a recent conference while I was still in post, that it is time the industry had one common campaign. It is no use each company having slightly different messages; there is a real scope to do something there.

Q88 Lord Sharkey: Finally, do you agree with Sir John Armitt that everybody needs to have a meter? I ask this partly because electricity companies have been saying the same thing for ages and have been grotesquely unsuccessful at getting meters—or even the right type of meters—into people’s homes. Why would it be more successful with water companies?

Jonson Cox: It is an oddity that this country has lived without water meters when, in almost any other western jurisdiction I can think of, water meters are standard. There are powers where water companies can go for compulsory metering. I agree with you; it seems blindingly obvious that we should have all households metered.

There is a slight issue about the timing of doing that in that, the more there is a shortage of water, the greater the economic case for doing it. To pick an example, you might think that Northumberland, which has a great water supply situation, might not be the highest priority for universal metering, but clearly, if you take the south-east, the case is made. I can only reflect that I probably agree entirely with you.

Lord Sharkey: You agree with John Armitt.

Jonson Cox: Yes, and I have obviously talked with John Armitt. There is a point you make, which is a very interesting one in the energy sector, that some people do not want smart meters because they distrust someone else having their data. That is clearly a consumer perception issue that utility providers have to deal with.

Lord Sharkey: The other reason that people do not want smart meters, of course, is that they do not see the consumer benefit of having a smart meter. Most of the stuff that I have seen put out by the electricity companies is not clear either about what the consumer benefit actually is.

Jonson Cox: I am probably a nerd as a consumer, but if you have that in-home display with your smart meter and it can show you how much energy you are using at any point in time, I think we will see a lot of attention on that in coming months. I have long believed that what we need to see with water meters is smart meters and proper in-home displays. If you could see as you are standing in your kitchen, or wherever you put it, what your instantaneous water consumption is on that day, think how much more you would know about leaking taps, invisible leaks, et cetera. That is where the consumer benefit comes, in my mind.

The Chair: I have a quick follow-up. Southern Water appears to be a serial offender over many years. Strictly in your personal opinion, are you surprised that it has not been prosecuted?

Jonson Cox: It has been prosecuted.

The Chair: The directors have not been prosecuted.

Jonson Cox: In relation to the environmental prosecutions, I encourage you to put to the EA that question of the extent to which it was able to consider, or not, individual director prosecutions over the big event that was fined last year. While Ofwat does not have the power to disqualify directors, I think we made it very clear and it led to a pretty rapid management change, and indeed a significant drive by us to change the board.

Q89 Lord Agnew of Oulton: I am very keen that you are candid in your replies on this, because we have the benefit of you as a citizen—not as the chairman of Ofwat, but with all the knowledge and experience of the sector. My question is a slightly supplementary one on others. Is the join-up of the regulators working effectively? If you were a policy adviser on it, how would you improve it? For example, what is the point of the Drinking Water Inspectorate? Why is it not part of the Environment Agency? Is there a proper join-up on issues such as providing in the capital allocation the funding for improvement on some of the things that you have been talking about? My main question is: is the regulatory landscape effective and how would you improve it?

Jonson Cox: I will try to be as candid as I can. I am often known for being too candid.

I fully accept that the regulatory landscape for water looks unduly complex, when you have Ofwat as an independent regulator, the Drinking Water Inspectorate and the Environment Agency. I agree that the perception of that looks odd. In practice, I do not worry about the Drinking Water Inspectorate issue. It is a specialised unit that essentially makes sure—I apologise to DWI if I am understating its role, I am not trying to—that water, from the point it comes into treatment and to the point it reaches the customer tap, is entirely safe to drink. It is an impressive regime. It is quite a technical regime. Its powers are felt very strongly if you run a water company. Yes, it can look a bit odd. You might say to yourself, “Why does that not sit in Ofwat? Why does it not sit in the EA?”. It sits in Defra. In practice, that has never given me any cause for concern. Sometimes things are set up like that and it is more effort than it is worth to change it.

I have probably been clear and said as much as I want to on environmental regulation. I give credit to the joint working there has been on water resources; I think that is great. It is very clear that there is not public confidence in how we handle, jointly as a sector, the enforcement of environmental standards for the discharge of sewage. That clearly has to change rapidly. I have been very clear that there needs to be much more common availability of consistent data, and there are billions of points of data on performance environment. It is about using intelligence and data analysis to make sense of that. If I was critical, that is an area that is missing. Regulators, both Ofwat and the EA, could make much more rapid use of data that is available as this new monitoring is all rolled out.

Lord Agnew of Oulton: Going back to one of your earlier answers, you said that you were personally shocked when the whole horror of this lack of monitoring of outfalls became visible. Is any legislation needed, or just more will on the part of the Environment Agency? I accept that it will have to answer for itself when we meet it. I just do not really understand how this has all sat there for years and years, and then suddenly someone clever brings it up. I do not know whether it was the Duke of Wellington, who started bringing this up in some recent legislation. Why has it got on to the drawing board only now? That is the bit I am puzzled by.

Jonson Cox: My understanding of how it came about in the wastewater treatment side that I referred to was, as I said, that we had been rolling out and funding these meters on the way wastewater treatment plants operated, and there was a storm overflow working task force that was working proactively. It is part of what has led to the recent Government paper. It was in the course of that work that the task force was made aware of the extent of non-compliance in wastewater treatment works. I would not start going to legislation. I think it is just a case of making sure we have the data, it is used, enforcement is done and, the moment someone steps outside of compliance, there is whatever form of action is appropriate.

You remind me of a question the Baroness asked, which was about upping the sanctions. When I was thinking about that question, it occurred to me that in the waste management industry—I did a quick Google search—there have been many cases of directors of waste management companies being disqualified or even going to jail, so it is not that novel.

Baroness Taylor of Bolton: I am just following what has been happening in the Commons, with George Eustice saying that he is putting the water companies on notice that he will not let them get away with criminal activity. There is a response going on as we speak in terms of threats and what might happen in the future.

Jonson Cox: Lord Agnew, I hope I answered your question.

Lord Agnew of Oulton: That is very helpful. Thank you.

Q90 Baroness McGregor-Smith: Thinking about your time at Ofwat, a lot has changed in the approach used to regulate the water companies. There have been some calls for Ofwat and the Environment Agency to change the approach from an outcome-based solution, which has been focused around telling the water companies what they need to build, to one that gives them more broader targets and more leeway—and, I guess, more innovation in theory—to deliver a broader range of outcomes. I am interested to know whether you see that happening. What would it take to let that happen, particularly bearing in mind some of the leadership challenges of this sector over the last decade?

Jonson Cox: Forgive a wry smile when we talk about moving from output regulation to outcome, because when I joined Ofwat at the end of 2012 and 2013, the move was already afoot to move the price review to an outcome focus. It took me a long time to get my head around the difference between outcome and output and whether this was real. Ofwat led the regulators in thinking about outcomes, and outcomes is making sure that you prescribe what you want to happen, not how to do it.

Let us take the example of cleaning up and improving the quality of a drainage basin of a water catchment. You specify the outcome you want, but you do not specify whether the company uses a natural capital solution, as it is known, or one that involves pouring concrete and creating tanks and treatment. That has characterised Ofwat’s approach for the last two price reviews—the outcomes. My team in Ofwat would say that it would like to get the Environment Agency to adopt a similar outcome approach to encourage innovation, particularly in treatment, where innovation can bring either higher standards or better solutions from a carbon point of view.

The classic one would be on the tertiary treatment of a wastewater treatment works. Do you build a tank with treatment or do you use some form of reed bed, as it were, to do it? When I have talked to the Environment Agency about that, my most recent understanding of it is a sympathy for that but, equally, a level of distrust of companies. You might see why there is a level of distrust of companies on its part. At the point where I left it, we had an agreement that companies that could perform at the top of their performance rating, known as four-star companies, would probably be given the opportunity for an outcome regime, though I do not think the trust was quite there for those that had not reached four stars.

Q91 Baroness Donaghy: The last question is about whether you think a single social tariff should be applied to all water companies, irrespective of the difficulties that consumers might have in the various areas. Particularly at the moment with the increase in the cost of living, is it fair to ask the consumer to pick up any of these? You have made your view clear about individuals where their own pipes are leaking and they are paying for it. Do you think there should be improved representation of consumers on the boards of water companies, and do you think it is fair to expect consumers to fund the social tariff, if there is one? Should there be some other form of government support for those in difficulty in paying their water bills in the future?

Jonson Cox: I emphasise that these are personal views. I can see why there is a desire, particularly in the very difficult times we are currently going into, for more of a common system of social tariffs. You can see what difficulty there will be if each company is slightly different. I am slightly cautious about just saying it is a good thing, because I am also conscious that innovation sometimes comes not by having one national scheme but by a company being able to do something that is right for its region, and that might set a new standard for others to emulate. That is my caution in just saying, “Let us have one standard scheme”.

I am also very well aware—I do not have the numbers off the top of my head—that there is a limit to which the majority of customers are prepared to subsidise those who might want a social tariff. There is an economic point of subsidy and you have to be careful of that, because if you lose the will of all customers, or the majority of customers, to pay for the social tariff, you are back to square one. Those are my two reflections on social tariff.

You raise an interesting point about consumers on boards. I mentioned that in 2014—I was very much associated with leading this—I brought in a code for how boards should be set up because I was absolutely horrified by what had happened to some boards in the era after they had gone from public to private. I have this very strong belief. I have been on really good boards of companies and boards that I do not think are so effective. I know that a good board can make a real difference to a company.

I was quite interested at the time when we were talking a bit about less regulation. If you have a really strong board, would it do some of the job for the regulator? That is a question. As we brought that in, we made it very clear and we introduced the pre-appointment process for all non-execs joining the board of a water company, which is parallel to what happens in the financial regime but rather less formal than the PRA/FCA approach. I had good dialogues about this with the chairmen. We started to have conversations about the right make-up of skills on the board of a water company. There would not be a conversation without it being clear that there needed to be someone who had a strong experience of consumer affairs and of customers. I do not think that on boards you should ever have someone who is earmarked, “This is the customer person and they get to decide what happens”, because in my experience of being a board member, sometimes the most interesting contributions on a subject come from someone who is not the expert in it.

I would go with our board leadership code, which requires a strong balance of skills and, of course, customers have to be right up there in the skills that any board should have. I would expect to have a pretty strong discussion with a chairman if they were not able to show that on their board they had a good awareness of customer issues.

The Chair: Thank you very much for what has been a fairly lengthy session. We have covered a lot of ground. It would be interesting if you could put your thoughts about reform and measures to improve Ofwat’s performance, and the performance of the entire panoply of regulators that have an interest and stake in this industry, on paper. We have ventilated a lot of the problems, but in the end we are looking for recommendations to improve the situation and you have touched on quite a few of those today. I wonder if you could send us some homework.

Jonson Cox: I had not expected to be set homework, but I am very happy to commit to do that.

The Chair: That would be very helpful. Finally, you are now a landlord for a lot of the water industry because you are the chair of the Port of London Authority. What is your principal anxiety about the behaviour of your tenants?

Jonson Cox: I have to say that I am not speaking for the Port of London here, but we do own the riverbed from Teddington out to sea; it is 94 miles. I can assure you that those who use the river, and it is obviously one water company in particular, will feel very strongly our statutory duty to protect the environment of the Thames. I referred to wet wipes earlier. The issue of wet wipes on the foreshore of the Thames is a big concern of mine. I am hosting a wet wipe count next month and I can assure you that Thames will be made very well aware of what we need to see in clean-up on behalf of our role as custodian for the public of a riverbed and foreshore.

The Chair: I think the directors of Thames Water are looking forward to the invitation to join you on your wet wipe hunt.

Jonson Cox: They have had the invitation already, and I think they will be coming.

The Chair: Thank you very much indeed. It was a very helpful session.