UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 471-i

house of commons

oral evidence

taken before the

Environment, Food and Rural Affairs Committee

Ofwat Pre-appointment Hearing

Wednesday 4 July 2012

Jonson Cox

Evidence heard in Public Questions 1 - 55

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Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Wednesday 4 July 2012

Members present:

Miss Anne McIntosh (Chair)

Thomas Docherty

Richard Drax

George Eustice

Barry Gardiner

Mrs Mary Glindon

Iain McKenzie

Neil Parish

Ms Margaret Ritchie

Dan Rogerson

Amber Rudd

________________

Examination of Witness

Witness: Jonson Cox, the Government’s preferred candidate for the Chair of the Water Services Regulation Authority (Ofwat), gave evidence.

Q1 Chair: Good afternoon and welcome. Thank you very much, Jonson, for agreeing to be with us at such short notice. I understand that you would like to make a short statement, which we would very much like to hear before we open up to questions, if that is all right with you?

Jonson Cox: You have probably made the point that I was going to make, which is I am delighted to be here. You all know that I know quite a lot about the water sector, having had a decade in various roles in it. I have been out of the sector for two years, and I heard yesterday afternoon that I was coming here, so please bear with me if I am not completely up to speed with some things. I would have been if the hearing had been when I thought. But you have made the point for me, so thank you.

Q2 Chair: Not at all. Thank you again. We are approaching the end of term, and we want to accommodate the processes as best we can. Given that the position of Chair of Ofwat is very different from the roles you have held previously, what made you interested in the position and apply for the post?

Jonson Cox: I have had an increasing interest in the water industry through two spells in the industry. There is something about it-being what I think of as a public service provided under a private franchise-that makes me really interested. I have often thought of it as delivering the promises that were made on privatisation: that new skills, new approaches and new investment would be brought to a poorly performing industry.

I have often thought of the role of a regulator as being one step ahead of the companies. This is a sector large parts of which are naturally a monopoly. That is why we have an economic regulator. The role of the regulator is very much to ensure that customers are fully represented, that companies are kept on their toes, and to try to move the industry progressively forward.

I am well aware of the question that might be thought of as "a poacher turned gamekeeper" one. I think we have a shared endeavour, which is trying to make this sector efficient, with bills as low as possible and as good a service as possible, and I thought I could bring something to that.

Q3 Chair: You have worked for public companies before, but you have not actually worked in the public sector and been exposed to public scrutiny. How do you feel you would be suited to that particular role?

Jonson Cox: I would be dishonest if I didn’t say I have a certain amount of apprehension about it. As you say, I have been in public service companies, and companies that have had a lot of public scrutiny, but clearly this would be the first time working in a public sector role. The honest answer to it is I probably have some things to learn, but there are some things that I bring to it from having been in businesses that cross the public and private divide.

Q4 Chair: When do you expect to take up the position?

Jonson Cox: I would expect to take it up during the autumn.

Q5 Chair: Philip Fletcher is due to remain until the end of this month?

Jonson Cox: Philip would remain, and we would do a handover during October.

Q6 Chair: How long is the appointment for? Would you intend to serve the full term of the appointment?

Jonson Cox: I have been offered the role on a three-year term, and I would absolutely intend to serve that. As you will be aware, that straddles a very important period in the sector, not only with the water Bill, and many other things on which you are deliberating, but also with the PR14 price review, so I think it is essential to commit for that period.

Q7 Neil Parish: Good afternoon. Where will you be based? Will you be based here in London or in Birmingham?

Jonson Cox: The answer to that is "both". With a non-executive role like this, it is never the case that one is based in one place doing the role. It is a part-time role, but you are on the whole time so as to be available to the chief executive and to other members. I would envisage a lot of time in London; I would also envisage making sure that I am in Birmingham regularly.

Q8 Neil Parish: That was the point I wanted to raise with you. The chief executive is likely to be in Birmingham. Therefore, most of the staff are there also. You do not know how you are going to be splitting your time between London and Birmingham?

Jonson Cox: I do not know how I would split the time, but I am very committed to both. As I understand it, this role was offered on the basis that it would be in London. But as I live mid-way between London and Birmingham, I think I will split the role as is appropriate, and I think it is terribly important that the chair is seen and has visibility in both locations.

Q9 Neil Parish: That’s right. Naturally we are all very keen to see that whoever takes the role that you are in for liaises with the chief executive and with the staff and encourages them forward, and also that you put your ideas about the way you would like to see the company go. Not the company-

Jonson Cox: The organisation. I could not agree more. The chair comes with an independence to help shape the strategy, the running of the board and to shape the agenda. You can’t do that in a vacuum. You are there to be the adviser, coach and challenger to the CEO, and you can’t do that without also having good engagement with the rest of the staff. I am the sort of person who gets into the office, I take my jacket off and I go wandering round the office talking to people, and I suddenly realise I have spent half the morning doing that. I like to find out what is happening and what is on people’s minds. The only caveat I would put on that is that it is important not to try to do the CEO’s job.

Q10 Barry Gardiner: As you have just outlined, chairs are there to provide strategic vision and direction to an organisation, in conjunction with the CEO, and to be a sounding board. What is your view of the strategic vision and direction of Ofwat? Where do you feel that direction needs to be amended? Where do you intend to work with the chief executive to carry the organisation forward?

Jonson Cox: I wonder if I could answer it this way. It is early days-having not even taken up the role-and it would be very important that I spend the first three months validating what I think I know, and I would be happy to come back after that and discuss it in more detail.

But if I could interpret your question as being: knowing what I know, what do I see at the moment as being really important for Ofwat over a three-year period? I would pick up half a dozen things, and forgive me if I leave out some things that are important to members of the Committee. So, delivering outstanding value to customers; building a capable and independent board-this is an independent economic regulator, some of whose functions are carried out independently, although clearly in a policy framework-also, improving the management and use of water, which picks up questions around abstraction, reform, metering and water usage. To see the industry make a step change in customer service is important. We would be exploring what I think of as-in my language-the pain-and-gain share mechanism, the arrangement with the companies. Companies get a determination. If they do better than that, that is really good. If they do better, for reasons that might be out of their control, how is that shared with customers? Then, obviously on the downside-how pain is shared. I think that is an important aspect to think about. The last one, which is very close to my heart, is the resilience agenda. Making sure that customers see a sector that is resilient and that customer service can’t be knocked off by any lack of resilience.

Does that way of answering it deal with what you are-

Q11 Barry Gardiner: It sets out a sense of your priorities, yes. But it does not address the element of the question, which was: where do you see things needing to move in a new direction? I don’t want to accuse you of being faux-naïf but you are a man who is steeped and rooted in the water industry, in that you have fulfilled some very high-profile positions within it, and therefore you are not new to the industry. Therefore, I think it is fair to challenge you. In order for you to have been offered the job in the first place, people must have thought, "Here is a man who can take the regulatory body off in the direction it needs to go"; it is really to try to get a sense from you of just what that new direction is.

Jonson Cox: From what I have read about what has happened in the few years I have been out of the sector, and from my previous experience-from what I have learned-those are six of the big challenges that I would see taking on. It would be equally unwise to come here today and say to you that I know exactly where to go, especially given the change in role from being a CEO of a company to being a regulator. It is important that I take some time going into the role to look, listen and talk to all the stakeholders in reforming the agenda.

Q12 Barry Gardiner: I want to move on to areas that are crucial in your role as chair of a public body, areas of personal independence. I need to ask you: have you ever held any post or undertaken any activity that might cast doubt on your political impartiality?

Jonson Cox: I thought hard, and the only thing I could get to was attending an anti-apartheid demonstration in the 1980s, or a series of them, and one or two things as a student. Beyond that, no.

Q13 Barry Gardiner: You can reassure us that you will be absolutely impartial in this role, should you be appointed to it?

Jonson Cox: I can absolutely assure you of my impartiality politically.

Barry Gardiner: Thank you. You appreciate that these are the sort of pro forma questions that have to be asked.

Jonson Cox: Absolutely.

Q14 Barry Gardiner: To get a little bit grittier, I believe there are other professional activities that you intend to continue with in addition to your position at Ofwat. I understand that that relates to your work with UK Coal?

Jonson Cox: Principally, yes.

Q15 Barry Gardiner: It is really important for us to understand how those commitments will not impinge upon your role and function as chair of Ofwat. Looking forward to the price review when it comes, that will take a considerable amount of time, resource and energy on your part. What happens if there is a crisis in your other role? How do you manage that? It is easy to say, "I am going to do two days a week here and three days a week there, and I am going to be spending time on the train between the two doing things for both", but what we really need to know is how do you manage it when there are imperatives on both sides?

Jonson Cox: In the business world, when you take on a number of roles-the jargon phrase is "become plural"-it is the real challenge of, how do you juggle having a number of roles? As an aside, I should say that one of the things that gives you independence is having a number of roles because, first, it ensures that you don’t intervene and try to run the organisation; and, secondly, that you bring points of view that are complementary. As you say, the challenge then is how to create the flexibility. The way to do a number of chairmanships-two in my case-is not to say, "These days of the week I do this and these days I do that". Life isn’t like that. If the chief executive wants to speak to me for a bit of guidance, and it happens to be a day when I am at UK Coal, of course I speak to the CEO. That flexibility is inherent, and I already have that in my life. I find all sorts of times when I might think I am going to be doing one thing but I am doing something else.

The second thing is, what happens when a crisis comes along? Let’s talk first about an unplanned crisis. One just has to find a way of managing that. It may be that it completely walks into your weekend. That happened to me in the coal industry earlier this year, in the first three months of this year. It may be you have temporarily to not do some other things, or you have to put them on to another colleague in one of your other businesses. Most people manage to find a way to do it.

Then there is the planned event, and you referred to 2014. Clearly, in planning my life, making sure that there is ample time and more in 2014 is something I have already thought about, to make sure I don’t find myself with other particularly onerous responsibilities in that time.

To give you a parallel, as you know, in my business life I was CEO of AWG, which later became Anglian Water Group. As a CEO there, I inherited an international business in 22 countries, the eighth largest construction company in the country, a failed property company and a water company that had got in trouble with its regulator. That had the same sort of juggling, albeit within one group. It is not an exact parallel, but one has to prioritise accordingly, and you have to keep all the balls in the air. You are particularly conscious of fiduciary duties and duties to any organisations.

Q16 Barry Gardiner: Do you have any other interests, including directorships or non-executive roles, that could conflict with your work as chair of Ofwat?

Jonson Cox: I have no roles that could conflict, and I can only say that I think the various roles I have are in fact beneficial. I have found that it is almost bizarre, the way that you bring something from one sector that is different that complements what you are doing in another role.

Q17 Barry Gardiner: Moving on, I will now refer specifically to what I think you called the "poacher turned gamekeeper" point.

Jonson Cox: I thought that was inevitably going to arise.

Barry Gardiner: Of course, inevitably. You did hold senior management roles at Yorkshire Water and Anglian Water.

Jonson Cox: Yes.

Q18 Barry Gardiner: I think that inevitably gives rise to a concern among consumers that you are somebody coming into a regulatory role, but you have an inbuilt bias or empathy with the bodies that you now have to regulate. I can ask you whether you will be biased, and you will tell me "No", so what I am going to ask you is: how are you going to ensure that the public are relieved of the concern that there is inevitably some sort of bias or empathy there? After all, you said yourself that you were chief executive of a water company that had a bit of a tussle with the regulator. Are there old scores to settle? Are there points to prove? These are things that linger in the mind of consumers.

Jonson Cox: May I put your mind at rest? While I described inheriting a company that had had a tussle with the regulator, in fact that applies to both the water companies: the one I led as MD and the later one I led as chairman of that regulated company and chief executive of the group. In both cases, I inherited a position where the companies had failed in regulatory terms. I need to make the point that, by the time I left both, they were at the top of the league. I just need to defend myself on that.

Barry Gardiner: No, I was not trying to-

Jonson Cox: Turning to your point about customers, there are two answers that I would like to give. I would like to tell you why I came into this sector. In 1996 I was offered a role to join Yorkshire Water, after its very well-publicised failure. The one thing that really interested me was how a monopoly dealt with its customers. I had come back from three years working in the United States for part of Shell. I came back to set up Shell’s first customer service centres in Europe. That really put me through quite a train of thinking about customers. Of course, if you go to the 1990s and water companies, you walked into that and you thought, "There’s a long way to go".

One of the things that has guided me right the way through water companies is, if you take that idea that it is a public service with a private franchise-that is not the situation legally, but morally I think it is-and if you have been given the right to run that company, you have to show that it performs for customers. That is part of the thinking that I bring.

Turning now-and stepping into this role-to how would I deal with customers, the very first thing for me to do in this role is to turn up. I know a lot about the companies, but I had better get back and really understand what customers today think about the company. I have already started with Ofwat planning how we would do that.

I do not know what more to say to you except that I am absolutely clear in my own mind that, with these roles in public services provided by private undertakers, if you can’t demonstrate before anything else that you are doing the best possible role for customers, you fail.

Q19 Barry Gardiner: Perhaps the first thing is to move-to make that transition from the mentality that thinks of those people as your customers to a mentality that thinks of them as the consumer, the public and the citizen. Your role now is to regulate on behalf of the consumer, the public and the citizen, not to have a relationship that is one of a provider to customers.

Jonson Cox: Absolutely. If I said anything to mislead you, my apologies. When we use the word "consumer", there are still a range of interests within that. There is a very important public service role, and there is a very important role in making sure that each consumer is also getting what they expect.

Q20 Thomas Docherty: Returning to your UK Coal role, you will obviously be aware that the chief executive of Ofwat has strong views about the contribution of-forgive me-"polluter pays" to abstraction and the water table. UK Coal, through its operations, inevitably has an impact with run-offs and discharges. How would you ensure that everybody was comfortable that you were not going to be a champion for UK Coal within Ofwat?

Jonson Cox: I had not thought about that question. I think the first thing is that the principal issues around mine water in the UK do not sit with UK Coal because they relate to closed mines. The entire responsibility for that sits with the Coal Authority. UK Coal has a small number of deep mines that continue that manage their effect on the water table because they are still in operation. I am not aware of any issues there relating to run-off or to anything that could be seen as trying to protect the position.

Q21 Thomas Docherty: Do you have open-casts?

Jonson Cox: There are some surface mines, yes. Let me revert to you if, on checking, I think there is anything different about that. To the best of my knowledge, in the half a dozen surface mines that are usually being operated at any time, there are fully compliant systems for preventing run-off of water. I will inquire. I had not thought about that question, and if there is anything that I ought to say to the Committee I will come back to you on that.

Q22 Thomas Docherty: On the issue of water companies, you will be aware that one of the great political tussles that the chief executive will probably have over the next year is on the draft water Bill and the Bill eventually going forward, regarding the speed of introduction of competition. It is probably charitable to say that Ms Finn has a different ambition for the time scale than some of the water companies. That is the most diplomatic way I can put it. How can we have confidence that you will be Ms Finn’s champion and not the water companies’ champion in that tussle?

Jonson Cox: I have a small caveat first, if I may. I will need to ensure that I completely come up to the latest stage in that debate about market reform that has been going on for some years.

Where I start from, I go back to having been trained in economics and remembering that competition is better than regulation. Where one can reform and take away regulation because customers have a choice and competition prevails, that is a good thing. It gets quite difficult with water, because such large parts of water are natural monopolies, but that does not mean to say that the entire integrated water company is a natural monopoly. I look forward to contributing to how we take forward that debate, and the position that Ms Finn has put in the public domain regarding how one starts to reduce the regulatory burden, to allow competition to have effect and to allow customers to have a choice where they can.

How would I assure you that I am not just a creature of the water companies? Obviously, there is a "the proof will be in the pudding" answer. In my latter two years in the water industry, as we started to think about reform, I was one of four companies that led the way in a water company reform project, saying, "Let’s engage with this agenda; let’s not just oppose it". I do think it is interesting to see where there are benefits to customers. I am very conscious of the innovation that has been brought about in Scotland by the WICS. I have talked closely with the WICS over a number of years about that.

All I can say to you is, please assume I have my own mind, and I intend to see how we move this forward at an appropriate pace.

Q23 Thomas Docherty: What do you define as "an appropriate pace"? Is it what Ms Finn believes in, or what? Is it what some of the water companies believe?

Jonson Cox: I have not had the opportunity to debate the exact timetable with Regina Finn. What I would say is-and if I am diverting from the question please stop me-there is a strange sort of symbiotic relationship here between companies and the regulator. The companies will say, "We want less regulation. Reduce the burden of regulation". Fine. So one says, "Let’s introduce some mechanisms that have some competition or reduce regulatory burden, and we will put more risk with you to manage". There will be some who welcome that-and I have heard them-and some who will say, "Actually, we quite like running this within the tramlines of very detailed rules; don’t take them away", and there is a sort of, "You can’t have your cake and eat it". I think there has to be a relationship that works.

I am conscious of some of the difficulties there have been in recent months about the pace of reform. I hope you don’t think it is ducking to say I would like to be given the opportunity to spend three months looking at it, to come to my own view and to come back to you on that. I do not know if that is sufficient to answer your question.

Q24 Thomas Docherty: Have you read the Water White Paper?

Jonson Cox: Yes.

Q25 Thomas Docherty: It is a very straightforward, very narrow issue. Ms Finn, or Ofwat-as an institution, I do not want to personalise it-wants the market opened in approximately three years from Assent. The water companies have given evidence. Some of them are modernisers, and some want longer. That is a straightforward proposition.

Jonson Cox: On that straightforward point, and can we take it down to the retail separation, which I think is what we are talking about-

Thomas Docherty: Yes, that is what we are talking about.

Jonson Cox: I am afraid that I cannot answer the question on time scale, but I think there are very good reasons to keep open the question of why there should not be the opportunity to separate retail and the true monopoly network.

Chair: We will have lots of opportunities to get into detail when it comes to the draft water Bill, without going into that now. I think that George Eustice wishes to come in on the same subject.

Q26 George Eustice: I think you have covered that issue. I want to return to what you said about the difficulty of juggling two jobs. I completely understand your point that you will obviously pick up the phone to the chief executive if she wants to talk to you. As I understand it, the annual accounts of UK Coal show that you will still be working there for three days a week. It was four, but it has gone down to three. Ofwat are expecting you for three days. Are you going to work a six-day week?

Jonson Cox: Life is moving on, as I take up this role. The role at UK Coal has been very intensive this year, trying to manage a restructuring of the coal industry to give it a viable future for the next 10 years. We envisage moving that to a stable place by the autumn. I envisage continuing, but with a reduced time commitment. Because of the speed with which this has come about, I have not quite resolved those discussions with my board at UK Coal, but we all know we are going to resolve that in a way that reduces my time commitment.

Q27 George Eustice: It would be your intention perhaps to go to two days a week at UK Coal?

Jonson Cox: Exactly. Yes. That will take a little while to manage, but that is absolutely the intention.

Q28 George Eustice: Because you have had a background in the water industry, I will ask briefly on this separation point again. The water companies always tell us that if too many changes are made there will be investor flight, the share price will collapse and they will not be able to raise the money in the City. Having been in the industry, do you have sympathy with that view, or is that scaremongering-now that you are out of it and do not have to represent a water company?

Jonson Cox: In part. It is very important to maintain the confidence of investors to invest in this industry. I am very clear on that, and I am very clear that that confidence translates into a lower cost of capital, which benefits customers. That is one part to the answer.

The second part to the answer is, if you are an infrastructure investor and were you to be offered an opportunity that somewhat reduced the scale of the company by taking retail out, let us say, but gave you a purer infrastructure return on the underlying monopoly part of the business, I struggle to see why that would not be as or more attractive.

Q29 George Eustice: For instance, at one stage we discussed the legal separation, and the industry was very much against it, saying that the investors would not come up with the money. Do you think that was correct?

Jonson Cox: I think we have to keep that under review. There may be merits to that argument, but I would like to re-examine that from another point of view. I absolutely understand why the certainty of return to an investor over the true monopoly nature of the assets is vital. I am not quite sure how one gets to extend that to say that you could not choose, if you wished, to separate off the retail part of the business. There may be some bits that I am out of date on, on that.

Q30 George Eustice: Just a more general point. The job description calls for a proven track record of success in working in highly political environments. I think the point has been made that this is not just like a public company. It is quite a political role. It is a Government agency. Can you give any examples of where you have effectively handled high-profile sensitive political issues previously in your career?

Jonson Cox: I suppose the best example is what I am doing in the coal industry at the moment; and if I can just take a moment to describe that. We all know that it is an iconic old industry in its last days, and carries enormous political interest. It carries lots of interesting political issues. There is the climate change point of view, where one might say, "Stop immediately". There is a socio-economic reason why you would recognise the livelihoods that go with it, and there is the problem that the abrupt end of it would bring about a lot of pollution issues.

I went into it in 2010, when that company had very nearly fallen over, with a brief to try to get it on its feet for the next decade; to see that through. In doing that, I managed a range of stakeholders that included very strong political interests, particularly from Members of Parliament; very strong local community and local authority interests; significant interests from an energy point of view, as coal continues to play a surprisingly large part in our energy use in the UK; and banks, which have a very large stake in the company. That is perhaps slightly more private sector, but it is an example of political complexity. I would not pretend to you that I have mastered it all, but that has certainly been useful experience in understanding the political dimension.

Q31 George Eustice: I know from looking at your CV that you were at Railtrack for a while as well. That was obviously during an incredibly tortuous time for that company. That was an incredibly political environment as well. What did you learn from that?

Jonson Cox: I had better tell you what happened. I joined Railtrack, having led a very successful turnaround of Yorkshire Water after its problems. The proposition was, "Will you come to Railtrack, a national utility, to lead a comparable change or turnaround programme as chief operating officer?" One month into my role there, the third of three big accidents happened, the Hatfield accident. Suddenly, the company was in operational crisis. I spent the next nine months working that-many of you will remember the chaos: three trains in 10 on time-back to its conventional level of just over eight trains in 10 on time. That was my role there. That was not what I went there to do, but it was what had to be done. In that role, I met with the Minister and the Permanent Secretary’s team usually three times a week during six months of that period, and I think that is a sign of working in a very political environment. I got things back to that level of operation, and customers fought for it to go further. I left because we had a new chairman, and he and I had a different point of view about how to proceed. It was agreed that I would move on. I hope that answers the question.

Q32 Dan Rogerson: As is common with many job descriptions nowadays, the post asks for experience of managing change and delivering that within an organisation. Can you talk about how you have done that in the past and met the challenges? You have hinted at something there, but what opposition have you come up against and how have you overcome that?

Jonson Cox: Yes. I think you will see from my CV that almost every role I have been in, for the last 20 years, has been one where something about the state of that organisation needed some change. But by that I do not mean to imply that that is why I am looking at this role.

In my background, that process of going into a company and thinking, "Where are we? What needs to be done? How do we set out our strategy and direction?" is usually about a three-year period. Because that is normally the time that we are given-certainly in the business world-to lead a change programme, to shape the direction and the strategy and, in a case like this, to bring the board together and start to deliver it. I would like to think that my CV demonstrates that that is what I have done for a living.

Q33 Dan Rogerson: Can you give an example of a specific area of resistance you have met to a particular plan for change, and how you have overcome that?

Jonson Cox: I am very conscious of what is not a business job. But in the business world where I operate there is usually some combination of investor issues, customer issues, union issues, and these days in business pension fund issues-because pension funds are often the biggest unsecured creditor in the business-and usually some operational issues. They always come in different guises. If I take the example of going into AWG or Anglian Water in 2004, the biggest issue there was that the investors had completely lost confidence, followed by the regulator and the water company having lost confidence.

Dan Rogerson: Not good.

Jonson Cox: Not a good place to be. When I took up the role at Yorkshire Water in the 1990s, the biggest issue was that customers had lost confidence. The single most important thing over two years was to get customers back to having confidence in that business.

To take the role I am currently doing, one of my biggest challenges is dealing with safety, taking an industry with an unacceptable safety performance to an acceptable and exemplary performance. So I think those challenges come in different forms. Particularly if you are chair of the business, the job is about having that sort of vision, not just straightforward but all the way around: what is coming at us that we have not thought about?

Q34 Chair: Before we move on, and in relation to the last question, you mentioned safety issues when you were at Railtrack and the dreadful history of accidents. Did you have any involvement with the Office of the Rail Regulator at that time?

Jonson Cox: Very significant, yes.

Q35 Chair: Could you elaborate on that?

Jonson Cox: As I said, I went into a situation where, whatever I was hired to do as chief operating officer, it became a very operational job for the period I was there. I was not the person in the lead with rail regulation. My involvement was very much about the rail regulator representing the issues of the train operating companies-from memory, 27 train operating companies and three freight companies-and being part of an agreed programme of how to take the service, which the infrastructure provider gave, back to an acceptable level for the train operators.

In terms of engagement on what one might think of as economic regulation matters, that was not my role. No one can have touched even a little bit of that industry and not thought, "Here is a real lesson where all parties had not got regulation right" in that sense, at that time.

Q36 Dan Rogerson: The job description asks for this experience of delivering change. Have you considered where that might be necessary in Ofwat, in coming into post, and where your challenges will be in that regard?

Jonson Cox: I hope this is an acceptable answer. What I feel I have learned from going into organisations is never to arrive on day one thinking I know the answers to that question. To be quite candid with you, I usually go in having made my own little notebook of what I think the issues are. I have been known to put that in an envelope and put it in the desk. Then I go into the, "Let me really discover what it is like now I have been in here". I am also very clear, if you think of a role having a three-year tenure-and in my business life that is what it has usually been-you can’t take more than three months to come up with your view of what you really want to achieve. What I hope I have given you is a sense of half a dozen little things that I think are most important, looking at it today. I would hope over the three-year period that we had moved forward on all six of those.

Q37 Dan Rogerson: On a slightly different area, you have talked already about your experience of working with Government on operational or reactive things, having to put things right where there have been issues. Ofwat has a consultant role, at least, in terms of taking forward policy. We have already discussed the Water White Paper and the water Bill that is coming up. For example, there are issues around social tariffs and a strategic policy statement for Ofwat. What experience do you have of engaging with Government in terms of policy development?

Jonson Cox: I will not pretend it is my strongest area of expertise, so there are things to learn. Let me give you a couple of examples of where I think I have done it. Back in 2004 or 2005, when climate change was barely an issue that people talked about, the Gleneagles summit was coming up and Tony Blair had made that a big part for the UK. I was invited by the Prince of Wales to be one of 12 chief executives to come together to work with Government at the highest level on how the UK should start to think about climate change and how business should engage. I did that because I thought it was a really big issue for the water industry, and I think I was the only member of the whole of the utilities sector who was on that original group. That lasted for the whole period until I left AWG in 2010. It involved very regular engagement on an issue that, over that time, went from being hard to get anyone to talk about, to turning down a lot of opportunities to come and push the argument, because others were making the argument for us.

Q38 Dan Rogerson: On the issue of the water Bill, do you expect to have discussions with Government before its publication?

Jonson Cox: I think that depends on time permitting before its publication. I do not know the date when that will be, and I would not want to say yes or no until I knew what the opportunity was.

Q39 Neil Parish: The review of Ofwat that was undertaken by David Gray identified that a "change of approach" is needed to the way Ofwat has regulated, and water companies should be encouraged to move away from risk-averse strategies to ones that allow innovation. How do you intend to champion such an approach?

Jonson Cox: Gray’s principal point about Ofwat was that regulatory burden point, coupled with a point about the board of Ofwat getting out and about a bit more. My view is that this is a symbiotic with the companies. We have to reduce the regulatory burden, but that takes both parties to play. I recall the submissions to Ofwat that I was part of being 5,000 pages long. That is an unreasonable burden to place on a team. I think of Ofwat as David and Goliath, and being the David in that role. The companies have to reduce their input, just as Ofwat has to reduce its requests for data. Therefore, both parties have to accept that, when you have a much less granular submission of data and running by the rules, there is a different profile of risk that goes with it for all parties. That is a conceptual answer, but I hope it answers your point.

Q40 Neil Parish: Yes, but to take it on a little more, when you came in you talked about getting value for money for customers and so on. Do you not think that, over the years, the companies have been averse to risk and have delivered quite well on infrastructure improvements; but have they delivered so well on pricing structure as we seek more competition? Well, some of us are, anyway.

Jonson Cox: A minor point I want to log is the importance of companies working on tariffs that help customers, which I have some experience of. The biggest point I want to make is that, if I am appointed to this role, I am absolutely clear that one of the two prime duties in this role is protecting customers. Customers are having a very difficult time at the moment. When this regime was conceived, most people’s income probably went up by RPI. I do not know anyone whose income has gone up by RPI in recent years. I am conscious that bills are a very big issue. In some parts of the country, they are an even bigger issue. I am very, very conscious that, looking to the PR14-and I don’t want to pre-judge anything-protecting customers and what they pay is a very important part of the role.

Q41 Chair: To press you on that, if water companies are best placed to promote payment for eco-system services, would you say that the way the water companies are currently regulated could act as a barrier to them investing in these services?

Jonson Cox: When you talk about eco-

Chair: Things like storing water, which is a subject close to my heart, because in Pickering we hope to retain water. In Northumbria the United Utilities water company is doing this already. It is put to us that the price review mechanism is so strict that it is almost a barrier to them investing in this type of innovation and in eco-system services going forward.

Jonson Cox: I have heard that. I am slightly out of date on it. I am absolutely keen to understand why there could be any barrier-and, if so, what we do about it-that is preventing any company from choosing to invest in systems that make better use of a scarce resource. I spent quite a lot of time, with my climate change interest, in my company role, on the issue of sustainable urban drainage. It was only when I started to think about that that I realised that the city near where I live has the biggest sustainable urban drainage scheme in the country. I had never thought of it as such; I thought of it as a series of 11 lakes, most of which are used for public recreation, but it is an SUD. I am very interested in that, but I do not know whether there is any barrier that we would need to think about from a regulatory point of view.

Q42 Neil Parish: In a way-dare I say it?-you slightly want to have your cake and eat it there. On the one hand, you are saying that you are going to protect the customers. But it is going to be a balance between: how do you see your role between balancing what the customer pays, and how much the water companies have to invest?

Jonson Cox: Yes. All these roles have balance in quite a lot of things. I see it as absolutely prime to make sure that the customer gets the best value for money. That is absolutely essential for me. I am not necessarily making the assumption that devices that make more efficient use of water, and so on, will cost investment. I have a bit of a sceptical view on whether that should be the case or not.

Q43 George Eustice: You touched earlier on engagement. One of the other things the Ofwat review said is that Ofwat should do more to engage stakeholders and the water companies it regulates. What could you change to bring that about? Do you think that was a fair criticism?

Jonson Cox: Looking at that, and thinking about it-and please understand I have not had a chance to discuss it with many people-it seems to me that we have a system that is very cumbersome in the way that consultation happens. In the apparent interests of transparency, Ofwat has been very good about putting out consultation documents that have got briefer-and then a whole forest gets cut down to produce the paper required for the number of responses. I do not think that is an effective way of consulting or having a dialogue about taking change forward. I do think there is a need to reform and think about how the consultation and the dialogue on changes happen. There have been times in periodic reviews when it has felt like things happen by megaphone diplomacy, and I would certainly not want to see that. Were I to be appointed chair, there would be a strong role in ensuring that I have informal and formal dialogue with companies, and that we listen and that everybody makes it simpler.

Q44 George Eustice: Does that not happen now-informal dialogue as well as the more formal consultations?

Jonson Cox: Having been out of the sector, I can’t tell you whether or not that happens now. What I can tell you is-

Q45 George Eustice: Sorry to interrupt, but did that happen when you were at Yorkshire Water, for instance?

Jonson Cox: In some cases, yes. But I remain concerned, if I look back to my more recent experience at Anglian, at the amount of that dialogue that happens almost by set-piece consultations-we consult on something, and back comes an answer that reminds me that it is much easier to write a long letter than a short letter, and that leads to a lot of things going in the file. I want to find a way to make the consultation process swifter, more concise, with people getting more to the key points.

Q46 Amber Rudd: To follow up on this conversation about the Ofwat review, it also called for more transparency. Have you given any thought to how that might be achieved?

Jonson Cox: Yes. Transparency is important, and I think that Ofwat is transparent in what it puts out. In my previous experience of it, it has got better. The board of Ofwat has to make some very difficult and often very courageous decisions. I come back to my David versus Goliath point. You have a small team having to make its independent decision in the face of large, voluminous submissions from very eminent advisers and companies. The important thing is to make sure there is sufficient transparency, but also to make sure that Ofwat never loses its power to make a judgment where it needs to make a judgment.

Q47 Barry Gardiner: To come back to a question that you were pressing, Chair-the answer to which I was very surprised by-we were discussing the regulatory asset base and, Mr Cox, you expressed some surprise at the question and pleaded ignorance about the way in which the regulatory asset value might be important in these matters. Surely you understand only too well that the regulated return on your capital is judged on your regulated asset value.

Jonson Cox: Of course.

Q48 Barry Gardiner: Therefore, it is in the water company’s shareholders’ favour-and always has been in their favour-for the company to invest in concrete and steel that costs money, rather than in green remediation or in soft technology, which it cannot show on its books as part of its regulatory asset value. I was honestly amazed that you seemed oblivious to that.

Jonson Cox: I am sorry-there must have been a misunderstanding. I am absolutely well aware of those arguments.

Q49 Barry Gardiner: In that case, can we come back to the question about how Ofwat intends to change the regulatory structure so as to incentivise the sort of SUDs that you were talking about: to incentivise that sort of green technology that will not appear on the balance sheet, when it is precisely against the company’s interests to do that?

Jonson Cox: Two things-just to put your mind at rest-that I am very well aware of: the debate and argument that the companies are principally interested in RAV growth, I understand that; and the point that separating out the allowance for operating expenditure and capital expenditure can give a bias towards capital expenditure. I am very well aware that, if you let the asset base grow unconstrained or you put in more growth in the asset base than is absolutely necessary, you have an adverse effect on customers’ bills. I am very aware that it is the role of the regulator to make sure that balance is struck fairly, struck in such a way that you keep bills for customers at the lowest level that is compatible with a sustainable service.

Q50 Barry Gardiner: Let me put it another way. I asked a slightly different question than that. I was not talking about striking a fair balance. I was asking you about the move that there has been, which has been indicated to the Committee by the chief executive, who very well understands the need to move from a regulatory regime that rewards investment in the regulatory asset value of the kit-the technical term-instead of providing an equal reward or incentive to companies to look at greener technology as ways to solve their problems, so that instead of contributing to all the other costs of-

Chair: If you can give Mr Cox a chance to reply.

Jonson Cox: I am afraid that I must have created a misconception here. I absolutely do understand the importance of this, for a whole host of reasons: keeping bills down, climate change effect and emissions effect, that companies are incentivised to find the least cost and the greenest or most climate-efficient way of doing things. From my experience, there are things you can do when you build a waste water treatment works-let me give you an example-from pouring a lot of concrete or building a lot of steel, to something that I was terribly proud to champion at Anglian that involved no steel and no concrete.

Q51 Thomas Docherty: It must be the way we were asking the questions; apologies for that.

We have heard a great deal about how you understand where companies are coming from. As chair of Ofwat, that is not your primary responsibility, though.

Jonson Cox: No.

Q52 Thomas Docherty: Can you demonstrate how you understand where customers are coming from, and what customers need out of all this?

Jonson Cox: Absolutely. It is a very hard-pressed and very difficult time for customers at the moment across the whole economic spectrum. I believe the absolute primary thing is the lowest achievable bills for customers, choice where possible, tariffs that help them make choices about how they use water, resilience in the way their water is provided. That is an issue we can spend quite a lot of time on because, for instance, this sector did not grow up with the resilience that we are used to in the electricity sector. It is also a level of service that is on a par with the best of what customers receive in any other sector, where they have a choice about who their provider is. That is my understanding of what matters to customers.

Q53 Chair: Looking at your previous experience, particularly delivering sustainable development, how will that experience be relevant to this industry and to your role as regulator?

Jonson Cox: It has given me an understanding that there are times and places where a different solution from what I will call the conventional "pouring concrete or building steel" delivers an equal or better outcome and a more sustainable outcome. If I had not had that experience, I might be sceptical about it, but I have seen it for myself.

Q54 Chair: Can you envisage any areas where delivery of your leadership vision for Ofwat could lead to political conflict?

Jonson Cox: Political conflict? I am very aware that it is a role that both has an independence in some of the functions that Ofwat carries out, together with the importance of listening to policy and direction from the Government, from this Committee, and from others. There is a balance there, about making sure that one has listened carefully. You do not want to get into conflict in that, but sometimes there are conflicting views through which you have to find a way.

Q55 Chair: You will have detected from the line of questioning that the role that you are undertaking is a very challenging role. On the one hand, we look for you to deliver affordable bills for customers. On the other hand, we want to see more competition, more innovation and more sustainable development. If you are confirmed in your position, how would the Committee judge your role at the end of your first three-year tenure?

Jonson Cox: How should you judge my performance at the end of my tenure? If I just take as an example the six things that I talked about, I said outstanding value for customers. I would expect you to be asking me, "Can you demonstrate that Ofwat, in the way the board made its determinations in PR14, delivered the best outcome for customers?"

I talked about improving the management of water resources. That picks up a lot of issues around innovation, different ways of using water, and metering, which we have not discussed but we will no doubt discuss at a future stage. I would expect you to hold me to account on what we have done in that area.

I talked about making a step change in customer service, so that customers look at the sector and feel that they get the same service that they would get if they really had a choice, or with sectors where they do have a choice.

I talked about how one thought about companies sharing benefits and pain with customers. That is important for how the review is struck and how the risks are allocated between customers and companies.

I talked about resilience, which I believe is a really important area in which to move forward, without creating the opportunity for lots more money to be invested in the asset base-which Mr Gardiner was asking me about-but making sure resilience improves.

You should also judge me on building an effective and capable Ofwat board, bearing in mind that this is not the post of CEO of Ofwat but it is to build a board that effectively governs Ofwat. I hope that answered your question.

Chair: I believe so.

On behalf of the whole Committee, I thank you for being so generous with your time, for accommodating our timetable and for being with us today at such short notice. We are extremely grateful to you.

Prepared 13th July 2012