Water companies are “laying the groundwork” to appeal Ofwat's decision to limit how much customers' bills can rise, according to a major credit rating agency.
Moody's said in a report on the water industry that it expected companies to take the water regulator's final decision on bill increases to the competition watchdog for reconsideration if return on investment expectations did not improve.
Businesses in England and Wales requested to spend a total of £104.5bn by increasing bills by £144 over the next five years in their submissions to Ofwat's price review process, but in July the regulator only provisionally allowed them £88bn. pounds, limiting increases to £94.
The companies responded formally the following month and Ofwat is due to make a final decision in December, although this could be delayed until January.
Stefanie Voelz, vice president and senior credit officer at Moody's Rankings, said: “Companies' statements in response to the draft indicate that many are laying the groundwork for an appeal to the Competition and Markets Authority, if the risk and return profile is “It has not been rebalanced in your favor.”
Four companies challenged Ofwat's 2019 price review before the competition watchdog and successfully won more generous compensation over the cost of capital.
Since then, the state of the water industry has rocketed up the public agenda, with pressure from politicians, activists and the public for companies to spend on infrastructure to prevent wastewater leaks and spills after years of underinvestment, huge dividends and high executive salaries.
Companies have asked for an average return of 4.4%, while Ofwat provisionally said it would allow 3.66%. Moody's estimates that the final figure could be in a range of 3.7% to 4.1%, based on the latest market data.
In the report, Moody's said the outlook for the sector remained “negative.” “Public, political and regulatory scrutiny remains high amid serious concerns about the operational and financial performance of companies. There is a risk that this will result in a less favorable risk-return profile that could further weaken the business risk profile of the sector,” Voelz said.
Moody's said some companies could “struggle to attract capital for an ambitious investment programme”, but could improve its view on a sector if Ofwat's final decision was more generous, “or management and shareholders took mitigating measures to strengthen credit quality”.
In a letter to Ofwat, industry body Water UK has argued that the regulator's draft decisions would “likely make it impossible for the water sector to attract the level of investment it needs”.
The report came as Moody's hosted a closed-door industry conference on Tuesday, attended by the heads of Ofwat, Water UK and United Utilities.
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The outcome of the price review is seen as particularly important for the future of Thames Water. Britain's biggest water company, which is £15bn in debt, is trying to negotiate a loan to secure its short-term future and also raise more than £3bn in new capital, most likely from foreign investors.
Thames risks falling into a government-controlled administration at an awkward time for the Labor government as it tries to position Britain as a safe haven for international investors. Business leaders from around the world attended their investment summit in London on Monday.
Thames' debt rating was cut to lower junk levels by S&P International Rankings and Moody's last month.
Ofwat is set to appoint LEK Consulting, a firm based in London and Boston, as the independent monitor of the Thames, Sky Information reported. Ofwat said in August that a supervisor would be hired who would have access to the company's financial information and report to the regulator.
An Ofwat spokesperson said it had received a “diverse range of views” in response to its draft price review and was considering the responses “carefully”.
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