Water companies are “laying the groundwork” to appeal against Ofwat’s decision to rein in how much they can increase customers’ bills, according to a leading credit rating agency.
Moody’s said in a report on the water industry that it expected the companies to take the water regulator’s final ruling on bill rises to the competition watchdog for reconsideration if expectations for returns on investment did not improve.
Companies in England and Wales requested to spend a total of £104.5bn by raising bills by £144 over the next five years in their submissions to Ofwat’s price review process, but in July the regulator provisionally only allowed them £88bn, capping the increases at £94.
Companies formally responded the following month and Ofwat is due to make a final decision in December, although this could slip to January.
Stefanie Voelz, the vice-president and senior credit officer at Moody’s Ratings, said: “Companies’ representations in response to the draft indicate that many are laying the ground for an appeal to the Competition and Markets Authority, if the risk and return profile is not rebalanced in their favour.”
Four companies challenged Ofwat’s 2019 price review with the competition watchdog and successfully received a more generous allowance on the cost of capital.
Since then, the state of the water industry has shot up the public agenda, with pressure from politicians, campaigners and the public for companies to spend on infrastructure to prevent leaks and sewage dumping after years of underinvestment, huge dividends and high executive pay.
Companies have asked for an average return of 4.4%, while Ofwat provisionally said it would allow 3.66%. Moody’s calculates the final figure could fall within 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 over the companies’ operational and financial performance. There is a risk that this will result in a less favourable risk-return profile that could further weaken the sector’s business risk profile,” Voelz said.
Moody’s said some companies might “struggle to attract capital for an ambitious investment programme” but it could upgrade its view on a sector if either Ofwat’s final decision was more generous, “or management and shareholders take mitigating action to bolster credit quality”.
In a letter to Ofwat, the 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 that it needs”.
The report came as Moody’s hosted an industry conference on Tuesday, attended by the bosses of Ofwat, Water UK and United Utilities at the Plaisterers’ Hall in London, which was bombed in the second world war.
At the event, Water UK chief executive, David Henderson, said: “As we gather here in a building that, after total devastation, was rebuilt into the splendour that we see today, let us take inspiration.
“While the water industry is not – yet – smouldering in ashes from a dropped bomb, it is certainly in a difficult place. If we are given the tools we need, we know what needs to be done to rebuild..”
The outcome of the price review is seen as particularly significant for the future of Thames Water. Britain’s biggest water company, which is labouring under £15bn of debts, is attempting to negotiate a loan to secure its short-term future and also raise more than £3bn in new equity, most likely from overseas investors.
Thames risks falling into a government-handled administration at an awkward time for the Labour government as it attempts to position Britain as a safe haven for international investors. Business leaders from across the globe attended its investment summit in London on Monday.
Thames’s debt rating was slashed to the lower levels of junk by S&P Global Ratings and Moody’s last month.
Ofwat has appointed LEK Consulting, a firm based in London and Boston, as an independent monitor to Thames, in a move first reported by Sky News. Ofwat said in August that a monitor would be enlisted. LEK will “report on the progress of Thames Water against its equity raise and transformation plans”, Ofwat said.
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”.
