Ofwat’s plans for the next price review will undermine a regulatory regime that has governed the UK water industry since its privatisation in 1989, Moody’s warned this week.
As well as slashing allowed company returns, Ofwat is proposing to claw back any financial benefits that accrue from highly leveraged capital structures. Moody’s maintains that such moves to influence levels of gearing and dividend policies – in response to recent public and political pressure – represent “significant departures from past regulatory practice”.
The rating agency also noted that holding companies with debt outside the regulated utility business would be “particularly exposed” to dividend cuts.
While the industry previously had to cope with cuts in allowed revenues at the 1999 price review, Moody’s pointed out that the sector was then in a stronger financial position to face such a challenge. The agency has consequently now placed most companies in the sector on negative outlook.