Moody’s has estimated that UK water companies could be fined a total of roughly £2bn over the next five years.
Analysts at Moody’s Ratings said in a report that they expected “most” of the 17 major water firms in England and Wales to incur net penalties over the period if they perform in line with their business plan assumptions.
The forecast came after regulator Ofwat issued a draft determination last month allowing companies to increase average bills by 21 per cent to fund an £88bn infrastructure upgrade – less than the 33 per cent the industry had requested and prompting criticism from the sector.
Moody’s analysts said the draft raised the risk that water companies’ returns may not be enough to attract the equity funding they need to support more investment.
“If the draft is adopted unchanged we could lower our view of the regulatory framework’s stability, predictability and supportiveness,” they added.
Analysts said companies were exposed to a higher risk of cost overruns or future underperformance as initial expenditure allowances may be below their needs and require upfront funding.
“We expect regulators to respond to additional evidence companies present, with final determinations typically less onerous than drafts,” they added. “However, the DD increases the sector’s business risk, a credit negative.”
Resolving issues plaguing Britain’s water industry has been an early test for the new Labour government. Opponents have accused firms of under-investing in critical infrastructure for decades while paying out billions in dividends and awarding executives big bonuses.
The UK’s biggest supplier, Thames Water, faces the costly prospect of being nationalised as it struggles under a massive debt pile. Moody’s lowered Thames Water’s class A debt to “junk” last month after Ofwat placed it under a so-called turnaround oversight regime.
Earlier this month, Ofwat fined three water firms a total of £168m over failures tied to illegal sewage discharges into rivers and the sea.
Elsewhere, payouts for customers from firms who fail to meet standards could be set to double under new proposals set out by the Department for Environment, Food and Rural Affairs (Defra) this week.