Last week Owen Paterson, the environment secretary, wrote to the chief executives of water companies urging them to consider forgoing allowed price increases in 2014/15.
While Moody’s believes the impact on companies of not increasing prices next year would be modest, it said the letter acted as further evidence of the “difficult environment in which the sector now operates”, with affordability of utility bills high on the political agenda.
“If political pressure were to result in Ofwat departing from its established price setting methodologies and the outcome of the 2014 price review were politically driven, we would view this as a clear credit negative for the sector,” said the ratings agency.
According to Moody’s, the political scrutiny is adding to “an already challenging backdrop” for Ofwat’s PR14.
Stefanie Voelz, an analyst at Moody’s, said: “The increasing pressure on water companies to reduce bill increases for customers will be felt mainly at the upcoming price review.
“Companies with large investment requirements, such as Thames Water, will be particularly challenged. The company is already facing pressure from the regulator, who is considering making a substantial favourable effects claim on the basis that the company disproportionately benefited from low funding costs and high inflation. Ofwat had also been reviewing Thames Water’s application for an interim determination of K for the year 2014/15, which it declined formally on 8 November 2013.”