UK water firms' Ofwat dispute heats up

A majority of water firms are unwilling to accept Ofwat's demand for unprecedented flexibility over the sector, opening the door for a lengthy referral to the Competition Commission.

The stage has been set for a potentially lengthy showdown between UK water regulator Ofwat and the private firms that manage the UK water sector, after the latter declined to accept the regulator's proposed changes to the licensing regime.
“Moody's understands that a majority of the incumbent water companies in England and Wales have declined to accept, in their current form, proposals by Ofwat to modify companies' licences. The non-acceptance, together with the possibility of the regulator now referring the matter to the Competition Commission (CC), sustains uncertainty which is credit negative,” senior vice president Neil Griffiths-Lambeth wrote in a note.
Ofwat is seeking significant changes to the current regulatory regime, including the ability to move activities accounting for up to 40 percent of water firms' total revenues outside of the established price control framework. In addition, Ofwat also wants to end the present five-yearly price review.
Water companies had until November 23 to get back to Ofwat with their comments. The next price review is in 2014. According to Moody's, there is still a possibility that the regulator and water firms might extend discussions, with a view to resolving their differences without involving the CC:
“We note, however, that Ofwat also said in a note published on November 21 that it would welcome responses that set out companies concerns and how they might be addressed; this together with company responses may open the door to a further period of discussion between the companies and the regulator. Both sides will be keen to avoid a time consuming and costly CC referral if at all possible,” Griffiths-Lambeth added.
The dispute comes at a time of intense scrutiny for the UK water industry. A few weeks ago, a flurry of newspaper articles – spearheaded by a Guardian collaboration with Simon Hughes, deputy leader of the Liberal Democrat party – accused the sector of tax dodging, overleveraging, and excessive dividend practices, among other criticisms.
There were also calls for an investigation of the sector by parliamentary watchdog the Public Accounts Committee. It should be noted that the water industry rejects these allegations.
The UK water industry – partly on the back of its stable regulatory framework – has been remarkably successful in attracting private sector capital over the years. A widely quoted estimate indicates the sector has been able to attract around £100 billion (€124 billion; $160 billion) of institutional capital over the last two decades.