Severn Trent, Pennon Lead Utility Gains on Inflation

Severn Trent Plc and Pennon Group Plc led gains among U.K. water utilities in London trading on speculation faster-than-forecast inflation will support prices.

Severn Trent closed at a three-week high, while Pennon rose to its highest in a week as the Office for National Statistics said inflation unexpectedly quickened in February after higher food costs and currency weakness sustained price pressures.

“This is seen as a small positive,” Mark Freshney, a London-based analyst at Credit Suisse Group, said today by telephone. “Water stocks are inflation plays.”

The inflation rate is used in setting the price of water in England and Wales, where utilities’ level of investment and customer tariffs are regulated. Ofwat, the industry watchdog, is undertaking a pricing review that will set rates and spending targets for the five years from 2010. Falling consumer prices can cut utility revenue without curbing costs at the same pace.

Ofwat will establish price limits for each company in a so- called final determination in November. The rates customers pay will then be calculated according to that cap and inflation, which is reviewed each year in the five-year period.

The regulator will use the inflation rate from this November to calculate prices effective April 2010.

Pennon closed up 8.5 pence, or 2.1 percent, at 416.5 pence, the highest since March 17. Severn Trent climbed 1.1 percent to 1,036 pence, the highest since Feb. 27. United Utilities Group Plc, the largest U.K. water company by market value, rose 1.7 percent to 505 pence. The U.K. benchmark FTSE 100 Index declined.

U.K. consumer prices increased 3.2 percent last month from a year earlier, according to the Office for National Statistics. The median forecast of 28 economists was for 2.6 percent.

To contact the reporter on this story: Rachel Graham in London at rgraham13@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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