Ofwat May Relax Water Price Proposals on U.K. Opposition

Ofwat, Britain’s water regulator, may soften proposals rejected by utilities over price reviews not linked to inflation that have created investor uncertainty and fears of possible rate increases, RBC Capital Markets said.

A compromise may have to be found with water companies after Ofwat said last month it wants flexibility to hold price reviews more often than the current five-year period, which may lead to rates not linked to inflation or a company’s assets.

“We are more encouraged that a middle ground is a viable option where investor confidence can be reinforced whilst allowing increased competition in areas that will ultimately benefit consumers,” John Musk, an analyst at RBC in London, and associate Maurice Choy said in an e-mailed note.

Companies including United Utilities Plc, Britain’s biggest publicly traded water company, and Severn Trent Plc on Nov. 23 submitted alternative suggestions to the proposals designed to boost competition and secure future water supplies.

Severn Trent suggested the proposal that may expose 40 percent of a company’s wholesale revenue to more frequent price reviews should be cut by half to 20 percent. Other utilities may have gone “even further” in their responses, suggesting a compromise could be in the offing, RBC said.

This would be “positive” for the sector, Musk and Choy said. United Utilities’s shares have fallen almost 4 percent since the proposals were made public in October and Severn Trent has slumped about 10 percent.

“Ofwat, I believe, realizes it is in a minority of one and unlikely to win this battle,” Musk said in an e-mail. “I fully believe there will be a near full climb-down by Ofwat.”

The regulator said today that it’s “in the process of considering all responses and will provide an update on next steps in due course.”

Ofwat could respond as early as next week, and it’s likely to start another round of discussions before year-end, RBC said.