Friday, June 23, 2017 11:32 AM /Fitch Ratings
The UK government's two-year legislative plan set out in the Queen's Speech on Wednesday suggests utilities are unlikely to face widespread price caps or other significant market reforms in the near future, Fitch Ratings says. However, the result of the recent election still points to rising political risks for the sector in the long term.
The Conservative Party's manifesto included a pledge to introduce a "safeguard tariff cap" for some customers on the poorest value tariffs. The wording appeared to have already been toned down from language used during the campaign, but the Queen's Speech, which opens each session of the UK parliament, only made reference to tackling "unfair practices" in the energy market to help reduce bills.
Briefing notes to the speech also do not mention a cap, but say the government is still looking at ways to extend "price protection", possibly via the regulator rather than legislation. We believe this makes significant energy price caps for the sector much less likely.
Similarly, the government has been considering introducing retail competition for household water customers since 2015 and it is reviewing the cost-benefit analysis that the regulator published in September 2016. This is likely to become a lower priority given how much harder it will be for a minority government to pass legislation and the amount of parliamentary time that will be taken up with Brexit. Depending on how they were implemented, both of these measures could be credit negative for Fitch-rated water and energy utilities, and the election result therefore alleviates near-term risks.
However, the election outcome strengthens the long-term trend towards political intervention in the sector. The opposition Labour Party performed much better than many polls had predicted and its manifesto included pledges that could be disruptive for Fitch-rated utilities.
The water regulator, Ofwat, will publish proposals for the methodology of its 2019 price review on 11 July. Given the election result and the timeframe, we do not expect the introduction of household competition to be part of the next five-year price control period, which starts in 2020, even if the government decides to implement it in the future. However, other elements of the next price control are likely to be credit negative, including changes to the indexation of regulatory capital value and regulatory allowed revenues, and alternative approaches to setting the cost of debt.
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