S&P Global Ratings are warning that regulatory reset, Brexit and other political risks could weigh on UK utility ratings – and a scenario in which the U.K. leaves the EU without a deal could lead to a prolonged period of market volatility, with reduced market liquidity and increasing regional risk.

In a report published today, the ratings agency examines the multiple political and regulatory risks facing regulated and unregulated utilities in the U.K. that could add pressure to their ratings.

S & P said that in recent years UK utility companies have come under public pressure and often have been criticised by the public and politicians for mishandling the risks, by making excessive profits, lacking transparency, mistreating vulnerable customers, underinvesting in aging assets and failing to protect the environment.

According to the ratings agency, the sector's main regulators--the Office of Water Services (Ofwat) and the Office of Gas and Electricity Markets (Ofgem)--have been subject to continuous scrutiny by politicians for failing to adequately balance the interests of consumers with those of investors.

"Perhaps the clearest illustration of this scrutiny is the proposition by the current opposition party, Labour, to bring key utilities back into public ownership," said S&P Global Ratings analyst Matan Benjamin. "The aim of the policy is to deliver lower prices, increase accountability and develop a more sustainable economy."

S&P Global Ratings is currently continuing to assess U.K. country risk as low and the rated water, electricity, and gas companies in England and Wales as benefitting from one of the best regulatory frameworks in Europe.

However, Matan Benjamin continued:

“In our view, the high political pressure could weigh on the ratings of both regulated and unregulated companies."

"Regulatory reset risk is increasing for water companies as the review process for the next regulatory period nears conclusion. For energy supply companies, the introduction of a tariff cap has undermined business prospects and added pressure on the ratings on the two largest players, Centrica and SSE."

S & P said that at this stage, the risk of a no-deal Brexit is still not base case, but has “increased sufficiently to become a relevant rating consideration.”  According to S & P, the ratings on water companies are already under pressure due to low returns and rigorous benchmarks on cost efficiencies and service performance.

Matan Benjamin added:

"Generally speaking, we do not expect the immediate implications of Brexit to be material for the stand-alone credit quality of rated utilities."

"Their business operations largely take place in the UK, with limited cross-country transactions, and several utilities benefit from local monopoly positions. That said, a scenario in which the U.K. leaves the EU without a deal could lead to a prolonged period of market volatility, with reduced market liquidity and increasing regional risk."