Fitch Ratings says in its 2009 credit outlook report on the Italian utility sector, that the combination of the anticipated domestic recessionary environment, the trend of oil price volatility and the effects of the global financial crisis on the domestic banking and capital market will put pressure on credit metrics of Italian utilities.

"Despite the strong resilience shown by the energy and utility sector to the generalised weakening of the economic and credit environment in the first nine months of 2008, the decline in consumption and production forecast for 2009 is likely to have a negative impact on electricity and gas demand", says Francesca Fraulo, Director in Fitch's Energy, Utilities and Regulation team for the EMEA region.

Recent tariff reviews that provide stable revenues over the regulatory periods that run to the end of 2011 will benefit regulated electricity and gas transmission and distribution utilities. Some volume related tariff parameters could be negatively affected by the expected demand reduction; however, the severity of such a decline will depend on the magnitude of the economic recession. Regulatory adjustments are also being discussed to potentially prevent further negative effects.

Companies most exposed to the falling demand in 2009 are electricity generators with un-hedged long positions. The combined effect of declining oil prices, reduction of demand and restored generation reserve margins are likely to drive down electricity prices over the next 12 to 18 months.

"The deteriorating economic scenario will cause a radical change of strategy for most market participants," adds Francesca Fraulo. "The investment spree in new generation capacity witnessed over the last six years is over. While the likely move of the price determination method proposed by the recent Government decree from the system marginal price to a 'pay-as-bid' method will substantially reduce incentives for new built generation and cause a change in companies bidding strategies with uncertain effects on margins."

Regulatory risk persists and contributes to undermine stability of the sector. In 2008 the introduction of the "Robin Hood" tax and the recent proposal to change the electricity price determination method shows that the Italian Government's intervention power remains strong. Other market segments including water and waste are under discussion and likely to be affected by sector reform next year.

Consolidation is expected to continue in 2009 as electricity and gas utilities seek to expand their customer base in response to competitive pressure. Capital market conditions will play a critical role for the sector over the next 12 months. Debt refinancing needs and investment plans will be negatively affected by availability of bank financing and cost of debt. Companies with higher debt exposure are likely to suffer most.