LONDON, July 30 (Reuters) - Moody's put British water

utility Southern Water on a 'junk' rating downgrade warning on

Tuesday, saying the shortfall in UK regulator Ofwat's draft

ruling on how much it will be allowed to raise prices could lead

to serious financing problems.

Moody's said it had placed the Baa3 backed and underlying

senior secured ratings of SW (Finance) I PLC (Southern Water) on

review for downgrade. Baa3 is the last rung of investment grade.

"The review for downgrade reflects our expectation that

Ofwat's draft determination would, if not materially changed...

result in severe Outcome Delivery Incentive (ODI) penalties and

total expenditure (totex) allowances below the level needed to

fund Southern Water's investment programme," Moody's said.

"Together with an allowed return that falls significantly

short of Southern Water's actual cost of capital, such

under-performance may challenge the company's ability to raise

equity finance to maintain leverage at levels consistent with

the current rating," it added.