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Morgan Stanley has raised its rating for United Utilities as part of its review into the UK water sector ahead of the Ofwat regulatory price review that will set prices for 2015-20."The 2014 regulatory review will clearly be tough but this is surely well known," the US bank said in a research report Thursday."We expect clarity on allowed returns shortly, which should remove uncertainty, and we think fears of dividend cuts are overdone."Morgan Stanley said the industry is now at the "point of maximum uncertainty" ahead of the January 27th Ofwat review. However, the regulatory risk that has been hanging over stocks has now been priced in, it said. The bank estimates that Ofwat will set a so-called 'vanilla' weighted average cost of capital (WACC) - which does not take taxes into account - of 3.9%, implying a 10-60 basis-point cut to the returns proposed by the 10 water and sewerage companies in their business plans.United Utilities has been labelled as Morgan Stanley's top pick in the sector as it offers good value and has "superior upside" than other water companies. The stock's rating has been upgraded from 'equalweight' to 'overweight', while the target price has been cut from 780p to 775p."The stock is trading close to its regulated capital value (at just a 1.5% premium) and we see 17% upside to our new price target even factoring in a cut to the company's proposed allowed return."United Utilities was trading 4% higher at 685.5p on Thursday morning.Severn Trent has been left at 'equalweight' with a reduced target price of 1,696p (from 1,730p); Pennon, also rated 'equalweight', has had its target price lifted to 723p (from 685p).BC