Walsall MBC may take the Audit Commission to court after it and Coventry MBC failed to receive the 'fair' comprehensive performance assessment ratings they feel they deserve.
Walsall chief executive Annie Shepperd said she felt a judicial review might be unavoidable after the commission
Coventry chief executive Stella Manzie said legal advice indicates the council has a strong case for judicial review, but it is unlikely to proceed because of the cost.
However, she launched a scathing attack on the regulator's handling of the councils' cases and said the CPA's credibility was seriously damaged.
Both councils had been expecting 'fair' ratings to be announced last month but their re-inspection reports were withheld after the commission discovered an anomaly in its scoring system (LGC, 16 April).
The rules specified that councils undergoing a corporate assessment this year had to score 36 to move up from 'weak' to 'fair' - four points higher than the threshold for 'fair' in the first CPA in 2002. But the rules said nothing about formerly 'poor' councils.
Coventry and Walsall, which both scored 34, believed they would be judged by the lower threshold.
Ms Shepperd said: 'It's difficult to see how a judicial review can be avoided. We have already taken legal advice.'
She added: 'The commission has never made a clear case for taking away our hard-won 'fair' rating.'
Ms Manzie said: 'We have absolutely played the [CPA] game and thought we would have reaped the benefits.
'The credibility of CPA wasn't high before but it is significantly lower now.'
The councils pointed out they were rated lower than authorities with as many or fewer points in at least one section of the CPA - corporate ability or service performance.
Ms Manzie claimed there were eight 'fair' councils with a corporate ability of less than 36 and similar service sc ores to Coventry.
Audit Commission managing director for local government Frances Done said: 'I would admit that the requirements for the move between 'poor' and 'fair' were not explained. But they were absolutely implied. There are 150 top-tier authorities, and just two felt the rules were
She rejected Coventry and Walsall's protests about having as many or greater points than some 'fair' councils. She added that CPA was not designed to provide an absolute comparison between authorities.
According to Ms Done: 'An authority that has a corporate assessment this year should not be compared with one that had one two years ago [because of changing thresholds]. There isn't a legal requirement for us to have a system that measures all authorities by the same rules at the same time.'