Utility Week

UTILITY WEEK | 6TH - 12TH DECEMBER 2019 | 19 Finance & Investment Analysis T ory privatisation of our utilities has been a disaster." This unequivocal view is set out in the Labour party's recently published manifesto It's Time for Real Change. The manifesto lists some radi- cal policies, including widespread renation- alisation of the utilities sector. If the opinion polls are anything like accurate (they are currently projecting a Con- servative overall majority), these policies will not be implemented. And even if Labour led a coalition government, it is unlikely that much of its renationalisation programme, would get through. The overall cost of this policy would be massive. While the actual costs are hotly dis- puted, the Confederation of British Industry has priced it at £196 billion. Detailed proposals Given the political sensitivity of being green, especially among young voters, the mani- festo also confirms a target of nearly 90 per cent of electricity being generated from renewable or low-carbon sources by 2030. In terms of corporation tax, Labour is planning a rise in the rate from 19 per cent to 26 per cent by 2022 – a policy that will not exactly help the balance sheets of individual utilities. And there is a proposed windfall tax on oil companies, with BP and Shell being obvious targets. The 1997 windfall tax on the utilities sector will be seen as a precedent in this respect. More specifically, the manifesto contains pledges for individual utility sectors, with the UK's leading energy companies sitting at the top of the shopping list. The UK assets of National Grid would be requisitioned by a new UK National Energy Agency, including its valuable US assets. National Grid is currently capitalised at over £30 billion. Aside from its UK electric- ity transmission business, National Grid also owns and manages the gas transportation network – both pivotal to UK energy supply. Also on Labour's hit list are the 12 dis- tribution network operators (DNOs) in England and Wales as well as the two in Scotland, owned by Scottish Power and SSE respectively. Taken together, renationalising these energy businesses would cost many tens of billions of pounds, even if a future Labour government paid only modest compensation. By contrast, the supply businesses of the big six are worth far less, as demonstrated by the modest price that SSE achieved for its retail-facing supply business, bought by sec- tor upstart Ovo Energy. Labour's manifesto is surprisingly pre- cise on renewable generation issues. It states baldly that "we will build 7,000 new off- shore wind turbines and 2,000 new onshore wind turbines". And on nuclear power, with which the Labour party has had a chequered relationship, it now supports new nuclear- build – for energy security reasons. Energy efficiency is also name-checked, with no less than 27 million houses being targeted for energy efficiency measures. Although the water sector is earmarked for renationalisation in the foreword by Labour leader Jeremy Corbyn, the manifesto itself makes scant reference to it. However, previous Labour publications have proposed the establishment of publicly owned regional water authorities to replace privately owned companies: Scottish Water, which was not privatised, or the not-for-profit Dwr Cymru could be used as a template. Implementing such a wide-scale rena- tionalisation policy would be a Herculean task, even if utility share prices plunged – as they assuredly would – before legislation was put before parliament. Shadow chancellor John McDonnell has stated that compensation levels would be set by parliament and would be paid in the form of gilt-edged stock, thereby adding apprecia- bly to the already enormous £1.8-plus trillion national debt. Utility shareholders do have some pro- tection, whether through ownership rights prescribed under the Human Rights Act 1998 or, in some jurisdictions, by bilateral interna- tional treaties. The one certainty is that spe- cialist lawyers would be very busy. Importantly, there are few recent prec- edents for setting compensation levels. Over the past two decades, both Royal Bank of Scotland (RBS) and Railtrack have been nationalised. In the former's case, a vast capital injection of £45.5 billion of taxpayers' money took place to prevent its bankruptcy. In 2001, the then Labour government sud- denly renationalised Railtrack, as concerns about its heavy underinvestment deepened. Despite its share price peaking at over £17, investors finally received around two-thirds of the 380p flotation price. Regulatory capital value It is likely that the water sector would be near the front of the renationalisation queue, with regulatory capital values (RCVs) pos- sibly being used. Currently, for the ten pri- vatised companies, RCVs total £75 billion. If compensation were given at just 20 per cent, this would equate to the c£15 billion valua- tion that Labour has placed on the sector. For United Utilities and Severn Trent, valued at £5.9 billion and £5.5 billion respec- tively, this would give renationalisation com- pensation of just £1.2 billion and £1.1 billion. For National Grid, its US assets would need to be stripped out, thereby reducing its UK value to below £20 billion. Add in a he©y renationalisation discount and shareholders inevitably would not be happy. Renationalising the 14 DNOs would be immensely challenging, given the diversity of their ownership: RCVs would again be an obvious starting point. The key company is probably UK Power Networks, currently owned by a leading Hong Kong consortium. If current opinion polls hold up, all these issues will be academic. If not, Labour rena- tionalisation of UK utilities will be a disaster for their shareholders. Nigel Hawkins, is an analyst at Hardman and Co and a Utility Week correspondent Labour's radical agenda for nationalising utilities Utilities had better hope opinion polls are right and the Tories win the general election, or the sector is heading for renationalisation and shareholders will be scalped, says Nigel Hawkins. "

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