Utility Week

14 | 13TH - 19TH DECEMBER 2019 | UTILITY WEEK Election 2019 Constraints to nationalisation Should Labour gain a majority in the general election and the opportunity to put its nationalisation plans into practice, what would the legal constraints be on the reforms, and what could it mean for investors? Comment Andrew Lidbetter L abour's 2019 manifesto con rms its utilities nation- alisation plans extends to nationalising the water companies, the energy network companies and the energy supply businesses of the big six, and bringing an expanded pipeline of o• shore wind farms into majority public ownership. The proposals raise questions about legal constraints on the reforms and the level of appro- priate compensation for investors. Compensation for a• ected investors under Labour's nationalisation policies will inevitably be controversial. A• ected investors should be entitled to compensation based on the property rights protections in the Human Rights Act 1998 (which directly incorporates the Euro- pean Convention on Human Rights into UK law). Of particular relevance, as the Labour policy documenta- tion acknowledges, is Article 1 of Protocol 1 of the ECHR ("A1P1"). Additionally, investment treaties with other states o• ers some protection against acts of those states that adversely a• ect qualifying investments, including a right to compensation. Property-related human rights protections The case law under A1P1 requires the government to provide a• ected investors with compensation of an amount "reasonably related" to the value of their inter- est for deprivations of property. It will not necessarily equate to full market value, but must not be manifestly disproportionate to the value of what is taken. Labour relies on the Northern Rock nationalisation litigation as a precedent. While the decisions of the Court of Appeal and European Court of Human Rights note that the government had a wide "margin of appre- ciation" in determining compensation under A1P1, the Northern Rock nationalisation occurred in an emergency situation amid concerns about the nancial system's collapse. It may be that, in the absence of a crisis, the government would be given less latitude. Compensation issues Several features of Labour's nationalisation compensation approach raise issues from the perspective of A1P1. Firstly, is a compensation methodology based on asset value, rather than share price, appropriate? Labour proposes to o• er book value reduced by reference to speci ed deduction factors. UK nationalisations have generally been conducted by way of a share price based valuation methodology. There has been limited direct consideration of the question of asset valuation versus share price. In the shipbuilding nationalisation case, the court found it was lawful to base compensation on the value of the shares in the nationalised companies as the government had chosen to do, describing an asset valuation as being "a costly and time-consuming revaluation of the assets concerned". However, the court was not saying that a book value would never be appropriate, and in the cur- rent regulatory environment, asset valuations are readily available to draw on. Secondly, Labour notes that the book value may be reduced by reference to "deductions" based on: (i) state subsidies given to the energy and water companies since privatisation; (ii) asset stripping since privatisation; (iii)™stranded assets; (iv) the state of repair of assets; and (v) pension funds de cits. Deducting factors have not previously come before the court. One question is whether they all fall within the requirement that investors be compensated with an amount "reasonably related" to the value. For example, it is not immediately clear why historic "asset stripping" (if any) is reasonably related to the present value of the assets, or broader policy considerations. Timing issues Finally, timing issues arise. When should the value of the asset be assessed? Possibilities include prior to Labour's nationalisation policies being published, prior to a Labour election win, or at a point close to the passage of the nationalisation legislation. These questions have not been directly addressed in an analogous context, but the company/assets should be valued at a recent point determined on a rational basis to achieve a fair value. The detail of the compensation methodology set out in the draœ legislation of a Labour Government will be important. It is by no means clear that all of the envis- aged deduction factors would survive a challenge, par- ticularly where they appear designed to address political concerns regarding corporate behaviour rather than the current value of the assets, and there may well be issues arising from any attempt to delay compensation. Those potentially a• ected by these plans are analysing the implications carefully and investors have also been con- sidering international structures to maximise their avail- able protections under investment treaty protections. Andrew Lidbetter, partner, Herbert Smith Freehills LLP note that the government had a wide "margin of appre- ciation" in determining compensation under A1P1, the Northern Rock nationalisation occurred in an emergency situation amid concerns about the nancial system's collapse. It may be that, in the absence of a crisis, the government would be given less latitude. Compensation issues Several features of Labour's nationalisation compensation approach raise issues from the perspective of A1P1. Firstly, is a compensation methodology based on asset value, rather than share price, appropriate? Labour proposes to o• er book value reduced by reference to speci ed

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