Utility Week

18 | 2ND - 8TH MARCH 2018 | UTILITY WEEK Policy & Regulation Analysis I n just over four years' time, at the next scheduled general election, utilities could be facing imminent renationalisation. The biggest concerns will be in the water industry, where wholesale public ownership is on the cards, according to the 2017 Labour manifesto. This also promised to bring back the energy network into public ownership. However, beyond the headlines, details have been scant about Labour's plans. In a speech at a conference last month, seen by Utility Week, shadow chancellor John McDonnell argued for a more co- operative model of ownership on the grounds that "nobody knows better how to run services" than those who deliver them. Spreading the ownership would also safeguard the indus- tries against re-privatisation, he added. Labour's emerging thinking is most fleshed out in a report on alternative mod- els of ownership presented by McDonnell in the run-up to the conference. This suggests a blend of national state, local and commu- nity ownership for National Grid and other electricity and gas sector infrastructure. The boards running the companies would be split between state appointees, local and devolved administration government nominees, and consumer and employee representatives. Fuzzy on finance McDonnell was less forthcoming in his speech about how Labour will pay for its public ownership plans. When pressed, he has said Labour would swap shares in energy and water companies for government bonds. With the government able to borrow at relatively low rates, McDonnell argues the profits from utilities could service these debts while delivering lower bills for customers. By cutting out the dividend payments to share- holders, Labour could achieve both goals. However, Scott Corfe, chief economist at the Social Market Foundation (SMF), says it is "pretty unclear" how the water compa- nies' current owners would be compensated. The SMF published a report in early February seeking to quantify how much Labour's water company plans would cost. This calculated that regaining control of the water utilities alone, based on standard takeover practice, would cost the govern- ment £90 billion. On top of that, the SMF estimates the government would also have to pay out £100 billion to meet the industry's investment needs over the next 25 years. McDonnell has rubbished the SMF's esti- mate as a "fantasy figure", adding that the research had been funded by "water com- panies whose shareholders are terrified of losing control of a money-making racket". The SMF estimate factors in a 20-30 per cent acquisition premium that would typically be paid by new owners in takeover scenarios, although Labour has not said it would pay any such additional sum. Nothing in legislation spells out how much the owners of industries Labour is planning to take over should be paid, Corfe acknowl- edges: "There is no obligation to compensate shareholders if it doesn't want to." Some of the utilities' biggest sharehold- ers are UK defined benefit pension schemes, which like the safe and steady returns offered by utilities. Impact on investors Caroline Escott, investment policy lead at the Pensions and Lifetime Savings Association, agrees with Corfe that it is "hard to judge" the impact of Labour's plans until further details are revealed. "Issues that will need to be considered… are over what period the pro- cess would take place, what sort of compen- sation will be offered to investors and what precedent this will set. "If – for example – investors were com- pensated at a fair market price it would help mitigate pension funds' concerns; it is important to remember that pension funds invest on behalf of their members, so any deal will need to be fair or you could find that ordinary people are disadvantaged." She adds that pension funds will be examining the period over which Labour aimed to implement its plans, which would determine how much leeway investors have for adjusting their holdings. Another "significant consideration", she says, would be the impact of the renationali- sation drive on the market overall and specif- ically on UK gilts. The SMF report calculates that its £90 billion estimated figure would push up total government borrowing by 5 per cent, with potential knock-on consequences on financing costs. And giving investors a poor deal could shake confidence, Corfe warns: "If you are a foreign investor wanting to invest in the UK and you see the government is purchasing assets below the market price, you might be more hesitant about investing in the UK." Price-setting process He adds that Labour still has questions to answer over the government's role post- nationalisation and the risk of more politi- cised decision making on water prices in the run-up to elections. "One of the motiva- tions for having a privatised water industry is because it depoliticises the price-setting process." In addition, utilities would find them- selves competing for investment with other pressing public services, says a Water UK spokesman: "The potential costs are huge, pointing to a world where future water investment struggles to compete with health, housing or education for taxpayers' money. "If you look at our record, private compa- nies have invested heavily to reduce leakage, improve drinking water quality, and protect the environment aer years of being starved of cash under public ownership. Properly incentivised, customer-focused companies subject to effective regulation is the right way to meet future challenges, not going back- wards with nationalisation." Corfe agrees: "It's not clear what you would achieve by nationalisation that you would not achieve by better regulation." But he adds that utilities and the govern- ment will have to make a more compelling case for private ownership if they want to ward off nationalisation. "Although in nor- mal times industry is in favour of light-touch regulation, this is an instance where indus- try could call for more regulation because the alternative to business as usual is this industry being nationalised." Renationalisation for water? The 2017 Labour manifesto pledged to renationalise the water industry. Now the party is fleshing out its plans and arguing for a more co-operative model of ownership. David Blackman reports.

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