Investors in U.K. utilities could pursue their claims for market-value compensation under bilateral investment treaties and potentially even at the European Court of Human Rights if the opposition Labour Party successfully pushed a proposal to nationalize energy companies through the U.K. Parliament.
The party is planning to take the country's private operators of electricity and gas grids, as well as water utilities and rail companies, back into state ownership, arguing that they have been prioritizing investor returns over desperately needed infrastructure investments. The plans announced May 15 would affect 23 energy companies, including parts of National Grid PLC, SSE PLC and PPL Corp., as well as the U.K. side of 11 existing and planned interconnectors with six different countries.
Shareholders in the companies would be compensated through a bond issuance, with the government also taking on utilities' debt. But the level of compensation would ultimately be decided by Parliament and include a host of deductions, including to account for pension fund deficits, asset stripping and the state of the companies' infrastructure.
Labour says grid companies have prioritized profits over investment.
Source: Associated Press
The possibility of transferring assets at below-market prices has raised an outcry among utilities, and National Grid CEO John Pettigrew said on May 16 that he would expect investors in his company, which include asset managers like BlackRock Inc., Vanguard Group Inc. and Standard Life Aberdeen PLC, to challenge any compensation that shortchanges shareholders.
"In the event that the Labour Party go forward and tries to pay less than fair value, then there are several legal routes available, including the European courts in terms of human rights and a whole host of other areas in terms of treaties," Pettigrew said.
Dan Neidle, a partner at London-based law firm Clifford Chance, predicted in a paper published in April that "nationalization for less than full market value will, almost inevitably, trigger compensation claims by investors," who could indeed appeal under the European Convention on Human Rights, which is an international treaty incorporated into U.K. law.
But Neidle said they would likely have a better chance of success making use of bilateral investment treaties the U.K. has signed with countries including Hong Kong, China and Singapore, which afford similar protections against expropriation and enable the use of international arbitration tribunals.
Although most investors in U.K. utilities are based in countries that don't have such treaties in place, like the U.S., Canada, Australia and Europe, a handful that would have access to this route could end up benefiting other investors, Neidle said.
Three of the affected energy companies — UK Power Networks Holdings Ltd., Northern Gas Networks Ltd. and Wales & West Utilities Ltd. — are ultimately owned by Hong Kong-based conglomerate CK Hutchison Holdings Ltd., for example.
"U.K. and other investors may benefit collaterally by virtue of another investor bringing a successful investment treaty claim," Neidle wrote, since the government "may not want to pay higher compensation to a foreign investor than to a U.K. pension fund."
Water utilities more exposed
In addition to several power and gas transmission and distribution companies owned by National Grid and SSE, the Labour plans would also affect several subsidiaries of Scottish Power PLC, the British unit of Spain's Iberdrola SA; as well as subsidiaries of Northern Powergrid UK Holdings, owned by U.S.-based Berkshire Hathaway Energy; Electricity North West Ltd., owned by JP Morgan Asset Management and Colonial First State; and Cadent Gas Ltd., with investors including Macquarie Group Ltd.
Analysts at Alliance Bernstein said that based on the proposals put forward by Labour, they would expect the party to use the utilities' book value of equity as the starting point for compensation. They also expect limited downside for the largest diversified utilities, calculating 7% for National Grid, 9% for SSE and 2% to 3% for Iberdrola, given that the book value would already include pension deficits and other deductions should be minimal.
Labour has indicated that it would also move to take control of water utilities, though a detailed plan has not yet been outlined. "We believe that the water companies in our coverage are most exposed given their lack of diversification — leading to a 43% downside for United Utilities Group PLC and a 62% downside for Severn Trent PLC," Alliance Bernstein analysts wrote in a May 17 note to clients. Water companies were not subject to the proposals released May 15, but Labour has said it plans a similar process for them.
In order to implement a nationalization, Labour would not only have to trounce the government but also command a majority in parliament. The Conservative government is currently still wrangling to get lawmakers behind a plan to leave the EU, with Labour leader Jeremy Corbyn walking away from cross-party talks on the issue on May 17.
With political uncertainty dragging on, some say the specter of an early election that could sweep the opposition into power is not going away, though — meaning neither is the threat of a drastic change for energy companies.
"[That] means market debate will continue," Sam Arie, a utility analyst at UBS, said.