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|15 May, 2019

UK may swap one utilities dogma for another

Britons aren’t wedded to privatised utilities, which over the last three decades have been allowed to pay occasionally egregious dividends rather than cutting customer bills

Britain's opposition Labour Party leader Jeremy Corbyn leaves his home in London, Britain, May 15, 2019.

Britain's opposition Labour Party leader Jeremy Corbyn leaves his home in London, Britain, May 15, 2019.

Reuters/Toby Melville

LONDON - Jeremy Corbyn is breaking down the door. The leader of Britain’s opposition Labour party may nationalise water and energy networks, and compensate investors below market values. That would carry multiple risks.

Britons aren’t wedded to privatised utilities, which over the last three decades have been allowed to pay occasionally egregious dividends rather than cutting customer bills. But in the developed world, paying owners the market value for their assets is a strongly-held principle. Corbyn’s proposals, which were reported late on Tuesday by the Financial Times and which seem to involve buying the companies out at their equity values with deductions for past “asset-stripping”, fall short.

Take National Grid, which runs the infrastructure that connects power stations to the end-user. The value of its regulated assets is 37 billion pounds, according to its last reported accounts, but the market value of its equity and net debt exceeds 50 billion pounds. Refinancing all the debt at lower government rates under a new state owner makes plenty of sense, but buying at book value would mean the state acquiring something that is currently worth 29 billion pounds for over 10 billion pounds less. Water companies like United Utilities and Severn Trent trade more in line with the value of their regulated asset bases, but would still look overvalued if Corbyn were to offer compensation that was below book value.

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Labour reckons the legislation which nationalised Northern Rock offers legal cover for its plans. That is not certain. The compensation to owners of the bust lender was minimal because its market value was similarly low, which is not the case with the utilities. The risk is a slew of legal cases that leaves the government with a bigger compensation bill, while exacerbating the damage that Brexit may inflict on the UK’s attractiveness as an investment destination.

Ideally, the government’s main priority would be customers rather than the dogma of state ownership. Judging by the latest reviews on their allowed returns, regulators have already got the message that utilities can’t be allowed to make outsized returns. That message could be strengthened further. Over time, that would reduce the value of the companies, and potentially make it easier for a government that still wanted to own them outright to acquire them at a fairer price. Assuming the ends are more important than means, this would be a better outcome.

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CONTEXT NEWS

- A future Labour government could nationalise Britain’s energy network companies at a level below market value, the Financial Times reported on May 14.

- According to a party research report, shareholder compensation would include deductions to take account of “asset stripping since privatisation”, state subsidies since the 1980s and pension fund deficits. The investor compensation would come from bonds issued by the Treasury.

- For previous columns by the author, Reuters customers can click on HAY/

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<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ FT story https://www.ft.com/content/7db291fe-7665-11e9-bbad-7c18c0ea0201 Labour party report https://www.labour.org.uk/wp-content/uploads/2019/03/Bringing-Energy-Home-2019.pdf BREAKINGVIEWS-How Corbyn could grab British water at little cost

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^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Swaha Pattanaik, Karen Kwok and Bob Cervi) ((george.hay@thomsonreuters.com; Reuters Messaging: george.hay.thomsonreuters.com@reuters.net))

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