Corbyn to Sidestep U.K. $172 Billion Nationalization Fight

(Bloomberg) -- Jeremy Corbyn may have found a way to make good on his pledge to nationalize the energy industry without spending more than 124 billion pounds ($172 billion) buying up the six biggest utilities.

The leader of the opposition Labour Party last weekend indicated he wants to bring grid companies under state ownership, including a web of 15 closely-held companies that own local power distribution cables and pipelines that feed directly into homes and businesses. He accuses the industry of ripping off consumers with excess charges to drive profits.

The “alternative models of ownership” suggested by Corbyn are the most specific comments he’s made to date about how Labour would follow through on a promise to nationalize utilities. With the next election due by 2022 and Corbyn running neck-in-neck in polls against the ruling Conservatives, investors are only starting to take seriously his suggestions and speculate about how the industry could be reshaped.

“It’s going to be complicated,” Keric Morris, partner in the energy practice of Oliver Wyman LLC said. “But there are ways it can be done. It’s not impossible.”

Corbyn has his sights set on local networks responsible for bringing power and gas directly into people’s homes, including 10 that work in electricity and five in natural gas. Power and gas travels through infrastructure owned by National Grid Plc at a high volume or voltage before reaching substations where it enters local distribution networks to be carried to homes and businesses.

Local Grids

The local distribution companies are a smaller, softer target than the Big Six utilities. They’re not household names, and they have multiple owners, many from overseas. U.K. Power Networks, which covers the eastern part of Britain, is owned by Hong-Kong-based CK Infrastructure Holdings Ltd., Power Assets Holdings Ltd. and Li Ka Shing Foundation Ltd. Northern Powergrid Holdings Co. is owned by Warren Buffett’s Berkshire Hathaway Energy Co.

Targeting the grid companies might sidestep the cost of buying up the U.K. assets of the big six utilities operating in Britain. They are: Centrica Plc, Electricite de France SA, SSE Plc, Innogy SE’s Npower unit, Iberdrola SA’s ScottishPower and EON SE. Corbyn surprised the industry by not discussing the outlook for the Big Six in a speech in London.

Instead, he accused grid companies of being “notorious for overcharging” and for being slow to connect up renewable projects that “might end up undermining their profits.” He said grids had overcharged customers in the last eight years, citing research from the consumer group Citizen’s Advice.

He didn’t mention National Grid Plc, which operates the main trunk lines connecting the local distribution networks. Renewable energy isn’t linked into National Grid’s transmission network. That makes the issues highlighted by Corbyn seem aimed mainly at distribution networks and not National Grid, a view shared by the company. Corbyn’s speech was general enough to keep the industry guessing about exactly how Labour might act.

Grid’s View

“There is no evidence that the large cost and distraction of nationalization would deliver the stability and long-term investment our energy networks need to continue the work towards a green energy future that is already underway,” a National Grid spokesman said by email.

Under a future Labour government, the industry could be led by local authorities, with towns or cities that consume power directing the local grid and its links with municipally-owned green power projects. This vision is best suited to a state-run grid that can prioritize preventing climate change, according to Corbyn.

The local grid companies rejected those thoughts.

“Network companies are already achieving the goals cited as being the rationale for nationalization,” a spokesman for the Energy Networks Association, which represents the local distributors.

Costly Plans

The idea of nationalizing the whole utility industry has been criticized as too expensive. The Centre for Policy Studies, a right-wing research group co-founded by former Prime Minster Margaret Thatcher, estimated buying the Big Six and National Grid Plc would cost 124 billion pounds ($172 billion), and that would reach to 185 billion pounds if the energy industry was nationalized. Sticking with the energy networks alone would cost 55 billion pounds, the CPS said last month, citing research by Moody’s Corp.

Bloomberg Intelligence puts the slightly lower cost at 135 billion pounds for buying the energy grids and water industry.

Corbyn’s allies dismiss those figures. John McDonnell, the Labour lawmaker who speaks on finance, has said nationalization can happen at zero cost. Also, the CPS acknowledges that the price would probably slide if Corbyn took office, pushed forward with his plans and spooked investors enough to sell some of their holdings.

Nationalizing energy grids increase government debt levels, but it would also bring income that would support interest payments. The state would get profitable assets that generate regular income, according to Scott Corfe, chief economist at the Social Market Foundation, a non-partisan research group that promotes free-market thinking.

The risk is that nationalizing even part of the energy industry would politicize the very technical job of bringing power and gas into homes. That would reduce the role that fundamental market forces like supply and demand play in shaping policies, with government officials reluctant to raise prices around the time of an election, he said.

“As soon as anything resembling public ownership or stewardship of key sectors is suggested, the debate very quickly become polarized, heated and descends into cliches,” said Andrew Baker, a politics professor at the University of Sheffield. “The bigger issue is to do with the legal and contractual practicalities.”

CompanyEnergyOwnership
Electricity North West Ltd.ElectricityUnited Utilities Group Plc
ESB Networks DACElectricityIrish government-owned ESB 
GTCElectricityBUUK Infrastructure No 2 Ltd
Northern Ireland Electricity Networks LtdElectricityIrish government-owned ESB
Northern Power Grid Holdings Co.ElectricityBerkshire Hathaway Energy Co.
SP Energy NetworksElectricityIberdrola SA
Scottish and Southern Electricity NetworksElectricitySSE Plc
U.K. Power Networks Holding LtdElectricityCK Infrastructure Holdings Ltd., Power Assets Holdings Ltd. and Li Ka Shing Foundation Ltd.
Western Power Distribution PlcElectricityPPL Corp.
Cadent Gas LtdGasNational Grid Plc, Macquarie consortium
Gas Networks IrelandGasErvia
GTCGasBUUK Infrastructure No 2 Ltd
Northern Gas Networks LtdGasCK Infrastructure Holdings, Power Assets Holdings Ltd
SGN PLCGasSSE Plc, Abu Dhabi Investment Authority
Wales and West Utilities Finance PlcGasCheung Kong Ltd, Cheung Kong Infrastructure Holdings Ltd, Power Assets Holdings Ltd and Li Ka Shing Foundation

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