Utilities Drop in U.K. on Labour Nationalization Report

(Bloomberg) -- The U.K.’s biggest utilities fell after a report showing the opposition Labour Party is preparing to nationalize parts of the energy industry if it takes power.

SSE Plc to National Grid Plc led the decliners in London trading, and EON SE, a German utility with a presence in the U.K. also fell. The report in the Daily Telegraph said Labour would pay pension funds in government bonds to take into public ownership the power transmission arms of SSE, National Grid and Scottish Power, a unit of Iberdrola SA.

Labour’s intention to renationalize the nation’s power and natural gas network is a central plank of the party’s agenda under Jeremy Corbyn, who took over as leader in 2015. While the next election isn’t scheduled until 2022, Prime Minister Theresa May’s grip of Parliament is fragile enough that lawmakers may opt to call a vote before then. Industry analysts think it’s unlikely Corbyn could achieve his ambitions even if he takes office.

“We do not believe that there is wider political support for the nationalisation of regulated utilities,” John Musk, an analyst at RBC Europe Ltd., wrote in a note to clients. “Paying below market value may also damage investor sentiment towards the U.K. We also continue to question the economics of nationalization. The impact on national debt, are not clear.”

Utilities Drop in U.K. on Labour Nationalization Report

Labour outlined its intentions for the energy in a policy document last year, suggesting the industry could be led by local authorities. Towns or cities that consume power would manage the local grid and its links with municipally-owned green power projects.

“What is new is how the Labour Party could look to justify a lower value and the inclusion of interconnectors to the nationalization ‘wish list’, should they come into power,” Jenny Peng, an analyst at Citigroup Inc., said in a note. “It is difficult to quantify the adjustment factors laid out, and in fact it raises more questions than it answers.”

SSE fell as much as 2.5% after markets opened in London while National Grid dropped by 2% before recovering some of those losses. SSE and EON were among the worst performers on the the STOXX 600 Utilities Index.

Costly Changes

The companies have bristled at the suggestion of a change in ownership structure.

“State-ownership of the energy networks would only serve to delay the huge amount of progress and investment that is already helping to make this country a leader in the move to green energy,” an official at National Grid said in an emailed statement. “At a time when there is increased urgency to meet the challenges of climate change, the last thing that is needed is the enormous distraction, cost and complexity contained in these 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 ($160 billion), and that would reach 185 billion pounds if the energy industry was nationalized.

Bloomberg Intelligence estimates the cost to be 135 billion pounds for buying the energy grids and water industry.

“Electricity networks are 17% cheaper than before privatization and more reliable thanks to 100 billion pounds of investment by private companies like SSE," the Perth, U.K.-based company said. "All funded by private capital investment and not a penny in public debt at the expense of the NHS or schools."

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