National Grid (NG.) and SSE (SSE) are certainly not adopting a wait-and-see approach to the general election. Both companies have moved ownership of large parts of their UK operations overseas in a bid to soften the blow of potential nationalisation. With the Labour manifesto reiterating the party’s intention to bring Britain’s electricity and gas infrastructure back into public ownership, energy companies (and their shareholders) face the threat of their assets being transferred to the state at a price below market value.
SSE has incorporated a new subsidiary in Switzerland to “acquire, oversee and hold” its electricity transmission and distribution networks through a share-for-share exchange. Despite the country recently being removed from the European Union’s list of tax havens, the group was quick to assure that its actions have “no profit or tax advantages”. Meanwhile, National Grid has established offshore holding companies for its domestic gas and electricity businesses in Luxembourg and Hong Kong. The energy giant has described Labour’s proposals as “highly detrimental to millions of ordinary people who either hold shares in the company or through their pension funds”.
The fear is based around how Labour would compensate the current owners of the UK’s energy networks, with calculations based on book value or regulatory capital value likely a discount to current market valuations. Back in May, the party mooted that payment could be given in the form of government bonds, claiming the nationalisation of Northern Rock set a legal precedent for Parliament to determine the price on offer. This would be subject to deductions based on pension fund deficits, state subsidies and “asset stripping since privatisation”.
Redomiciling does not prevent nationalisation but international legal agreements governing the fair treatment of shareholders could force a Labour government to pay shareholders market-based compensation. Shifting ownership of these businesses to the continent brings them under the protection of the Energy Charter Treaty and companies based in Hong Kong are covered by a bilateral investment treaty. SSE justifies its offshoring as an “additional safeguard” rather than a necessity. It believes that “precedent, the principle of fairness and the need to secure future investor confidence” would allow a fair value to emerge from any nationalisation process without needing to enforce treaties.
Water utilities are also in the firing line. Preceding SSE and National Grid, non-listed Anglian Water saw two of its biggest shareholders, IFM Investors and the Canadian Pension Plan Investment Board, set up entities in Hong Kong through which to hold their shares. United Utilities (UU.) says it has no plans to pursue offshoring while Severn Trent (SVT) declined to comment on suggestions it is considering such action.