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Renationalize the  UK's Utilities: Where Will the Money Come From?

 


Thirty Years after the Electricity Act of 1989, which  launched the great experiment, the privatization of the UK's energy utilities,  Jeremy Corbin's Labor Party wants to bring the companies back into government ownership, And he will if he wins the next election.  And considering the sorry state of the Conservative Party, he might win. The financial press now seems more concentrated on the future Labor Government's payment plans than on  whether nationalization is a good idea. Makes it seem like a foregone conclusion.

 


The owners, then, may be more focused on getting the right price  than keeping the assets. They  start by playing the international card.  Foreigners own most of the industry.  Not paying a proper price for the assets will upset them, will cause the world to think the UK is a bad place tin which to invest, will raise UK capital costs in the future, might even get tied up in international arbitration and treaty issues.  So they say.  But back in 1997, when Labor levied a windfall profits tax on mostly foreign-owned utilities, forcing  foreign owners to pay a tax brought about by the excesses of the previously British owners, nobody said anything about international treaties or boycott of investment in the UK. The present utility owners will get paid, but maybe not as much as they would like. Hauling the UK into international courts seems unlikely.You pays your money and you takes your chances,

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Next issue: can the new (if elected) Labor Government find  money to buy the industry?  Well, Labor intends to print bonds with which it will pay for the utility shares.  It will receive, in return, control of profitable local utility monopolies.  Those monopolies earn returns four to six times as high as the under 2% interest rate on the government bonds. The new government owner could earn a nice profit on the deal, or it could use the lower capital cost to reduce electricity delivery charges by 5-10%.  Either way, there's no problem coming up with the money.

 


So, the real issue is price.   Owners of the utilities, by and large, bought them at prices well in excess of the regulatory asset value on which their returns are based. Financial theory says that utility stocks sell above regulatory asset value when they earn returns above the cost of capital.  Basically, then, the buyers paid more than regulatory  asset value because they expected the utility more than it needed to service its customer. They had no guarantee that excess return would continue, no guaranteed that regulatory asset value would remain high, no guarantee that regulators would continue to allow high returns, and no guarantee that Parliament would continue the regulatory system.

 


Well, maybe the government should pay market value (which some of the analysts confuse with fair value).  You know, an asset is worth what the market says it is worth. Problem is that most of these utilities are not traded in the market. And, the market values stocks on the basis of future earning power.  Labor could win office, take over the regulatory system, push down profits, which would push down market values, and thereby cut the price it would have to pay.  Not a good set up for investors. 

 


Bottom line. Bet on regulatory asset value, which may or may not  leave  investors with book  losses. As for the international consequences, the UK would surely survive. As for the industry, if nationalization occurs, too bad that this experiment will, as T.S. Eliot put it, end with not a bang but a whimper. 

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