Labour’s plans to renationalise the energy networks by paying investors less than market value will fly in the face of international treaties, according to two legal specialists.
Speaking to Utility Week Dan Neidle, a partner at Magic Circle law firm Clifford Chance LLP, said that the party’s plans to take public ownership of Britain’s energy sector as unveiled yesterday (15 May) are “silly, even childish”.
Specifically Neidle expressed concerns at Labour using the case of Northern Rock as a precedent, which was nationalised by the government following the financial crash in 2008.
He said: “Labour thinks Northern Rock is this fantastic precedent that says the government can set any price it likes when nationalising a business, actually it is not like that at all.
“First of all, an obvious point, Northern Rock was bust with a market value of zero so any application of that to the very ‘not bust’ profitable utility sector is silly, even childish.
“More fundamentally if you look at the legislation which nationalised Northern Rock it required that market value compensation was paid.
“There was an independent valuer, he conducted a proper evaluation, he had to do so on the assumption that there was to be no further government support and on that assumption he said that the market value was zero.”
Plans from the party suggest it aims to take ownership of Britain’s water and energy sector by paying investors well below the market value. Neidle adds that this may well result in an international arbitration panel intervening.
During a recent interview on Radio 5 Live’s Pienaar’s Politics programme, the shadow chancellor of the exchequer John McDonell rejected the suggestion that his party’s public ownership plan would be successfully challenged in the European Court of Human Rights.
Such a case could be mounted on the grounds that failure to pay full market value would represent an interference with property rights, which are protected by the European Convention on Human Rights, according to an analysis published by Clifford Chance last year.
Neidle added: “It is a bit sad to see the Labour Party not taking the European court of Human Rights seriously. What is maybe less surprising is that they’re ignoring the UK’s many bilateral investment treaties.
“The fastest and easiest way for a foreign investor to sue isn’t the European Court of Human Rights, it’s going to an international arbitration tribunal under the Energy Charter Treaty or one of the UK’s bilateral investment treaties under which you are entitled to prompt, full market compensation.
“Labour has never engaged with that point when it has been raised because there is no answer to it.”
Furthermore, Neidle said, in “every single previous UK nationalisation”, market value compensation was paid in “every case”.
“That is not because of absurd generosity on the part of previous governments, it’s because that is what you have to do”, he added.
Echoing Neidle’s concerns Katharine Davies, partner at Pinsent Masons, said: “At a time when the UK needs more private investment to improve its infrastructure and combat climate change, this would scare investors off for a generation and could drive energy projects into bankruptcy.
“Nationalising energy networks would trigger years of litigation from both domestic and international investors impacted by broken contracts.
“Foreign investors might look towards pursuing action through the Energy Charter Treaty that binds signatories to rules on energy and arbitration, but UK investors would need to seek other avenues.”
In the foreward to Labour’s Bringing Energy Home policy paper, shadow business and energy secretary Rebecca Long-Bailey, said: “The energy sector is central to the UK’s decarbonisation process. Yet energy networks are poorly placed to respond to the task at hand.
“Since Thatcher’s wave of privatisations, energy network companies have been able to post huge profit margins, overcharging customers to the order of billions of pounds, and failing to invest properly in infrastructure needed to accommodate the transition to renewable energy.
“Though it is possible to identify specific regulatory failings, the truth is that the current system, in which natural monopolies
are run for private profit, puts regulators and, by extension the public, at a structural disadvantage. Gaming and profiteering
are not remediable glitches with the current system – they are intrinsic to it. Given the challenges facing the energy system,
the status quo is no longer tenable.”
She added: “Energy networks that are owned by the public and responsive to the public interest will be able to prioritise tackling climate change, fuel poverty and security of supply over profit extraction, while working with energy unions to support energy workers through the transition.”
Utility Week has contacted the Labour party for comment about the legal implications of renationalising utilities.