Lawyers say energy treaty among those that could greatly increase costs of Labour pledge

The Labour party’s plans to take large parts of the energy industry back under public control is on a collision course with international treaties that guard Europe-owned companies against government takeovers.

The rules mean a Labour administration could face rising costs or a legal battle in European tribunals over plans to pay a discount to nationalise energy networks and the big six energy suppliers.

The party set out plans in May to renationalise energy networks at below market prices by taking into account the “asset stripping and profiteering” since privatisation in the 1980s. The party has also said it would fund the multibillion plans by offering energy company investors Treasury-backed bonds.

The plans are part of a wide-ranging policy drive to end “rip off” costs and poor customer service by nationalising water, energy, rail and BT’s broadband network.

But City lawyers have warned that a web of international treaties could force the cost of Labour’s nationalisation pledges far higher than expected.

The law firm Clifford Chance has said the energy charter treaty (ECT) would force the party to offer compensation at a “fair market value”, and would rule out the option of paying shareholders for their assets in government-backed bonds.

The ECT would apply to a third of the UK’s energy network companies. These include Scottish Power, which is owned by Spain’s Iberdrola, which runs two electricity networks in the UK and Northern Ireland’s energy networks, which are owned by the Irish company ESB Networks.

The treaty would also apply to four of the big six energy suppliers, including Scottish Power, the French-owned EDF Energy, and E.ON UK and Npower, which are both owned by the German utility company E.On SE.

British companies that are not covered by the ECT have already set up offshore holdings to take advantage of similar bilateral agreements with tax havens such as Hong Kong, Luxembourg, Switzerland and Singapore.

SSE, which owns two energy networks and is the UK’s second largest energy supplier, told the Sunday Times that it had moved the assets into a new Swiss holding company. In the same report National Grid said it had shifted its gas and electricity transmission arm into subsidiaries based in Luxembourg and Hong Kong.

UK Power Networks is also understood to be protected by a bilateral treaty because it has been owned since 2010 by CKI, an investor based in Hong Kong.

One City source said companies representing half the total value of the water industry, which is first in line for nationalisation under a Labour government, have also followed suit. Anglian Water was reportedly investigating an offshore holding company last December, and Yorkshire Water and Severn Trent are considering a similar move.

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This leaves only a handful of UK companies – including British Gas – which are thought to be facing the general election without cover from a treaty that would help them secure a higher price in the event of a government takeover.

According to Clifford Chance, these companies can “take a degree of comfort from the political quandary the government would find itself in if it is ordered by an international tribunal to pay increased compensation to foreign investors.”

The firm added: “The final result may be that there is little practical choice but to offer a fair value to all.”

A spokesman for Labour said the party has consulted “with a number of lawyers” and is confident that the party will “deliver the changes that the electorate wants”.

“Our whole economy will benefit from affordable and reliable rail, mail, energy, water and broadband. In the meantime, those who have done very nicely out of privatisation – and those with something to gain from talking up the legal difficulties – will no doubt continue to exaggerate the legal complications,” the spokesman added.

• This article was amended on 28 November 2019. An earlier version referred to the energy charter treaty as an EU law when it meant to refer it as an international treaty, which applies to most EU countries. This article has also been amended to say that any legal action would take place in tribunals, not the European courts.