Lobby: the general election marks the return of the big two

Utility Week reviews that state of the polls and considers the cost of renationalising the industry as utilities nervously await 8 June's election.

The decades-long trend of increasing political plurality has snapped back fiercely in this election to a straight battle between the two big beasts.

It’s long been conventional wisdom in political circles that the two-party system’s day is over.

The evidence of recent elections indicates that modern society’s increasing diversity can no longer be contained within the walls of the traditional two main parties.

However, so far 2017 has seen the ancien régime reinforced with a vengeance. We’re a long way from the peak of the two-party system’s dominance in 1950 when Labour and the Conservatives secured 98 per cent of the vote between them. But if current polls are replicated on election day, Labour and the Tories will grab 78.8 per cent of the total. This would represent the biggest combined vote share for the two biggest parties since 1979 when Margaret Thatcher won the first of her three general election victories.

Of course, this year’s contest is looking like a much less even contest than 1979 when a consistent 7 per cent separated Thatcher’s party from Jim Callaghan’s Labour. A YouGov poll last weekend put the Tories just 5 percentage points ahead of Labour, and the weekend following the botched launch of the Conservative manifesto saw the party’s lead at 9 per cent according to a Survation poll,  but these two are outliers. The average puts the Conservatives a mile out in front.

It’s a different story in Scotland, of course, where a very different two-party race is emerging with the Conservatives supplanting Labour as the main opposition to the Scottish Nationalist Party.

South of the border, energy policy has had a higher profile than usual in the campaign. Conservative support hit its seven-day average peak of 47 per cent in the week following the publication of Theresa May’s Sun column in which she pledged to cap standard variable tariffs.

Crucially, the policy appears to have helped bolster Conservative support among the working-class voters it was clearly targeted at. Among the C2DE group, the Tories were outpolling Labour by 12 per cent.

Part of the reduced poll lead is a recovery in the Labour vote. The party’s support troughed at 25.9 per cent on the weekend following May’s general election announcement, according to a seven-day average poll tracker carried out by the Britain Elects website.

But Labour’s pledge to bring chunks of the utilities back into public ownership has not proved to be the voter turn-off conventional wisdom suggested. In the week following the leaking of the party’s manifesto, which first revealed that Labour was planning to renationalise parts of the national grid, the party’s average polling levels put on more than 3 points to reach a 12-month peak of 31.8 per cent.

Both main parties have picked up support from the minor parties. The Liberal Democrats’ attempt to wrap themselves in the European Union flag hasn’t worked and the party has dipped from 10 per cent at the beginning of the campaign to 8 per cent today. If repeated on election day, this result would see the party going backwards on the 8.5 per cent it recorded in 2015. The Greens have also been crowded out of the debate, seeing their 4.7 per cent vote share at the 2015 election nearly cut in half to 2.5 per cent, according to Britain Elects

However, UKIP has been the biggest loser. During the past month, the party’s poll share has cratered to 4.8 per cent from nearly one-eighth of the vote in 2015.

While two-party politics may be staging a revival, the current polls indicate that there is still only one game in town. The key battles that look set to determine utilities’ fate over the next five years are likely to be determined within the Conservative Party rather than at the ballot box next week.

What is the cost of renationalisation?

The 2017 Labour party manifesto has echoes of its equally radical 1983 predecessor, famously dubbed “the longest suicide note in history”. While various renationalisation proposals are advocated – some of which are quite popular – both National Grid and the privatised water companies are now in Labour’s sights. The costs of implementing such a policy would be massive, although utility share valuations would undoubtedly plummet prior to any actual implementation.

Of course, opinion polls give the Labour party minimal chance of prevailing on 8 June, so its manifesto commitments will be seen by some as academic. Nonetheless, if the polls turn against the Conservative party in the next two weeks, utility share prices would come under sustained pressure.

On page 20 of its manifesto, Labour states its aim to “take energy back into public ownership”. More specifically, there is a commitment to “ensure that national and regional grid infrastructure is brought into public ownership over time”.

Initially, tougher financial regulation, along with other measures, would probably precede any actual renationalisation. Interestingly, the Labour party is focusing on energy grids, a sector where National Grid is unquestionably the key player. A substantial part of its current £37.6 billion capitalisation arises from its US activities, but its core business remains its extensive UK electricity and gas networks.

If a future Labour government sought to acquire a 51 per cent majority stake in National Grid’s UK operations, the cost – allowing for a heavily depressed share price – would probably lie within the range of £8 billion to £12 billion.

The Labour manifesto has also pledged – rather surprisingly – to “replace our dysfunctional water system with a network of regional publicly-owned companies” (p19). The benefits of such an expensive policy are not immediately apparent.

However, if a 51 per cent majority stake were acquired in the three quoted stocks, Severn Trent, United Utilities and Pennon (ex Viridor), the cost would probably be within the range of £5 to £7 billion.

The remaining water companies are not UK-listed. Determining a comparable valuation for them is difficult, although their ongoing regulatory asset value would no doubt serve as a base calculation figure.

In assessing the projected renationalisation costs, key assumptions need to be made about the market’s response to a highly unlikely Labour party victory and, if so, which of its many expensive commitments would actually be implemented.

It is perhaps relevant that on the day after the 1992 general election, when the Conservative party secured a narrow – and somewhat unexpected – majority, quoted water stocks rose on average by 18 per cent.

The controversial Railtrack renationalisation in 2002 also provides a valuation precedent.

For many, however, the general election result is already a given so that possible renationalisation of key utility players is little more than a contingency risk. But if new opinion polls show the large gap between the two leading parties narrowing sharply, holders of utility stocks have every reason to become very nervous.

Nigel Hawkins, director, Nigel Hawkins Associates