Outlook 2016: A Bad Wolf less Big

Not quite the light at the end of the tunnel. In September, the investors that had sued the Norwegian government over a 90 percent pipeline tariff reduction got told by the Oslo City Court that their case wasn't really grounded.

The decision mattered. Investors in Gassled, which transports 96 percent of the gas extracted from the Norwegian continental shelf and supplies 20 percent of Europe's needs, will soon feel pronounced pain (the tariff cut starts to take effect next year). Blue-chip names such as UBS Infrastructure Fund, CDC Infrastructure, Allianz Capital Partners, Canada Pension Plan Investment Board and the Abu Dhabi Investment Authority all hold a stake in the $12.5 billion network via two consortia.

The market is divided on whether these institutions have been the victims of unpredictable wrong-doing by the regulator or whether they simply made a rookie mistake by not looking at the contract closely enough before signing it. Some observers say alarm bells should have started ringing at the prospect of such a safe and steady asset really warranting the promise of double-digit returns. 

The case nevertheless brought back the unpleasant ghost of retroactive regulatory risk a few years after the Spanish renewables debacle. The case, which saw Madrid retrospectively cut onshore wind and solar tariffs, still populates many a conversations among investors today. It is also in the spotlight thanks to an ongoing arbitration process. And a number of fund managers we spoke to reckon that the Spanish energy regulator remains fairly immature.

Despite this, the picture is nuanced. Few investors think national authorities will be willing to shoot themselves in the foot again by pushing through retroactive changes. Governments want private money to do more of the heavy lifting in infrastructure, which is only possible if a predictable regulatory regime exists.

It doesn't mean that regulation will be immune to changes nor that these changes will always please investors. But as was the case when the UK water regulator revised prices down this year, regulators achieve a much better outcome when action is communicated clearly and with advance notice – even if politicians' promises often have to be taken with a pinch of salt.