They lost the argument, now they must pay the price of their profligacy

Windfall Tax: ROAD TO THE TAX

The privatised utilities can say what they like about the windfall tax and indeed they do, all of it unflattering, but the one thing they cannot argue is that they did not see it coming. Labour first hinted at the imposition of such a levy in its 1992 election manifesto. John Smith, the then Labour leader and Gordon Brown, the shadow chancellor, turned it into a firm commitment a year later.

Since then, the utilities have been on a war footing. They have squirmed and wriggled, they have complained and cajoled, they have whined and they have dined in an attempt to persuade opinion-formers what an arbitrary, retrospective and unfair tax it is. And finally they have threatened. Tax us and we will see you in court. But their every act has merely brought them, Oedipus-like, closer to their fate.

However hard the utilities have lobbied, Labour has always been one step ahead, impervious to their pleas and implacable in its determination to introduce the tax.

The intellectual basis for the tax is shaky. Labour sometimes refers to the special levy Sir Geoffrey Howe imposed on the high street banks in 1981 as a precedent for what it is doing now. The then chancellor imposed a one-off tax of 2.5 per cent on the banks' non-interest bearing sterling deposits. But there was a specific reason for it. In 1981 interest rates were high - a reflection of the Conservative government's monetary policy - but banks were prevented by law from paying interest on deposits held in current accounts with the result that they began accumulating super profits.

The tax had the merit of being well-defined, coherent and timely; it was levied when the windfall profits were being earned, not years later.

The windfall utilities tax can boast none of these things. But it has popular support, since the money it raises will be used to get the young unemployed into work. The utilities thought they could win the argument by depicting the levy as a tax on 12 million shareholders and 25 million consumers. Labour's landslide election victory put paid to that. The campaign against the tax was also undermined by a series of spectacular own-goals. First there were the "fat cat" headlines that greeted bumper annual pay rises culminating in the public humiliation of Cedric Brown at British Gas over his 75 per cent pay increase, and Sir Desmond Pitcher at United Utilities. The two men had a pig and a pantomime cat named after them respectively.

Then there were the huge share option windfalls directors of the National Grid and privatised electricity companies collected as they were floated on the market or scooped out of it during the frenzy of takeover bids in 1995 and 1996.

Finally, there was the apparently remorseless decline in standards that accompanied ever rising profits, most obviously in the water industry where the drought of 1995 reduced Yorkshire Water to the status of most hated company in the land as the standpipes sprang up and road tankers struggled to maintain supplies.

Now they are under attack for the lack of adequate investment in their infrastructure - whether it be Railtrack's failure to maintain the rail network or the water industry's failure to plug the leaks. Yesterday the privatised utilities, and their shareholders, discovered the cost of all that profligacy.