Utilities braced as Government plans new tax on `excess' profits

THE GOVERNMENT will next month set out proposals to tax the "excess" profits of the privatised water, electricity, gas and telecoms companies as part of a radical overhaul of utility regulation.

The proposals will be contained in a Green Paper from the Department of Trade and Industry (DTI), which had been due to be published this Thursday.

However, publication has been delayed until mid March because of a Whitehall battle between the DTI and the Treasury, which is understood to want to link the Green Paper proposals to a fresh deal to preserve the British coal industry.

The Paymaster-General, Geoffrey Robinson, brokered an agreement before Christmas giving the country's biggest coal producer, RJB Mining, a three- month stay of execution after contracts with the electricity industry expire in April.

He is keen to put together a long-term deal involving the generators and electricity supply companies in order to avert up to eight pit closures and the loss of 5,000 jobs at RJB.

The proposal to tax the excess profits of the utilities is sure to prove controversial. The industries involved were given to believe that the Government had dealt with the matter with the windfall tax. The Chancellor, Gordon Brown, raised pounds 5.3bn through the levy in his first Budget last July.

It is not clear how much detail the Green Paper will contain on what constitutes "excess" profit, how it would be taxed and what proportion shareholders might be allowed to retain. The proposal, if implemented, would also herald a sea-change to the existing regulatory regime. Under present arrangements, prices are capped, not profits. The price caps imply an allowed rate of return for each industry but if individual companies can do better that then they are free to retain the extra profit earned.

Whitehall insiders believe that they can overcome industry opposition to the move by arguing that it will provide regulatory certainty. "Companies are aware that at some point in the future excess profits could accrue. By setting up a mechanism for dealing with that, it reduces regulatory risk for the utilities," one adviser said.

However, a spokesman for the Electricity Association warned: "We are absolutely clear that the issue of excess profits has been settled once and for all. A line was drawn under this with the windfall tax and we would vigorously oppose any such proposal."

The regional electricity companies also question whether there will be any scope to extract excess profits from customers once the supply market is thrown open to competition. According to one estimate, each domestic customer signed up outside a REC's franchise market will contribute just pounds 5 a year extra to profits.

The Energy Minister, John Battle, has instituted a review of energy policy which will include an examination of the balance of fuel sources for electricity generation. But he is thought to be anxious not to embroil the proposals on utility regulation with any measures to underpin one sector of the market such as the coal industry.

Other DTI sources point out that if would be unrealistic for Mr Robinson to use the Green Paper as a bargaining chip to secure a deal for the coal industry since the paper will need to be approved by the full Cabinet and signed off by the Prime Minister, Tony Blair.

The DTI paper will also address the need for the regulatory system to protect poor and socially disadvantaged customers.

Although it has been reported that the Treasury is opposed to the idea of a pounds 100m levy, raised from electricity companies and their customers, to help poorer consumers, Whitehall sources insisted the paper would include measures to tackle the issue.

Other proposals will include splitting the RECs' supply arms from their distribution businesses and merging the electricity and gas regulators, Offer and Ofgas.