Windfall tax: Utility chiefs resigned to paying up

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The privatised utilities may kick and scream over the Shadow chancellor Gordon Brown's proposed windfall tax, but in reality most are privately resigned to paying it.

The bulk of the huge profits earned by the electricity and water companies will continue to be based on monopolies over pipelines and wires for the foreseeable future.

Labour has given up listening to directors of these businesses who naively believe they can avoid the tax altogether. Most have stopped lobbying shadow ministers in favour of examining the legality of the tax. Already several utilities have pledged to test the legislation in the European Court in the interests of their shareholders.

So can they afford it? Recent research from NatWest Securities, the City of London arm of the National Westminster Bank, concluded that "logic" suggested Labour would raise pounds 5bn.

An analyst with another leading City bank, who did not want to be named, said: "The utilities all have strong balance sheets with relatively small amounts of debt. Provided the tax is not levied at draconian rates they'll write a cheque out to pay it. They may not do that happily, but it won't hurt them."

The real haggling will be over those companies which have changed so much since the initial burst into the private sector that they no longer consider themselves to be utilities at all. British Telecom is the most obvious example. "We would argue we are not a monopoly utility," a spokesman said yesterday.

In BT's defence it does face stiff competition in the business and international phone call markets. The company's pounds 12bn merger with the aggressive American long-distance operator, MCI Communications, also lessens BT's dependence on the UK market.

Yet BT still controls more than 90 per cent of residential phone lines and domestic customers will see their bills regulated by a tough price cap until 2001.

The row goes a step further with BAA, the former British Airports Authority. Though it is has a hugely dominant position in the South-east of England as the owner of Heathrow, Gatwick and Stansted airports, it has been hard at work lobbying Labour to try to show its competitive credentials.

It also insists that it has not made excess earnings and paid pounds 103m in tax last year. How Mr Brown's parliamentary Bill will combat these claims is still unclear.

Yet perhaps the biggest hurdle Mr Brown faces may not be from the companies themselves, but from the industry regulators, who he has pledged to consult.

Yesterday Clare Spottiswoode, the gas regulator and one who is never afraid to court controversy, said that she would tell Mr Brown that the tax would be "hard to justify".

She claimed her recent savage price formula for British Gas's pipeline business was designed to compensate for past efficiency gains. She went on: "If I was going to do my job properly there won't be any excess profits."

Ms Spottiswoode also argued that current shareholders of British Gas, who have had a torrid time in recent months because of her own price proposals, would be the ones clobbered rather than those who made the true windfall gains in the glory days of the late 1980s after privatisation.

Labour will also have to prevent the tax being passed on to consumers in higher bills.

Professor Stephen Littlechild, the electricity regulator, has said that he would be obliged to look at the case put to him by the companies. Equally, party sources said they would override such a move using existing legislation.

Few of those affected genuinely believe Mr Brown will fail to push through his cherished windfall levy. But this does not mean they will stop trying every method possible to persuade him to abandon it.