Labour's utilities policy smacks of confusion

It was a little rich of Labour to seize on yesterday's Trade and Industry select committee report on energy regulation to back its case for a windfall profits tax. That was not what the report either said or implied, though it did make the entirely obvious and uncontentious observation that electricity profits had been excessive and that this was in part down to the fact that regulators had underestimated the scope for efficiency gains.

Moreover, the report actually contradicts Labour policy in recommending the retention of the RPI minus X system of price regulation. This is found to be a superior system to any of the other methods examined. Labour policy for regulating the electricity industry has not yet been set in concrete, but it has for water and it is reasonable to assume that Labour would wish to apply the same "profit sharing" principles to electricity.

Unfortunately for Labour, "annual formula profit sharing" and other alternatives such as "rate of return" and "sliding scale regulation" are specifically dismissed by the committee "because they are likely to erode incentives". Quite so, but were the committee's Labour members aware they were disavowing party policy when they signed up to this document? After Gordon Brown's continued confusion yesterday about who the windfall profit tax would apply to and on what basis, it seems all too likely that they were not.

It is still not clear what Labour wants to do about the utilities, other than make political capital out of them and pillage them for as much as it dares in its search for new forms of taxation. Now along comes the Trade and Industry select committee to say that the present system of price regulation be left pretty much unchanged.

The irony is that this is the very same system that resulted in the "excess" everyone complains of. Furthermore, it is a system which in a way is actually designed to encourage excess. The idea behind price cap regulation is that it provides encouragement to improved efficiency because companies be allowed to keep for shareholders any "excess" return they earn. These efficiency gains are then recognised on behalf of customers at the time of the five-year periodic review.

What the windfall profits tax does, in effect, is retrospectively attempt to claw back these "excess" returns. It is hard not to draw the conclusion that intellectually Labour is all at sea over these issues.