Budget '97: Water and power companies to bear brunt of pounds 5.2bn bill for excess profits

The Chancellor ended months of speculation yesterday by revealing the windfall tax on the privatised utilities would raise pounds 5.2bn, a figure widely expected but combined with a formula that left the water and gas industries bearing unexpectedly heavy burdens.

Gordon Brown confirmed the tax would hit not just the electricity, water and gas companies, but would also include British Telecom, the airports operator BAA and Railtrack.National Grid and British Energy were not included, a decision which surprised the Grid. The two electricity generators, National Power and PowerGen, also came off with lower bills than expected.

The tax was spread widely enough to head of the possibility of legal challenges from the companies. BT estimated last night it would pay around pounds 500m, lower than the pounds 1bn in recent speculation and indicated the chances of the group fighting the levy in court were "receding".

Sir Iain Vallance, BT chairman, said the Chancellor had taken into account BT's "special characteristics". He said: "We recognise that a figure in the order of pounds 500m spread over two years, whilst not a small sum, is considerably lower than earlier speculation might have suggested."

The biggest loser was British Gas, now split into BG and Centrica, which came off with a combined bill of pounds 704m, of which BG would pay pounds 513m. The bill came just a fortnight after the company lost its fight against savage price cuts from the industry regulator which will reduce its annual revenues by a further pounds 380m. A BG spokeswoman said: "This is a blow coming on top of a tough MMC settlement. We will need to consider the implications fully."

The formula chosen by Mr Brown was more complicated than expected by analysts. Designed to focus on excess profits, it compared the flotation value at privatisation with an average market value for the companies based on annual profits over up to four years after the sell-off.

The tax would be levied at a rate of 23 per cent on the difference between the two figures. The companies could pay in two equal installments, the first due on or before 1 December and the second a year later.

The Inland Revenue, which will assess and collect the levy, said the company values would be calculated by multiplying average profits with a price earnings ratio of 9, which approximated to the lowest average for the companies over the period. At flotation p/e ratios had varied from 11 for BT to 5 for water.

Simon Flowers, head of utility research at NatWest Markets, said: "It doesn't discriminate between those that were floated off cheaply or those companies which made increased profits through efficiency gains. From that point of view it's a bit unsatisfactory."

Mr Brown said the formula was designed to hit "excessive under-valuation and under-regulation" while no company would bear an undue burden. The water industry was also hit more heavily than predicted, paying pounds 1.65bn spread over the 10 privatised groups.

The electricity sector, including the regional companies, two Scottish groups and the generators, would pay pounds 2.1bn, with pounds 1.45bn raised from the rest, including BT.

To Conservative jeers, Mr Brown pledged the tax would be paid "without any impact on prices, or investment, or the quality of service or ... employment".

His claim was challenged by Anglian Water, which said its burden of around pounds 170m would hit future price cuts. "This is at the higher end of expectations. Our current borrowing is pounds 960m, so this adds another pounds 170m to that. The cost of that increased borrowing will be pounds 12m to pounds 15m a year. That restricts our ability to commit to discretionary investment and has an effect on the size and the timing of future price cuts."

The Chancellor coupled his announcement with the surprise abolition of the gas levy, a tax introduced in 1981 to cream off excess profits made from the original North Sea oil and gas boom. The move will cost pounds 400m over the next three years, reducing the windfall tax Welfare to Work fund to pounds 4.8bn and will reduce gas bills by about 2 per cent. The levy, which was 4p a therm, raised pounds 200m in 1996-97, of which Centrica, the demerged British Gas supply business, paid around pounds 150m. The move was seen as a concession by the Government which would cancel out most of Centrica's pounds 191m windfall tax liability, an interpretation confirmed by company sources. Independent gas companies complained that the group had been given a "deal" with Labour because of the huge take-or-pay burden on long-term gas contracts.

Another loser, according to analysts, was ScottishPower. The multi-utility group came off with a combined bill of pounds 317m. Manweb would pay pounds 97m, while Southern Water would have to find pounds 127m. Scottish Hydro-Electric breathed a sigh of relief with a bill of just pounds 45m.

By comparison BAA, which owns Heathrow and Gatwick Airports, escaped with a levy of between pounds 70m and pounds 100m.

Sir John Egan, chief executive, said: "While we regret our shareholders have to pay this bill, it is at least pleasing that the Chancellor appears to have produced a formula which ensures that BAA's bill, compared with other companies, reflects the strength of our case and the quality of our performance and our regulation since privatisation."