Utilities fight 'second windfall tax'

GOVERNMENT plans to give utility regulators greater powers to claw back profits from the privatised electricity, gas, water and telecoms companies are running into fierce opposition.

The electricity industry is to urge ministers to abandon the proposals, warning that they are unnecessary and will increase firms' cost of capital.

Margaret Beckett, President of the Board of Trade, outlined plans to clamp down on excess profits through a so-called "error correction mechanism" in her Green Paper on utility regulation in March. The mechanism, viewed as a windfall tax by another name in some quarters, would be additional to the existing RPI minus X price control formula which limits price increases to "X" per cent below the rate of inflation.

Mrs Beckett said the mechanism would be used only on very rare occasions where companies benefited from circumstances outside their control, such as a big drop in fuel costs, or where they deliberately misled the regulator.

However, in its response to the Green Paper, the Electricity Association, the body representing all the electricity distributors and generators, will warn that the proposals would increase uncertainty and raise borrowing costs for all utilities. The proposal for an error correction mechanism was criticised at the time by the shadow President of the Board of Trade, John Redwood, who said it would leave the Goverment free to dip into the funds of the privatised utilities.

The idea was also questioned by one of the regulators themselves, the electricity watchdog Professor Stephen Littlechild. He said that the present system worked well and it was important that any other forms of control did not either blunt incentives to make profits or create uncertainty among consumers over future price levels.

Electricity companies are not sure what circumstances would trigger use of the mechanism since the regulated parts of the industry - transmision and distribution - are unaffected by factors such as a drop in fuel costs.

John Roberts, president of the Electricity Association and chief executive of Swalec, said: "It is not clear what the mechanism does that the existing price control formula doesn't already do. We will be asking them to withdraw it because if it is there then the regulators will also be tempted to reach for it."

The electricity industy's response to the Green Paper will also set out its plans for a pounds 100m levy on consumers to cover the cost of servicing poorer customers such as those on pre-payment meters. The levy would work out at pounds 3-pounds 4 a head and would help ensure that when the electricity market is opened to competition from this September, suppliers are not tempted to cherry-pick or discriminate against pre-payment customers who generally use less electricity and are therefore less profitable. Protecting the interests of poorer and socially disadvantaged customers is one of the central themes of the Green Paper.

Mr Roberts said the industry supported the idea of giving regulators a new primary duty to protect the consumer. But he said the utilities themselves should not be turned into a branch of the social services. It would, for example, oppose moves for companies to be required to keep a register of vulnerable customers or those in particular social or age groups such as pensioners.

The electricity industry has also recommended that the Government introdue a "small claims court" to deal with disputes between firms and the regulator. At present, if a company objects to a ruling, its only course of action is to opt for a full referral to the Monopolies and Mergers Commission.