Martin Hickman: Energy giants should return money that's rightfully ours

Alistair Darling is thinking of slapping a windfall tax on banks in tomorrow's pre-Budget report. He should also consider a windfall tax on energy suppliers. Such a tax would be socially, morally and politically wise.

Why should the "big six" suppliers experience a sudden and retrospective loss of income? Not because they are making their highest margins for five years, as revealed by the regulator Ofgem yesterday, nor because those margins will rocket this winter unless the firms announce price cuts, which they may do, cynically, in late January or February.

The reason is because of a multi-million pound over-charging extravaganza which is only just emerging in its full, grubby wretchedness. Between 2004 and 2008, suppliers charged quarterly and pre-payment customers hundreds of millions of pounds more than they should have done.

In 2004, the European Union passed a directive outlawing energy suppliers from discriminating against vulnerable customers. This socially-minded directive stated they should essentially charge everyone the same amount. Not exactly the same amount, because running meters or waiting for a quarterly cheque costs more than direct debits, but any extra charges should reflect only these extra costs, nothing more.

This would have been equitable because pre-payment meters are heavily used by the poor, unemployed and tenants. A high proportion of quarterly customers are "inactive", having never changed their supplier. Alas, the Government, applying its laissez-faire approach, did not enshrine this directive in UK law, which could have warmed the bones of a hidden army of pensioners too poor to switch on the fire. (Number of excess winter deaths last year: 36,700).

Nor did the body charged with protecting the interests of customers, Ofgem. In fact, Ofgem, riddled with its own pervasive free-market dogma that allowed suppliers to charge what they liked, ignored it until last year, when, following its own eureka moment, it decided to include "cost reflectivity" in licence conditions.

During these wasted five years, suppliers rapidly cranked up pre-payment and quarterly bills. Ofgem's reluctantly-introduced Market Probe last year showed that between 2005 and 2008 the difference between direct debit and pre-payment meters jumped by 50 per cent from £80 to £125 a year. Charges for quarterly customers doubled from £40 to £80. Ofgem worked out the extra cost of running these accounts, from which it is possible to glean quarterly customers were paying £43 a year more and pre-payment homes with high energy use £82 more than a tariff deemed fair by Brussels.

The National Housing Federation estimates that between 2004 and 2008, pre-payment customers – annual income £13,500, half the national average – were charged an extra £464m above the cost of running their meters. The figure for quarterly payers is likely to have been several hundred million pounds, making the total overcharging about £700m, give or take a few tens of millions of pounds.

Consumer Focus, the publicly-funded watchdog, is taking legal advice on whether it can get this money back. A lawsuit against Ofgem would merely re-circulate taxpayers' money. Action against suppliers seems doomed to fail, given they were simply maximising shareholder returns by grabbing as much money as possible.

Instead, the Government should impose a one-off tax on the suppliers and redistribute the proceeds to the 8.6 million victims of this corporate opportunism.

The suppliers can afford to pay. They are making huge profits because of falling wholesale prices – an issue which requires a long-term solution from a Competition Commission inquiry. Socially, such redistribution would have a pleasing pre-election ring of social justice. Economically, too, it would be smart, given that the money would probably be quickly injected back into the economy, as quantitative easing comes to an end.

To those who argue it is wrong to penalise businesses for making fat profits, I would say: this is different. They made excessive profits because of a regulatory failure. Why should customers, including some of the poorest in the land, pay for that? The firms must have known their practices should have been illegal.

One other thing. Ofgem's chief executive, Alistair Buchanan, was appointed in 2003. Surely it is time for him to resign without a pay-off? He has probably saved enough from his £260,000 salary to fire up his central heating this winter.

I doubt we will see an energy tax or the back of him, though. It's so much easier to bash the bankers than to get policy right at the time.

m.hickman@independent.co.uk