Clinton warns Labour over windfall tax threat to US utilities

The Clinton administration has approached Tony Blair's office to express concern about a windfall tax being imposed on US utilities that have acquired British regional electricity companies in the last 18 months.

The representations are understood to have followed lobbying of the Clinton administration by various US power utilities in the run-up to Tuesday's presidential elections.

President Bill Clinton is thought to have raised the matter with Mr Blair when the Labour leader visited Washington earlier this year. Labour has also been contacted through diplomatic channels.

Three British Recs have so far been taken over by US utilities at a total cost of pounds 4.4bn and a further two may fall to American predators. That would leave nearly half the UK electricity distribution industry in US hands.

According to City estimates the US utilities could be faced with a combined windfall tax liability of pounds 370m and perhaps more depending on how Labour chose to levy it.

Avon Energy, a partnership between Ohio-based Cinergy and GPU of New Jersey, which paid pounds 1.73bn for Midlands Electricity in May, could face the highest windfall tax bill of pounds 92m.

Other US companies which stand to be affected are Southern Company of Atlanta, which bought South Western Electricity, and Dallas-based Central and South West, which acquired Seeboard a year ago for pounds 1.6bn.

CalEnergy, based in Nebraska, which launched a hostile bid for Northern Electric, could be hit by the tax as could Dominion Resources of Virginia, which is considering a bid for East Midlands. Labour will argue that all these US companies bought into the electricity sector knowing that its policy was to levy a windfall tax.

However, it is now emerging that the tax may be targeted on a narrower band of companies, principally the RECs and the privatised water companies. The Clinton administration is thought to be concerned that this would result in US companies being unfairly singled out and penalised more heavily.

In a letter to The Independent on Tuesday, Alastair Campbell, Mr Blair's press secretary said the windfall tax would apply to "the excess profits of the privatised monopoly utilities." This is the clearest definition yet of how the tax would be targeted. Ed Wallis, chairman of PowerGen, told a select committee of MPs yesterday that based on Mr Blair's latest thinking, he believed the privatised electricity generators would be excluded altogether from the tax.

During a Commons Trade and Industry Select Committee hearing Mr Wallis suggested Labour's current strategy was only to tax utilities which enjoyed a monopoly in their markets, which were regulated on price and were subject to slack regulation. He insisted PowerGen did not fit into any of the three categories. National Power has also construed Mr Campbell's comments as an indication that the tax will not affect it.

Last night a spokeswoman for Mr Blair denied that the letter represented any shift in thinking. "No one can read anything into this letter. Our commitment remains that the windfall tax will apply to the privatised utilities," she said, emphasising that another criteria used could be if the company had been floated with a low share price.

Tony Blair's potential victims

US bidder UK target Offer Price Tax Liabiity

Southern Company SWEB pounds 1.1bn pounds 44m

Cinergy/GPU Midlands pounds 1.73bn pounds 92m

Central & South West Seeboard pounds 1.6bn pounds 81m

CalEnergy Northern* pounds 759m pounds 81m

Dominion Resources East Midlands** pounds 1.2bn pounds 69m

*contested bid

**considering bid

Source: BZW/Goldman Sachs