MPs offer a case for windfall tax

An all-party Commons select committee yesterday provided valuable ammunition to Labour's plans for a windfall tax on the privatised utilities, with a report unanimously concluding that regulation had been too lenient in the the years after the state sell-offs.

However the rest of the report provided little support for the key Labour utilities policies. It conspicuously failed to back Labour's plans to change the system of price controls which cap bills each year by a formula based on the retail price index. Labour wants to supplement this with an additional annual lever to cream off any excess profits, but the committee's Labour chairman, Martin O'Neill, argued this would be too complicated. "We're not sure that is going to work." He said the current regime, was "as good as we're going to get at the moment".

Committee members were also notably lukewarm on Labour's policy to back up individual regulators with boards of advisory directors, preferring to delay structural reforms until the completion of domestic competition in gas and electricity later next year.

Successive opinion polls have demonstrated that the Government has been hard pressed to get across the benefits of privatisation, while utility executives pay themselves huge salaries. However,the issue has also proved complex for New Labour. Mr O'Neill yesterday admitted that privatisation had "benefited" consumers, a statement which would have been hugely controversial before the last election, though he insisted much of the improvement had come from a worldwide plunge in energy prices.

Gordon Brown, the shadow Chancellor, immediately seized on the conclusions, which he claimed endorsed the case for the windfall tax. In a BBC interview, he added: "What the report is about is whether the profits have been to high and the regulatory system too lax. And my whole case for the windfall tax is that the profits have been too high."

Though the tax itself was ostensibly beyond the committee's remit, Mr O'Neill told a news conference "there was evidence in the report to support the case for a windfall profits tax." He went on: "Profits were excessive and we all agree they were excessive."

John Butterfill, a Conservative committee member, swiftly disagreed, arguing that there would be "no point in having a regulator" if the tax went ahead. "The concept of a windfall profits tax undermines the role of the regulator," he said. However, he also admitted that regulators had "underestimated the efficiency savings that could be achieved" from privatisation.

The Committee singled out the electricity sell-off for supplying up the biggest windfalls to investors, outweighing savings to customers. Figures showed shareholders in the 12 regional electricity companies, privatised in 1990 for pounds 8bn, had earned total returns of about 40 per cent a year, well above the rise in the stock market as a whole. In contrast, prices for domestic customers dropped by just 15 per cent after inflation.

Business Comment, page 21