A rant about windfall taxes...

[rhythmaning]

There has been a lot of talk over the past few months about the need (or otherwise) of the UK government to charge the energy companies – electricity, gas and oil – with a windfall tax.

Labour MPs, unions and even 70% of the public support such a tax (sorry – I can’t find the reference).

I really don’t understand this at all.

The argument goes that a windfall tax is needed because the energy companies are making excess profits: that is, they are profiting from unfair market practices – they either represent an oligolopoly or, locally, a monopoly.

The electricity and gas companies – privatised in the 1980s and 1990s – are regulated by the Office of Gas and Electricity markets – Ofgem. If any energy companies are abusing their market position, they should be subject to sanction by Ofgem, the Office of Fair Trading - “making markets work well for consumers” (I mean, jeez! It’s their bloody job!) or the Competition Commission.

That’s right – there are three different regulatory bodies who have the power to investigate market abuse by energy companies.

If MPs or the unions believe the energy companies are profiting from excess prices because the energy retail or wholesale markets aren’t working properly, they have lots of ways of prompting an investigation – which would result in large fines.

As it is, these companies are making large profits at the moment. (I have no idea if these are excessive or not.) As a result, they pay a large amount of money in corporation tax – this is a good thing: it pays for hospitals and schools and lots of other things we need money for in society.

This is a very different argument to saying that energy prices are high, and many people may need help to pay their bills this coming winter. This is something MPs and unions can do something about. Indeed, looking after their constituents is what they should be about. But they don’t need to bash businesses whilst they are about it.

Comments

[matgb]

Agreed. A lot of it is a combination of economic stupidity and competition law ignorance anyway.

For the most part, the excess profits come from the drilling/extraction/importing arms of the companies. They're obliged to sell their stuff at the international price on the commodities market, even if they're selling it to themselves.

That way other companies (like Tesco) can buy oil and then sell it to us. In normal circumstances, it keeps costs down (UK pre-tax petrol costs are amongst the lowest in Europe IIRC).

If the extraction companies are making excess profits, it's because the speculation on the energy markets is massive and/or demand has rocketed (both of which are true currently). To allow them to sell it internally (so BP fuel stations buy from BP extraction) at cheaper rates would pretty much force other fuel stations and/or home energy distributers out of business and thus hurt us medium term.

The solution is cut consumption and stop invading oil producing countries for spurious reasons. Oh, and maybe switch to trading oil in Euros like what we should've been doing 5 years ago and Iran is planning on. Propping up the dollar and the US economy in the way we are is a bit silly, really.

[rhythmaning.livejournal.com]

I should actually have written this with a view of the Government's attempt to intervene in markets: it annoys me that the Government feels it needs to come to the rescue of the housing market. I might write that sometime.

I heard a clip of Gordon Brown as newly appointed Chancellor, saying the days of boom and bust were gone. How we laughed.

[psychochicken.livejournal.com]

I think it's more of a case that at a time when they're making more money than ever they're pleading poverty and chucking 30% on the household bills of their customers. Sorry, but that ain't right.

These firms should be forced to take up a bit of the strain here. Like the financial institutions before them they made hay when the sun shone and they should have catered for the lean times but they didn't, and now they are turning to their customers to make up for that fact. If they can't weather this without clobbering their customers then they deserve to die as organisations through poor management.

[rhythmaning.livejournal.com]

I don't disagree with you - we need to help those that can't afford it to pay their energy bills. I just don't think a "windfall tax" is the way to do it: it is a vindictive, knee-jerk reaction - just like the attempt to make non-doms pay more.

Targetting a single type of company or a single part society is unjust. It is a short step to targetting Jew or "foreigners" or the old or women or ...

[psychochicken.livejournal.com]

Oh absolutely - I agree entirely that a windfall tax isn't the answer. A body such as Ofgem quibbling their pricing policy and telling them they can't constantly plunder their long suffering and generally captive customer base to preserve the artificial and unsustainable rising profits their cloud-cuckoo land inhabiting share holders demand just because they didn't cater for this inevitability, might be. And if they have to let those profits slide, or their shareholders lose out, then so be it. Even if it loses them their business. Christ knows no other industry would get away with such blatent mismanagement and profiteering.

Just as no financial institution can be excused to not forseeing the stock market issues that they've experienced, no energy company can be excused for not making provision for the day that oil prices would go through the roof.

[sandwell.livejournal.com]

Just as no financial institution can be excused to not forseeing the stock market issues that they've experienced, no energy company can be excused for not making provision for the day that oil prices would go through the roof.

Er, indeed. That's why Energy Traders and Energy Risk Analysts get paid so much money :p And the clue is in the job title ... *Risk* analysts. It's their job to minimise it. And if oil prices (which everything else is linked to) can be seen to steadily rise, constantly, it's not exactly a difficult leap of faith to imagine them to continue to so so, and therefore try to get as much energy bought on long-term contracts as physically possible.

Or to put it another way, if you knew for eaxmple in 2004 that prices would double by 2008, you'd buy enough energy *then* for future contracts (at 2004 prices) thus mitigating any medium-term price rises (of course if prices rise constantly and rapidly for a decade then at some point there'll be a catch-up, but, er, they haven't!).

[sandwell.livejournal.com]

Howdy!

Sorry to intrude, but ... I thought you might like to hear something from the *other* side of the argument. Given that I *work* for an energy company ... !!

[All of this is, of course, unofficial, and I'm speaking from my own viewpoint and not as a representative of any particular energy company :p]

First thing to say is that, yes, undoubtedly, energy companies make money. Oodles of it - and after all that's kind of their raison d'etre (they *are* private businesses after all). However, and this is a very important point, all energy companies are (and have to be) subdivided so that their trading arms do not deal directly with their retail arms (to prevent issues of Leeson-esque proportions). In general terms, it is the *trading* arms that make all the money, not the end-retail arm. Indeed the domestic retail side of the firm I work for regularly makes a *loss*.

Since it's the retail side in charge of prices, it's pretty clear that prices actually aren't as high as they ought to be for retail to make money!

That said, much of this is caused by issues outwith the *markets*, and more to do with eg unbilled accounts, old debt, incorrect billing, some of which is our fault and some of which is National Grid Transco's.

In addition, the major issue with a windfall tax is that, with their other hand, the government is requiring energy companies to invest in 'green energy' schemes - the nature of which means they are expensive. So by imposing a windfall tax, the government is taking away much of the cash that would be used to finance such schemes, which would leave energy companies no option but to revert to 'cheaper' forms of energy production - ie ones that already exist; coal, gas, etc.

[The whole 'green energy' is a complete joke btw, and only a directed effort by the government will change that. Otherwise all the energy companies will simply pay lip-service to the regulations and continue to trade in 'carbon certificates' rather than actually producing any *real* green energy!]