U.K.'s new Labour government has carried out an election promise to impose a "windfall" tax on utilities privatized under the previous Conservative regime.
Gordon Brown, Chancellor of the Exchequer, said in his budget speech July 2 that social reforms would be funded "...by a new and one-off windfall tax on the excess profits of the privatized utilities."
Britain's gas and other utilities have come in for much public criticism since privatization for cutting staff levels, reducing quality of services, and yet awarding vast salary increases to utility chiefs and big dividends to shareholders (OGJ, Dec. 12, 1994, p. 26).
Brown's target is to raise a total £5.2 billion ($8.32 billion). He said £2.1 billion ($3.36 billion) will come from the electricity sector, £1.65 billion ($2.64 billion) from the water sector, and £1.45 billion ($2.32 billion) from other industries, including gas supply.
BG companies hit
The companies formed by breaking up British Gas plc-BG plc and Centrica plc-are expected under the new tax to pay £515 million ($824 million) and £190 million ($304 million), respectively.
The Treasury Department said the taxes will be payable in two equal installments, on or before Dec. 1, 1997, and Dec. 1, 1998.
Although BG and Centrica have written off profits in recent annual results figures to cover the long-expected payment, BG said, "This is a blow coming on top of a tough Monopolies and Mergers Commission settlement. We will need to consider the implication fully before commenting further."
Only last month, BG heard it had failed to prevent a ruling by government regulator Office of Gas Supply (Ofgas) that it must cut transportation charges to third parties by 21% (OGJ, June 23, 1997, p. 26).
Other measures beneficial
Not all the new budget measures were designed to make utility bosses squeal, however. The government reduced the corporation tax to 31% from 33%, a measure that will benefit all U.K. companies.
Brown also decided to remove the gas levy, a tax introduced in 1981 to capture revenues from southern North Sea gas basin fields that were exempt from the Petroleum Revenue Tax.
Wood Mackenzie Consultants Ltd., Edinburgh, said that as the gas levy was paid by Centrica, this increased gas costs to customers. Removal of the gas levy more than compensates for Centrica's windfall loss.
"In the last reported financial year, 1995-96," said Wood Mackenzie, "the gas levy yielded some £191 million ($306 million) to Treasury, the lowest level since its introduction.
"The gas levy was not the cornerstone of government's oil and gas taxation regime. Its removal will help one of the government's aims: a real reduction in the gas price payable by consumers."
Copyright 1997 Oil & Gas Journal. All Rights Reserved.
