Energy companies, banks and windfall taxes

Should energy companies have to pay a windfall tax? There are many people, including a significant number of Members of Parliament feel that the energy companies should pay a windfall tax. The argument goes that the energy companies have to pay 30% more for their wholesale costs and they are imposing a 30% price increase on their retail prices to their customers, which means that they are getting a greater profit per unit sale by imposing a price increase on retail charges which significantly exceeds what they have to pay on whole charges.

Similarly the banks are now into windfall territory, but not in order to make larger profits. They are exploiting their position to bolster up their reserves having lost vast amounts of money in buying dud subprime mortgages which were not worth anything like the sums they paid for them. The banks are now setting their operating margins and fees higher as they seek to recover money from the hard work of people who would not have known as subprime derivative if one had fallen from the sky and hit them on the head, and even then if it were explained to them would have avoided these speculations like the plague.

All nations need banks and energy companies. Without a banking system in which people can have confidence businesses can collapse with all the chaos and hardship that creates. Without a viable energy distribution system businesses will also collapse which will also creating hardship and chaos.

The energy companies are regulated officially, by Ofgem, which is supposed to stop the energy companies from profiteering at the expense of the public. The banks are supposed to be regulated by the Financial Services Agency, also intended to protect the public.

It is interesting that the energy companies feel very confident that they can impose these present price rises, without, i suspect too much to fear from the regulator. Certainly the banks have very little to fear from the FSA, as there has been no investigation or examination of the very high margins and fees that their customers are now having to pay.

The annoying thing is that the customers of banks and energy companies have to pay because these are quasi monopolies where it seems that regulation has failed, either structurally or by virtue of the policies and tactics of their regulators. The customers pay with their own extra hours worked and sacrifices in their lifestyles, which of course have not affected those in charge of the banks and energy companies who are rewarded for their short term tactics and when these go wrong get the customers to bail them out.

This rewarding failure is written into our economy; there seems to be very little that we can do about it as consumers but you can do something. You can invest in microgeneration, to make you a little freer of the energy companies or move your business to a credit union or a genuine building society if you need banking, but beyond that it is hard to fully escape the clutches of the energy companies and the banks because people you trade with or employ or know will be suffering as a result of their being able to use their quasi monopolistic position.

Every business aims to become a monopoly; every monopoly acts against the public interest. It is I am fariad as simple as that.

The Association of Electricity Producers regards a windfall tax a legalised raid on the energy companies’ bank accounts. They are right about that, but then in one sense all tax is a legalised raid on assets. They claim that it would scare off investors. I am not so sure. Every investor needs a balanced portfolio and investing in energy companies is traditionally done in order to spread the risks of other investments with the vanilla plain lack of excitement of a utility with regular income, not because the investor is seeking with windfall profits.

Banks at the moment need capital, rather than investment and the easiest pickings are from their existing customers. In the absence of close regulation those customers will continue to pay the price for the excesses and orgies that senior management presided over that caused the banks to deplete their capital by unwise investments.

So should energy companies have to pay a windfall tax? The people that think they should want to distribute the tax gained to poor people to help them manage their energy bills. This circular arrangement is usually expensive and hard to administer efficiently. Ultimately if energy companies or banks have been profiteering in the existing energy crisis and banking crisis, then this should be addressed by the regulator; otherwise there is no point in having one.

One Response

  1. Good idea! The regualtors should take heed!

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