Graph: fuel bills compared with the cost of living

It feels a long time since Tony Blair was drawing cheers at the Labour Party conference for denouncing the politics of envy. This week 70 Labour MPs, including five junior ministers, have signed a petition demanding that Gordon Brown levy a windfall tax on energy companies. The MPs accuse energy companies of profiteering from the global rise in oil and gas prices, lining their pockets while granny shivers.

Labour under Tony Blair did levy one windfall tax: in 1997 it raised £4.5 billion from windfall tax on the privatised utilities. The tax was partly a populist gesture inspired by disquiet over the paypacket of Cedric Brown, then chief executive of British Gas and original corporate “fat cat”, who in 1994 had received a 75 per cent pay increase to £475,000 a year. Yet there was a good case for a windfall tax on utility companies in 1997. They had been sold off by the Tories at artificially low prices - as shown by the massive oversubscription of shares - in order to inspire the public to invest in the stock market.

There is little justification, by contrast, for energy companies to be subjected to a windfall tax now. The charge that privatised energy companies have been fleecing their customers simply isn't true. The effect of competitive energy markets has more than made up for the cost of filling Cedric Brown's bowl with cream. As the graph shows, energy prices fell in real terms for nearly two decades after the privatisations of 20 years ago. Even after the sharp rises of the past two years, gas and electricity consumers are paying little more in real terms than they were in 1987. The energy consumers who have been hit are the mainly rural dwellers who rely on boilers fired by heating oil, propane or other liquid and gas fuels: prices of these fuels are much more volatile and have nearly doubled in three years.

Since January 1, 1987, gas prices have risen by 144 per cent and electricity prices by 122 per cent. Over the same period, the retail prices index rose by 115.3 per cent and the RPI services index, which excludes manufactured goods, has risen by 168.8 per cent over the same period.

As regards the large increases in gas and electricity bills over the past year, a fair proportion of them has been caused as a direct result of regulation. The second phase of the European Emissions Trading Scheme, which came into effect this January, has itself added an average of £31 to household bills, according to the energy regulator Ofgem. Another £38 has been added by the Carbon Emissions Reduction Target - new rules that oblige energy suppliers to subsidise the provision of more energy-efficient household appliances, and a further £10 by the renewables obligation, which forces electricity suppliers to buy a proportion of their electricity from wind or other renewable providers. It is disingenuous for Labour MPs to complain about rising gas and electricity prices when so much of it is down to environmental legislation that they have demanded.

Not all energy companies have benefited from rising wholesale energy prices in any case. Customers will tend to blame their rising energy bills on the company named on top of their bill. But not all suppliers are involved in the business of extracting gas and oil from the ground. Many are involved only in supplying energy to homes and have themselves been squeezed by rising global oil and gas prices. Even British Gas, whose gas- extraction arm has been in a position to benefit from high wholesale gas prices, has been hit by tight margins in the gas supply industry: its parent company, Centrica, saw profits slide by 20 per cent in the first half of 2008 compared with the same period in 2007.

Taxing British energy companies is a poor way of targeting the windfalls made by investors in oil and gas extraction: thanks to declining production in the North Sea, 39 per cent of gas is now imported. If the Government really wanted to tax windfalls it would have to find a way of taxing Gazprom, the Russian company that is supplying an increasing proportion of the raw energy consumed in Britain. But of course, Gazprom's profits are beyond even Mr Brown's grabbing hands.

It is a similar story with petrol prices. It is all too easy to assume that the company that runs your local garage must be profiting from rising oil prices. Yet the reality is that petrol retailing is a business with tiny and shrinking margins. BP, more than any other business, inspired the demand for a windfall tax on energy companies by announcing in July a 61 per cent rise in profits in the second quarter of 2008 compared with the same period in 2007. Yet all that increase was thanks to the “upstream” business, drilling oil out of the ground. Profits in BP's “downstream business” in the UK - refining and selling petrol on the forecourt - slumped by 87 per cent over the same period.

If we want affordable energy in future we shouldn't be penalising energy companies for making money in a boom provoked by rising global demand for oil and gas. They are going to need those profits in order to invest in the ever more expensive business of prospecting for fossil fuels and extracting them from ever more tricky sources. Moreover, what message does it send to other businesses thinking of investing in Britain if the Government establishes the principle that any business that happens to have a good year can be hit retrospectively with a windfall tax?

The demand for a windfall tax on oil companies is really nothing more than a piece of old-fashioned envy politics by a bunch of left-wing Labour MPs who feel now is the time to flex their muscles against an unpopular Prime Minister. Gordon Brown has so far resisted their demands, and he is right to do so.

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