Utility windfall profits in tax spotlight

By Gerard Wynn and Nina Chestney

LONDON (Reuters) - Utilities will likely escape a tax on profits they make from a European Union carbon trading scheme -- but the issue has sparked fierce debate about the size of windfalls and how utilities spend them.

Prime Minister Gordon Brown wants to help households cope with the rising cost of fuel bills and may ask power companies to pay money into a voluntary fund making homes more energy efficient, government and industry sources say.

That would ignore some members of parliament who have asked for a tax on utilities' windfall profits. Companies have argued that a tax would be a policy u-turn requiring Brussels approval.

The debate has sparked a debate on the size of and justification for windfall profits which energy regulator OFGEM in January estimated at 9 billion pounds through 2012.

"I would argue that they're completely over-compensated... (it's) a handout to industry," said UBS analyst, Per Lekander.

The EU emissions trading scheme allows power generators to add to electricity prices the cost of carbon emissions permits many of which they get for free, resulting in a profit.

The size of the profit depends on how many permits companies have to buy -- which depends on the size of their free quota and how polluting they are -- and how much cost they can pass on to the wholesale power price.

"There are no windfall profits," said David Porter, chief executive of the Association of Electricity Producers.