Industry watchdog to probe energy giants

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Britain's energy giants are to be investigated by the industry watchdog after it emerged that recent price hikes have seen suppliers' profit margins soar by 38%.

Ofgem announced the probe after discovering average margins on a standard dual-fuel tariff had risen to £90, compared with £65 in September.

The latest inquiry comes after three of the "big six" providers - British Gas, Scottish & Southern and Scottish Power - hit households with bill hikes.

Ofgem said it would look at the "facts behind the numbers" as companies claimed rising prices in the wholesale market - where suppliers buy their energy - left them with no choice but to lift bills.

The probe into provider accounts has been welcomed across the board from 10 Downing Street to consumer campaigners, while energy suppliers claimed they had "nothing to hide".

The inquiry is the latest in a line of investigations by the watchdog, which most recently included a probe into claims npower, Scottish Power, Scottish and Southern Energy and EDF Energy were failing to comply with new obligations to prevent mis-selling.

Announcing the review, Ofgem's chief executive Alistair Buchanan said: "The energy retail market can only be fully effective if consumers have confidence that the market is transparent and easy to take part in.

"So we will go beyond our usual quarterly reports on prices and do a comprehensive review of the retail market and our recent reforms from the consumers' perspective.

"We will also carry out a detailed investigation of the newly available retail accounts and the facts behind these numbers.

"Greater transparency in the market is good for consumers, investors and for the energy industry as a whole."

Ofgem said it aimed to finish its investigation by March next year.

The regulator warned in a recent report that rising wholesale prices, boosted by increased demand and the impact of soaring crude oil costs, could be passed on to the consumer.

British Gas managing director Phil Bentley recently claimed his company had been selling gas at a loss, which was not sustainable.

But consumer groups have questioned energy suppliers' figures, claiming wholesale prices are still around half their peak in 2008, while in the same period customers' prices have fallen by less than 10%.

British Gas - owned by Centrica - saw profits nearly double in the first six months of 2010 to £585 million after the coldest winter for 30 years saw customers reach for the thermostat.

But Scottish & Southern Energy (SSE) announced a 6% fall in half-year profits earlier this month after selling gas at a loss.

Number 10 welcomed Ofgem's review, but stressed the decision was a matter for the watchdog.

Prime Minister David Cameron's spokesman said: "Absolutely we welcome Ofgem's decision to look at the effectiveness of energy markets. They are doing exactly the right thing in looking into the effectiveness of this market and whether it is working from a consumer perspective.

"Energy bills are a significant expense for many families in this country and that's why it is important that we see these markets working effectively."

Lobby group Consumer Focus said energy companies were quick to protect profits when wholesale prices rose, but slow to benefit consumers when they fell because of a lack of competition between the major players.

The group said if Ofgem's "overdue" review showed the current level of competition did not force companies to price fairly, Ofgem or the Government should refer the market to the Competition Commission.

Audrey Gallacher, head of energy at Consumer Focus, said: "We all have to pay for gas and electricity and the main protection we have against being overcharged is competition in the market.

"We have long been concerned that the market is not as competitive as it should be and this review needs to get to the bottom of whether prices are fair or whether consumers are being taken for a ride."

Ms Gallacher said more information about wholesale costs, retail prices and company margins was required.

Energy UK, a representative of the country's energy trade associations, said suppliers had "nothing to hide".

Christine McGourty, director of Energy UK, said: "The energy companies have been working closely with Ofgem for some time to implement an array of reforms that should bring significant benefits to customers."

Ms McGourty said no previous investigation had found anything to concern the competition authorities.

She said Britain had one of the most competitive but complex energy markets in the world, with an array of costs factored into bills, such as environmental obligations.

A spokesman for British Gas said margins in the second half of 2010 were expected to be an average of 3% to 4% on residential energy sales, "substantially less" than the margin predicted by Ofgem.

EDF Energy is the only "big six" supplier to have guaranteed to freeze standard gas and electricity prices for residential customers at current levels until at least March 2011, while E.ON and npower have not yet made their pricing positions known.