'Big Six' Energy Firms May Be Broken Up
The energy watchdog has identified a string of concerns over profits, while confirming a competition inquiry into the household supply market.
Ofgem's decision to refer the sector to the new Competition and Markets Authority (CMA) could lead to the so-called 'big six' firms being broken up.
The regulator charted a quadrupling in energy company profits between 2009 and 2012 - a performance disputed as inaccurate by Centrica, the owner of the country's biggest household supplier, British Gas.
Ofgem's State of the Market Assessment accused suppliers of "consistently setting higher prices for consumers who have not switched," suggesting households were not engaging with the market because firms were not trusted to be open and transparent.
The review also reinforced concerns about barriers to entry for independent suppliers.
It found that retail profits soared from £233m in 2009 to £1.1bn in 2012 and disputed suggestions that profit margins were falling by pointing to expectations of rising industry margins and retail profits this year.
Ofgem said there was clear evidence of suppliers becoming more efficient in reducing their own costs, although further evidence would be required to determine whether firms have had the opportunity to earn excess profits.
The market investigation, Ofgem said, would conclusively determine whether there should be more separation between the largest companies' supply businesses and generation arms, in a bid to provide more clarity on earnings.
One of the 'big six, SSE, confirmed on Wednesday it was to legally separate its supply and generation businesses in a bid to improve transparency as it announced a price freeze until January 2016.
Such a move could be forced on its competitors by the CMA if it decides it would be in the public interest.
While Ofgem found no evidence of collusion on pricing, the review discovered "evidence of possible tacit coordination" in the timing and size of price announcements and new evidence that prices rise faster when costs rise than they reduce when costs fall."
The regulator also confirmed that from June 1 it would substantially increase the level of penalties it imposes on energy firms who break its rules to give "sufficient focus within businesses."
Its chief executive Dermot Nolan said: "Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices.
"The CMA has powers, not available to Ofgem, to address any structural barriers that would undermine competition.
"Now consumers are protected by our simpler, clearer and fairer reforms, we think a market investigation is in their long-term interests."
News of the competition investigation was welcomed by politicians, consumer groups and by some of the 'big six' firms.
Centrica, which owns the biggest supplier British Gas, said its was committed to "an open, transparent and competitive British energy market" and backed moves to restore trust.
But its statement rejected "any suggestion of possible tacit coordination with other market participants" and insisted the market was already competitive.
Chief executive Sam Laidlaw also sounded a note of caution on the possibility that firms could be forced to split or even sell off their power generation businesses.
He said: "We hope that a lengthy review process will not damage confidence in the market, when over £100bn of investment in new infrastructure is needed.
"A prolonged period of uncertainty could damage investment at a time when Britain's energy security is being seriously challenged."
The energy sector says it invested £11.6bn in 2012 - the equivalent to building 20 Olympic stadiums - to secure power and gas supplies.
E.On's chief executive Tony Cocker said: "A full market investigation by the CMA is the only way to restore full public confidence to the energy sector and depoliticise the whole issue.
"Whilst we have already made a large number of changes such as running our businesses separately, simpler tariffs, simpler bills and further investment in levels of service, a full investigation will once and for all get to the heart of any structural issues that exist or are perceived to exist and help us to all deal with many of the myths and misinformation that surround the energy market."
A seemingly lone voice, critical of the competition inquiry, was the GMB union which represents energy sector workers.
It claimed the investigation was designed to "kick the issue down the road" until after the next election.