Energy watchdog tells big firms: cut prices or else

Big Six suppliers could face mandatory price controls, says Ofgem, as public anger mounts over exorbitant fuel bills

A cap on fuel bills could be introduced for the first time in more than a decade amid rising concern that customers are being ripped off by the Big Six energy firms, the regulator Ofgem has told The Independent.

The dominant companies – EDF, E.on, British Gas, Scottish and Southern, Scottish Power and Npower – will have to overhaul their confusing and expensive tariffs this year to escape tougher action, it said.

One solution is a Competition Commission inquiry into the whole industry which could force a break-up of its dominant players, who have 99 per cent of the market. The other is imposing price controls for the first time since 2002 – potentially affecting all 22 million households in Britain. Ofgem said: "Parliament has given us the task of trying to create an effective market where competition is the downward pressure on prices. We think that's the way to go, although we haven't ruled out regulation, particularly for more vulnerable customers, if our reforms don't work."

Bills have doubled since 2005 to £1,250 a year, leaving 5.5 million households in fuel poverty, spending 10 per cent or more of their income on power. Rising global demand for energy and the end of cheap North Sea gas are responsible for most of the increases, but consumer groups also believe suppliers are keeping bills artificially high.

Yesterday one of the Big Six, the French-owned EDF, reported a near trebling of its annual profits to €3bn (£2.5bn), with profits from its British operations rising 8.5 per cent. It is currently the subject of two Ofgem investigations into poor customer service and mis-selling. Over the next three months, the Big Six – four of which are foreign-owned – are expected to announce total European profits of £15bn, up £2bn on last year.

The Independent's energy campaign is calling for a windfall tax on excessive energy profits and for the money to be used to help in the fight against fuel poverty by making homes more energy efficient.

Almost 3,000 winter deaths are caused every year by fuel poverty, according to one study, and Age UK estimated last month that two million elderly people were so cold they huddled in bed when not tired to keep bills down. The new Energy Secretary Ed Davey and his Labour counterpart Caroline Flint have already backed our campaign, underlining a tougher stance towards the energy giants.

Ofgem is currently consulting on forcing them to set uniform standard charges to allow consumers to compare raw costs, or unit prices, more easily. It is also intending to sweep away the hundreds of different tariffs operated by the companies into just two types – standard and innovative.

Ofgem's faith in an unfettered free market has been shaken by the failure of the Big Six to embrace its previous reforms of bills and tariffs. Although it says it is "encouraged" by recent attempts by some suppliers to simplify charges, it is closely monitoring their performance.

Unless all the companies agree to its latest reforms, expected to be announced in July, it will trigger a Competition Commission inquiry. If they do accept them, it will scrutinise their performance carefully. From March, it will issue weekly rather than monthly reports on suppliers' margins, currently £80-a-year per dual-fuel customer.

In an article published online at Independent.co.uk today, one of Ofgem's senior officials, Ian Marlee, says the regulator "will continue to force the pace of change by taking a tough stance on enforcement and by driving forward changes to increase the competitive pressure on all energy suppliers."

Pointing out that bills are expected to rise by up to 60 per cent by 2020 as suppliers invest £200bn in replacing clapped-out power stations, he adds: "Consumers are right to ask whether the market structure is right and whether re-regulation of prices is the answer."

Consumer groups expressed anger at EDF's rise in profits . Audrey Gallacher, director of energy at Consumer Focus, said: "EDF Energy's UK profits have risen despite lower energy use in the milder winter. This will leave many customers wondering whether energy prices can, and should, be cut further."

She added: "Consumers need to know big profit margins are not being made needlessly at their expense."

Which?'s executive director Richard Lloyd said: "When people see energy suppliers announcing increased profits despite a mild winter, they're bound to question whether they're paying a fair price. There's an unstoppable tide of public opinion demanding more affordable energy."

UK Energy, which represents the energy industry, refused to be drawn on the threat of price controls. A spokesman said: "Companies are looking very closely at all the reforms proposed and listening hard to what their customers are telling them about the choices and the service they expect.