Ofgem blames energy costs and low supplies for rising gas bills

The Energy regulator cleared gas producers and shippers of manipulating the market yesterday, blaming high oil prices and a sharp decline in UK output for the record gas prices now being seen.

The Energy regulator cleared gas producers and shippers of manipulating the market yesterday, blaming high oil prices and a sharp decline in UK output for the record gas prices now being seen.

As if to emphasise the point, British gas prices for the first quarter of next year soared yesterday, hitting new highs. January futures on the IPE exchange jumped 20 per cent to 78.76p a therm.

Ofgem said that British consumers would pay £5.3bn extra as a result of gas price increases since October last year. After an 11-month investigation, Ofgem found that the knock-on impact of the soaring oil price and a fall-off in production from the UK's own gas fields in the North Sea were the primary reasons for current gas prices.

As a result, suppliers such as British Gas have increased the prices that homes and businesses must pay. Ofgem said it found little wrong in the behaviour of the gas industry. Alistair Buchanan, Ofgem's chief executive, said: "On the whole, the market is working."

However, energywatch, the official consumer watchdog, called for a coordinated action plan from the Department of Trade and Industry, Ofgem and the European Commission.

Allan Asher, the chief executive of energywatch, said: "Ofgem's gas inquiry suggests to us that British consumers have suffered unprecedented price rises, in large part because of an ineffective regulatory structure and a lack of transparency. The report does not allay our concerns that there may have been a degree of manipulation within the wholesale gas market."

The Ofgem investigation began in November last year, after a rise in wholesale gas prices to 34p per therm. Prices have since doubled.

At the same time as Ofgem began its inquiry, the Financial Services Authority, the City watchdog, was brought in to see if the price fluctuations "amounted to a breach of the market abuse regime". Yesterday the FSA said that it had "not found any evidence of such a breach occurring". It continues to monitor the situation.

Ofgem found that the gas price rise would cost British consumers an extra £3.6bn in higher gas bills this winter. It also said that consumers would have to pay £1.7bn more for their electricity as a result of the gas price increase - much electricity is generated from gas-fired power stations.

Of the £3.6bn, Ofgem said £1.4bn was because ofhigh oil prices. This was because the gas this country imports from continental Europe is tied to the oil price. Ofgem has taken a complaint about the functioning of the European gas market to the European Commission.

The other part of the problem - declining supplies from UK gas fields - has meant that the UK has had to rely on more expensive sources of gas. This issue should be cleared up over the next two or three years as new supplies come on-stream, the regulator said.

Ofgem found that about 5 per cent of supply related to certain "legacy" contracts for three North Sea fields. Its inquiry into the effect of these contracts on the market continues.

The UK Offshore Operators Association (UKOOA), which represents 30 oil and gas producers, said it was "deeply disappointed" at Ofgem's continuing inability to bring its investigation into rising gas prices to a conclusion.

Malcolm Webb, the chief executive of UKOOA, said: "The contracts concerned [in the investigation] are long standing and accounted for only about 1 per cent of the total UK gas supply during that period. We must question the materiality of such a small percentage on the overall market over the weeks under investigation."