Sir James McKinnon, director-general of Ofgas, also accused the company of 'monopolistic attitudes' and of 'wriggling and squirming' over its price controls. He spoke of lethargy and resistance to change and of an 'era of tension' between British Gas and the watchdog.
Earlier this week, British Gas announced a price freeze from April, while claiming that it is entitled to make an increase 'in line with inflation'. Sir James said he had received scant information from the company on why the price had been frozen rather than cut. 'I am not prepared to accept that flimsy information,' he said.
Under its current price control formula, British Gas must keep price increases to inflation minus five percentage points, which should mean a cut of 2 per cent in gas bills. The company argued that factors including increases in gas costs - part of which it can pass on to customers - more than offset the inflation cap.
However, Ofgas said: 'If the company's gas purchasing costs rise then that may be a result of mismanagement by British Gas.'
Ofgas also accused the company of refusing to offer gas contracts to smaller customers, including schools and other publicly funded bodies. Greg McGregor, deputy director-general at Ofgas, said that contract customers can save around 20 per cent compared with customers paying normal tariff prices, but that British Gas will only offer contracts to very large customers - those using at least 25,000 therms a year.
Mr McGregor accused British Gas of enhancing its profitability by overcharging smaller customers. He said schools and local authorities were in constant contact with Ofgas demanding fair play. 'For schools that are strapped in their budgets it is understandable that they feel really aggrieved.'
Sir James, who intends to leave Ofgas later this year, warned against any relaxation in the regulation of British Gas. Critics of regulation in the UK have called for changes in the system, but Sir James said: 'We fear that focus may be lost. You may not have the tension and acrimony but equally you may not have the results we have achieved.'
He believes that only constant pressure has achieved price reductions of 20 per cent for 18 million customers since 1986, and allowed significant competition in the industrial gas market. 'This is a classic case of failure to bring about a change in monopoly management culture,' he said.
The report said disputes over bills, service and related charges caused most trouble. In one case, a Birmingham woman received a bill for pounds 987 even though her only gas appliance was a cooker, and a couple from south London living on invalidity pensions were held liable by British Gas when pounds 100 was stolen from their meter.
The report drew a sharp response from British Gas, which said only one in 35,000 of its customers made a serious complaint. Ofgas attacked British Gas 'spin doctors' for playing down the significance of the increase.