Leading article: A failure of regulation

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Ofgem's latest report provides clear evidence of profiteering by energy firms. It shows how the prices charged to customers have not moved down in line with wholesale energy prices and that the gross margins of the "big six" suppliers are at a five year high. But the regulator once again draws the wrong conclusions from the data it has collected.

Ofgem sticks to its argument that there is no evidence that energy companies are behaving badly. It says, instead, that the six major firms are simply using their present high profits to recover from several lean years; that this is an innocent exercise in smoothing out the economic cycle.

Such a conclusion is a further sign of the regulator's capture by the commercial interests it is supposed to be policing. The high profits of the sector are not the result of some rational smoothing out process, but a lack of competition. There has been too much consolidation in the sector in the past decade. The result is that there has been insufficient pressure on the big suppliers to cut their retail prices when wholesale prices fall.

In the context of such market failure, it falls to the regulator to step in and ensure that prices come down. This is a duty Ofgem has repeatedly failed to carry out. The regulator does now warn that prices must fall in the new year if wholesale prices remain low and that it "will not shy away from proposing radical reform to protect the interests of consumers". But such threats have little credibility given Ofgem's past performance. Certainly the energy firms are showing no signs of heeding the warning.

One of the excuses Ofgem has used for its historic inaction is that energy firms need to make a profit if they are to invest in renewable energy infrastructure. Yet it is precisely because of the need for such "green" investment that public confidence must be maintained in the pricing policies of the sector. People will accept higher bills if the revenues flow into renewable energy infrastructure. They will not accept them if the revenues are siphoned off into the excess profits of a monopolistic energy sector.

That is the argument that a serious regulator would be making. Instead, we have the muddled analysis and feeble excuses of Ofgem.

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