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Leading article: Signs of a power failure

Energy prices are on the rise. Npower raised its tariffs for gas and electricity two weeks ago and EDF Energy did the same this week. Given that the sector generally seems to act in unison on price, it is considered only a matter of time before the other four big British energy firms follow. This led to the Chancellor of the Exchequer, Alistair Darling, calling in the energy regulator, Ofgem, this week to account for the price rises.

But Ofgem has defended the sector. The regulator told the Chancellor that there is no evidence that these latest price rises are a result of industry collusion. It also accepts the explanation of the energy companies that these hikes can be explained by rising global energy prices, higher distribution costs and new centrally imposed environmental obligations.

Yet the energy price explanation is highly dubious. It is true that the average cost of wholesale gas has increased in the past few months. But wholesale energy prices remain 20 per cent lower than their peak in 2006. Energy companies are also notoriously slow to pass on savings when energy prices fall. When wholesale energy prices dropped by 60 per cent last year, average retail costs fell by only 12 per cent and most customers had to wait months for these cheaper tariffs to apply. By comparison, when Npower announced its price hike this month, customers were hit within a day.

Putting the blame on environmental obligations is suspect too. The European Emissions Trading Scheme came into effect in 2005. But far from being squeezed by the scheme, UK energy companies have barely been affected. Indeed, Ofgem argues that UK energy companies have received a £9bn windfall because of the ridiculously generous allocation of quotas negotiated by national governments.

Despite all this, Ofgem persists in arguing that the market is working well for customers. Its chief executive, John Buchanan, argues that "we see companies gaining and losing significant market share, record switching levels and innovative deals". Yet it is hard to square this analysis with the fact that more than three-quarters of energy customers are not on their company's cheapest tariff. The elderly are especially badly served. Two-thirds of over-60s have never switched and are paying more than they should. Considering that 40,000 elderly people die each winter from the cold in Britain, this is not something our political leaders can afford to treat lightly.

No one would want to return to the old monopoly system of energy production and distribution. But if the free market is to operate properly it needs a regulator that will keep the sector in line and prevent abuse. It is hard to avoid the conclusion that Ofgem is failing to perform that function.