Watchdog launches probe into Buffett's UK energy firm

Two UK electricity companies owned by the legendary US investor Warren Buffett are facing the threat of fines running into millions of pounds after the energy regulator Ofgem launched an investigation into suspected breaches of their licences.

Ofgem began the investigation into Northern Electric Distribution and Yorkshire Electric Distribution earlier this month. The companies supply electricity to 3.7 million homes in north-east England, Yorkshire and north Lincolnshire and have revenues of £500m a year. If they are found guilty of contravening their licences, Ofgem has the power to fine them 10 per cent of their turnover.

The two distribution companies are part of CE Electric, which is in turn owned by Mid-American Energy, a subsidiary of Mr Buffett's parent company, Berkshire Hathaway.

The president and chief operating officer of CE Electric, Mark Horsley, left the company last week.

The Ofgem investigation concerns suspected breaches of Northern and Yorkshire's licence condition relating to quality of service. Under the regulator's incentive scheme, electricity distribution companies are able to earn extra revenues for minimising the number of blackouts and the length of time customers are left without power. In 2004-05, the latest year for which figures are available, Northern and Yorkshire made about £6m under the incentive scheme. Figures for the most recent financial year are due to be published later this month.

Ofgem confirmed that it had begun an investigation, but refused to comment on the details. However, officials are understood to be examining the accuracy of the information on supply interruptions sent to the regulator by the two companies.

The investigation mirrors a similar probe being undertaken into the performance of water companies by the water regulator Ofwat. Severn Trent and Southern Water are both facing heavy fines for supplying Ofwat with incorrect information on customer service. In the case of Severn, Ofwat said the company had deliberately provided misleading figures. The Serious Fraud Office is carrying out separate investigations into the two water companies.

Mr Buffett bought Northern Electric from another US energy company for $1.3bn (£690m) six years ago. A year later, he swapped its retail customer arm for the distribution network of the neighbouring Yorkshire Electricity in a deal with Innogy, which is now owned by RWE of Germany.

Ofgem officials said that investigations of electricity distribution companies for licence breaches were extremely rare. There have been only two such investigations in the past three years.

If Northern and Yorkshire are found guilty, it would be a severe blow to Mr Buffett's reputation. He is keen to expand Berkshire Hathaway's presence in the energy industry and is understood to have considered bidding for ScottishPower, although Philip Bowman, the chief executive of the company, said earlier this week that Mr Buffett had indicated he was not interested in making an offer.

Distribution companies run the regional power networks that link households to the high-voltage national transmission grid. The cost of running and maintaining these regional networks makes up about a third of the typical household electricity bill.

Ofgem said that in the past six years there had been a big improvement in performance nationwide, with the number of power cuts down by 10 per cent and the average length of disconnection 30 per cent lower.

A spokesman for CE Electric said last night: "We notified Ofgem of an error that we detected on some quality of supply data. No customer has paid too much for their electricity. However, we take the issue very seriously and are co-operating fully with Ofgem. We do not comment on investigations while they are in progress."

Referring to Mr Horsley's departure, he added: "Our policy is to make no public comment in relation to individuals who leave the company."