Gas may be free but your bills will carry on rising this winter

Wholesale gas prices have been falling for months. So why are bills still going up, asks David Prosser

Supporters of privatisation believe that once markets are opened up to competition, prices should fall as rivals fight to win a share of customer demand. That was certainly the theory when British Gas was privatised two decades ago.

Try telling that to households facing gas bills 80 per cent higher today than in January 2004. It's a tough argument - particularly as the price of gas on the wholesale market, from where Britain's gas companies source their supplies for homes, fell to minus 5p on Tuesday. The market was so flooded that suppliers actually had to pay gas companies to take it off their hands.

The fact that wholesale gas prices have been falling for months has not resulted in lower bills for consumers. The typical household has faced at least five price increases in the past three years - the latest such rise was announced only last Friday, when Scottish & Southern Energy said it would put up gas and electricity bills by 12.2 and 9.4 per cent respectively.

Despite such an apparently obvious incongruity, Scottish & Southern's Julian Reeves claims there is no contradiction between falling wholesale prices and rising household bills. "The prices we've been paying for the gas we supply today have been much higher," he says.

British Gas, the market leader, is also hugely sensitive about accusations that it is profiteering - it refused to comment this week, referring questions to the Energy Retailers Association, the industry trade body.

The ERA's Russell Hamblin-Boone says this week's dramatic fall in wholesale gas prices was nothing more than a "blip", brought about by an unusual set of circumstances.

There has been a sudden surge in supply of gas, because a record-breaking new 746-mile pipeline from Norway to the UK is being tested at peak flow this week. There is nowhere to store surplus gas because Britain's storage facilities have been filled up to prepare for winter. And this autumn has so far been so mild that none of the winter supplies have been used - as a result, storage facilities are even fuller than usual.

Hamblin-Boone says that as soon as this situation unravels - once pipeline testing is complete or the weather turns - the market will return to normal conditions. And price falls cannot, in any case, be immediately passed on. "In order to secure supplies for this winter, suppliers had to buy their gas back in the spring," he says. "There is a lag of between six and 12 months between the price suppliers pay wholesale and the prices we pay in our gas bills."

Such explanations may sound plausible, but consumer groups smell a rat. Even before this week's trading, wholesale gas prices have already fallen sharply this year - from around 90p a therm to 72p a therm this month. Assuming a six-month lag, gas companies ought to be able to promise price cuts starting from next February or March, but have not done so.

Energywatch, the consumer watchdog for the gas and electricity industries, last week called for a Competition Commission inquiry into the sector. There is also scepticism about the ability of Ofgem, the industry regulator, to force gas supplies to pass on lower costs, though it has powers to levy fines on companies that profiteer.

A spokesman for the regulator says: "If we see a sustainable fall in wholesale gas prices that does not translate into lower domestic bills, we have said we will look very closely at that."

However, the regulator admits that it has no set definition of "sustainable". The four months of price falls since June seem not to have qualified and for now, Ofgem says it is content to leave pricing to competition between gas suppliers.

Meanwhile, consumers are set for another winter suffering from a gas price double whammy. Not only are gas prices more than 80 per cent higher than three winters ago, but, since so many power stations burn gas, electricity prices are up by more than 52 per cent too.