An EU investigation into the energy sector inquiry has confirmed that serious problems exist in the operation of the market in its preliminary report.

EU Commissioner Neelie Kroes said: “We will act decisively to remedy the serious malfunctions identified on the energy market in order to uphold the interests of European consumers and industry and to help Europe become more competitive.”

The report confirmed five main areas of electricity and gas market malfunctioning, including a high level of concentration of the pre-liberalisation period, creating scope for incumbent operators to raise prices in the wholesale market. Consumers are also denied choice due to the difficulties for new suppliers to enter markets with insufficient separation of infrastructure and supply functions also preventing new entrants from reaching the final consumer. In addition, there is no significant cross-border competition with new gas entrants unable to secure transit capacity on key routes and integration in electricity hampered by insufficient inter-connector capacity and long-term capacity reservations.

A lack of transparency is also found to benefit incumbents and undermine new entrants with prices often not determined on the basis of effective competition, the report finds.

The Commission intends to pursue investigations into possible violations of EC rules on restrictive business practices and abuses of dominant positions in areas such as long-term downstream contracts and restricted access to capacity on gas pipelines, gas storage and on gas and electricity interconnectors between Member States.

The energy sector inquiry was launched in June 2005.

EU Energy Commissioner, Andris Piebalgs, said: “A more focused European energy policy will be the object of the Green Paper to be adopted by the Commission in March this year. We need to guarantee that the freedom of EU citizens to choose energy suppliers is real and not just a “paper” choice in 2007. To ensure this the Commission intends to concentrate on a number of areas, including the adequacy of the unbundling measures taken by Member States, the compatibility of certain public service obligations with EU rules, and the need to ensure significant developments in view of increasing the interconnection levels between Member States.

British energy regulator Ofgem, faced with significant price increases and concerns over security of supply, welcomed the European Commission’s (EC) determination to create a competitive European energy market.

The Commission’s final report is expected later in the year.