A load of hot air from the gas companies

Plain speaking is a delicate art for an industry regulator - not enough and people will write you off as toothless, too much and people will expect you to actually fix things.

But with just six months left in the job, Ofgem head Alistair Buchanan could afford a little frowny face about the ever-increasing rise in household fuel bills.

With old nuclear and oil-fired plants due for decommissioning, renewable and clean coal investment abandoned following the financial crisis and new reactors of dubious value still a decade away, Britain was now hurtling headlong into the "dash for gas" along with half the planet.

"No-one doubts that there is plenty of gas out there, but what is critical to Britain is how much will be available over the next five years and how much we will have to pay for it to ensure that it comes here," he said.

All of which neatly sets up future prices as a simple intersection of supply and demand - power companies are forced to jack up household bills simply to maintain a razor-thin profit margin, thanks to rising prices in the global wholesale market set by the shadowy multinationals which extract the fuel in the first place.

That at least is the story trotted out by E.ON in December, by EDF, Npower, Scottish Power and British Gas in October, and by Scottish & Southern Energy in August.

Between them these "big six" retail power companies raised gas bills by 7 to 10.8 per cent at the end of last year, following rises of between 15 and 19 per cent the year before.

But is the explanation really so simple? Superficially it bears up. Following the Gas Board's privatisation in 1986, prices rose by 30-odd points over the next two decades - still significantly lower than the 47-point rise in the general rate of inflation.

But once Britain became a net importer of gas in 2004, bills skyrocketed.

Where inflation rose by 26 points over the next eight years, gas leapt by a staggering 220 points - with the first spike beginning two years before the financial crisis.

So there's certainly a correlation. But things become far murkier when you realise that your poor, struggling retailers are losing money hand over fist to… themselves.

Take British Gas, a subsidiary of Centrica - itself the zombified remains of the Gas Board.

Centrica is a giant in the gas exploration industry and is largely self-sufficient, generating 35 terawatts a year for 40 terawatts' worth of internal demand.

Scottish Power, E.ON, SSE and RWE, which owns NPower, are all only slightly behind, while giant EDF actually regularly exceeds demand.

Each splits into "upstream" operations which extract the fuel, and "downstream" operations which actually sell it to households, a practice known as "vertical integration."

You would think then that good business sense would tell them to flog fuel to their own subsidiaries at cost. But apparently you'd be wrong.

If anything, Ofgem's own statistics seem to suggest the reverse - in a typical £650 gas bill, around £400 of that is directly going to the wholesaler, in most cases the parent company itself.

The wholesale market is notoriously opaque, but an unscrupulous board could easily cotton on to a winning strategy - sell gas to your subsidiary at a massively inflated price and pocket the cash, then blame those damned wholesalers and raise the subsidiary's retail price, ultimately funnelling that money back into the parent company - or boosting its share value at any rate.

It just so happens that at this very moment investigators at both Ofgem and the Financial Services Authority are pursuing allegations of price-fixing in the wholesale gas trade.

The allegations stem from a series of wild swings in wholesale gas trading last year apparently affecting the "day ahead" price - a standard market index with an unsettling resemblance to the Libor rate.

Whether Buchanan's depiction of simple supply and demand squares up with their investigation remains to be seen.

But either way, blaming wholesalers is a lot of hot air.