National Grid, the gas and power infrastructure company, has been fined a record £41.6 million by Ofgem, the energy market watchdog, for restricting competition in the market for domestic gas meters.

Ofgem said that National Grid, which owns 19 million gas meters in the UK, or about 86 per cent of all units, had abused its dominant position in the market by restricting the number of meters made by competitors that could be installed. Ofgem said that this had harmed consumers and had curbed innovation in the £260million-a-year gas metering market.

Sir John Mogg, the watchdog's chairman, said: “Ofgem has imposed a substantial fine on National Grid for a serious breach of competition law. The abuse has prevented suppliers from contracting with other companies for cheaper metering deals and could discourage suppliers from installing smart meters.”

Smart meters are designed to improve energy efficiency by making consumers aware of how much energy they are using at any time.

The fine was imposed after a 32-month investigation by Ofgem, which was launched after the company signed agreements lasting up to 20 years with five of the UK's top six energy suppliers - British Gas, Scottish and Southern Energy, E.ON, npower and ScottishPower - in 2004.

The contracts included financial penalties if the power companies replaced more than a limited number of National Grid meters - a clause that Ofgem believes restricted access to the market for rival suppliers, including manufacturers of more efficient and advanced devices. Ofgem thinks that the contracts denied consumers access to greater choice and may have served to keep prices artifically high.

Steve Holliday, chief executive of National Grid, rejected the regulator's view. He said that the company was “extremely disappointed” with the decision and had hired two of the most experienced barristers in British competition law - Mark Brealey, QC, of Brick Court Chambers, and Jon Turner, QC, of Monckton Chambers. A spokesman said: “They are reviewing National Grid's legal position with a view to an appeal.”

Mr Holliday said: “These contracts were negotiated over a two-year period, were voluntarily entered into by gas suppliers and delivered immediate and substantial reductions in charges for meter services.” He said that the agreements had saved customers about £120million over four years.

Ofgem based the size of the fine on its view of the seriousness of the the market abuse and the fact that it had been going on for four years.

Ann Robinson, the director of consumer policy at uSwitch, a price comparison and switching website, welcomed Ofgem's announcement. “Anything that is designed to boost competition in the market is a good thing,” she said.

Ms Robinson, a former chairman of Energywatch, hoped that the fine would be followed by a review to ensure that metering contracts were allocated in a more competitive way. “The knock-on effect for consumers should hopefully be a reduction in household energy bills,” she said.

Changes to household gas and electricity metering are expected to form a key part of a government drive to encourage greater energy efficiency in the UK.

Power player

What is National Grid?

— One of world's largest utilities, National Grid owns and operates the high-voltage electricity transmission network in England and Wales.

— It also owns and operates the high-pressure gas transmission system in Britain. Its distribution business delivers supplies to around 11 million homes and businesses.

— In the United States, National Grid distributes electricity to nearly five million customers in Massachusetts, New Hampshire, New York and Rhode Island.

— The utility is the largest distributor of natural gas in the northeastern United States, supplying 3.4 million customers in New York, Massachusetts, New Hampshire and Rhode Island.

— In addition, National Grid also has a number of other businesses. These include the importation and storage of liquefied natural gas, as well as land remediation and metering.

British assets

9,000

Circuit miles of high-voltage overhead lines in the UK

420

Miles of underground cables

337

UK substations at about 240 sites

200

Supply points to distribution companies and large users

4,300

Miles of high-pressure gas pipelines in the UK

7

Coastal terminals around the UK

19m

Number of gas meters in the UK

Source: National Grid

Times Recommends

• Food prices rise 8.3% on soaring fish and meat
• Car sales crash as economy hits skids
• House prices fall but Bank leaves rates on hold