A draft report of a European Commission statement due this morning, and seen by The Times, shows that its inquiry into the European Union’s gas and electricity markets has found that they are “not yet functioning on a competitive basis”.

The strongly worded draft leaves little doubt that Brussels’ competition authorities are intent on taking tough measures to impose greater competition on Europe’s energy suppliers if governments and the industry fail to promote liberalisation.

“The Commission will continue its inquiry and will also identify adequate remedies,” the draft statement says. “Such remedies may include action against operators under the EC Treaty’s bans on restrictive business practices and abuse of dominant market positions, and action under the EC Treaty’s state aid rules against subsidies that distort competition.”

The inquiry’s “preliminary results” found that much of the sector across Europe was riddled with obstacles to greater competition.

Brussels has identified “five areas of market malfunctioning” in the gas and electricity markets. These include concentration of the market, with energy supply in many member countries dominated by a few companies allowing them to “influence prices”.

The Commission has also found that wholesale energy markets are “illiquid”, while there has been too little progress to open up supply networks, the draft statement suggests.

The Commission points to “vertical integration” between generation and supply as a key problem. Unlike in Britain, continental gas and power utilities frequently own the pipelines and powerlines that move energy to consumers, a potential barrier to competitors seeking access to the market.

Brussels condemns barriers to cross-border energy supply and a lack of transparency that “aggravates mistrust by industry and consumers” over how prices are set.

The draft findings were welcomed by UK utility companies last night. Jake Ulrich, managing director of Centrica Energy, said a lack of competition in energy markets was undermining the EU’s economic performance.

Mr Ulrich cited reports suggesting that the cost to Britian would be as high as £10 billion next year. “We need an end to the era of large monopoly energy suppliers, and we think the EC inquiry should act as a valuable catalyst for this to happen,” he said. “Member state governments have been dragging their feet and this must end.”

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