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Photo: Reuters

Woolworths is being investigated by the federal competition watchdog over the way it does business in Canberra, according to a rival operator.

The Australian Competition and Consumer Commission is investigating allegations Woolworths has tried to use its market dominance and financial muscle against smaller grocery shops in the capital.

Several figures from the local supermarket industry are understood to have been interviewed by the commission this year over Woolworths' operations in the capital.

Woolworths and Coles control about 70 per cent of Canberra's grocery sales despite years of protest by smaller operators and government policy aimed at breaking the market dominance of the big two.

The retailers are also being investigated by the ACCC about claims they have abused their market power by imposing unfair penalties on suppliers, demanding additional payments and discriminating against them in favour of their own private labels.

The ACCC is also worried about the supermarket shopper dockets offering petrol discounts that could not be matched by other fuel retailers.

The Canberra Times approached James Koundouris, development manager of the Koundouris Group which owns Canberra's Supabarn chain of supermarkets about the investigation. Mr Koundouris confirmed he had been interviewed by federal officials in relation to their inquiries about Woolworths, but would offer little detail.

''All I can confirm is that I have been interviewed by the ACCC in relation to the behaviour of a major supermarket chain at Giralang and other locations within Canberra,'' Mr Koundouris said.

A spokesman for Woolworths declined to answer questions and referred inquiries to a speech by the chain's chief executive made in Queensland in late February.

The commission did not respond to a series of questions.

The ACT government's controversial supermarket policies, which aim to use the planning system to encourage smaller players into the market have failed to slow Woolworths and Coles' quest for greater market share in the territory.

The giants have opened two of Australia's biggest supermarkets in Canberra, with Coles in Gungahlin boasting 4766 square metres of selling area, overshadowing the nation's biggest Woolworths at Majura Park, which has about 4000 square metres.

Last November, an ACT administrative tribunal found Woolworths was trading in breach last year of its lease at Bonner, exceeding the permissible 1500 square metres but decided not to take any further action.

It has been alleged to the ACCC that Woolworths has opened shops, like the site at Giralang, which are

smaller than its average supermarkets with the sole aim of targeting the businesses of smaller rivals.

The ACCC probe is the latest twist in the saga at Giralang shops, which has been without a supermarket for nearly nine years as legal disputes raged over the redevelopment of the complex. In August 2011, Planning Minister Simon Corbell used his ''call-in'' powers to allow the owners of the Giralang shops to proceed with their deal with Woolworths to develop the site.

In July last year, a group of northern suburbs supermarket operators lost a Supreme Court challenge against the redevelopment, with the court ruling Mr Corbell had acted lawfully when he had used his powers to call in the development.

In March this year, Mr Corbell moved to cap the size of supermarkets in local centres at 1000 square metres, a move that would have ruled out Woolworths' expansion into Bonner and Giralang.