Stephen Littlechild, director-general of Offer, said he did not believe the generators had actively colluded. But he added: 'Both have wanted to increase pool prices for some time and both were prepared to lose market share to achieve that. They have indeed together got market power and they exercise it in a significant way.'
Professor Littlechild said more competition was needed to curb the two main generators. Should that not emerge within the next two to three years, he may refer National Power and PowerGen to the Monopolies and Mergers Commission.
Offer was immediately attacked as 'ineffective' by the Chemical Industries Association for not taking immediate action to stop the problem recurring.
A study by Offer showed that prices in the pool between June and September were 20 per cent up on the same period last year.
The price in the pool is set by generators of electricity bidding in to run their power plants on a half-hourly basis. The plants offering the lowest prices are taken on first, but the same price is paid to all, based on the price bid by the last plant needed to meet expected demand.
Professor Littlechild said that because pool prices had been very low last year - in some cases not covering the generators' costs - he could not object to recent price increases. But he warned: 'If they have this market power, what is to stop them continuing to increase pool prices in future?'
The watchdog has also attacked the pricing of electricity in the contracts between the generators and the regional electricity supply companies, which were meant to provide a buffer against volatility in pool prices.
However, Professor Littlechild has questioned whether the profit margins taken by National Power and PowerGen are too high. He may seek to regulate the generators' contract prices for the first time.
Any need to regulate the generators' prices or profits would require a change to their licences. If National Power and PowerGen found this unacceptable, the matter would be referred to the MMC.
National Power, which has an estimated market share of 43 per cent, said: 'The director-general has found nothing improper in our actions and indeed does not object to the increase in bid prices to the pool.' The company was also confident that the contract offers to the regional electricity companies were fully justified.