Callum McCarthy, the director general of Electricity and Gas Supply, said that there were fundamental flaws in the way electricity was traded, which the generators had taken advantage of in order to manipulate the electricity pool to their commercial advantage.
Addressing a conference of major energy users in Birmingham, Mr McCarthy said: "Such behaviour cannot be allowed to continue." Since privatisation, he said, gas prices had fallen 50 per cent, coal prices by 28 per cent and costs of new plant by 40 per cent, and yet pool prices had increased.
Mr McCarthy said he may seek to modify the licences of the generators - National Power, PowerGen and Eastern.
He was speaking just a day after the Government conceded that it could not guarantee meeting its target date of April 2000 for overhauling pool trading arrangements - a move designed to reduce prices by 10 per cent.
His remarks drew a furious response from the industry. The Electricity Association, the Association of Electricity Producers (AEP) and the Electricity Pool all claimed that prices had fallen sharply since privatisation, with charges to domestic customers 23 per cent lower.
David Porter, chief executive of the AEP, said: "I am surprised at the regulator's tactics. He does not need to indulge in this kind of thing to bring about changes."
Meanwhile, the European Commission waved through Electricite de France's pounds 1.9bn takeover of London Electricity after refusing to hand back the merger to UK authorities for vetting.
However, the Commission confirmed that the UK would be able to tackle regulatory concerns raised by the takeover and amend London Electricity's licence as appropriate.
The Government put a brave face on the snub from Brussels - the first time that the Commission has ignored a demand from a member state to be allowed to vet a merger on public interest grounds.
Outlook, page 19