Callum McCarthy, the director-general of Electricity and Gas Supply, said 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 the 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 prices had fallen sharply since privatisation, with charges to domestic customers 23 per cent lower.
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