Prices will rise to pay for investment in the power network

Distribution costs account for about 25% of the average domestic bill and the move should add 6p to the average monthly household bill, Ofgem said.

Distribution charges will then be capped at the rate of inflation for the next four years, Ofgem said.

Ofgem also told power firms it expected �5.7bn ($10.6bn) to be invested in the UK network over the next five years.

The regulator made the announcement in its final decision on distribution charges for the 2005-2010 period.

Consumer body Energywatch has not yet commented on the price rise but said it is currently examining the proposals.

Investment up

The move comes hard on the heels of a number of gas and electricity price increases for consumers after oil prices hit record highs earlier this year.

We have produced a package of measures that strikes the right balance between attracting investment and ensuring that customer prices are no higher than they need be John Mogg, Ofgem

Electricity companies had asked to be allowed to increase their charges to meet the cost of upgrading the network and integrating more renewable energy sources, especially wind farms.

"The key message through this package is that firstly investment is going to go up by 48% five years on five years," Ofgem chief executive Alistair Buchanan told BBC Radio 4's Today programme.

"We're going to require quality to go up from the companies and we're also still going to keep the pressure on them on bringing down their operating costs."

The investment includes �0.5bn to allow grids to cope with the increase in green power.

"The local network was put in largely just after the war. This system had a 50, 60-year life and we're now simply coming round to the renewal phase," Mr Buchanan explained.

Costs 'must fall'

The increase will also allow companies to meet additional tax and pension costs they face, Ofgem chairman John Mogg added.

"We have produced a package of measures that strikes the right balance between attracting investment and ensuring that customer prices are no higher than they need be," Mr Mogg said in a statement.

UTILITY PRICES CREEP UP Water. Ofwat agrees price hike in August - consumer bills to increase 13.6% over three years, raising bills from an average of �250 to �284 a year. Gas - Ofgem agrees an average rise of 1% in 2005, adding an extra 6p a month to household bills. Powergen -the utility group has raised prices three times this year adding an extra �34 to gas bills and �23 to electricity bills. British Gas - in August the firm announced price increases would add an extra �25 a year to electricity bills and �52 a year to gas bills

However, as part of the changes, power firms will be expected to cut their operating expenditure by approximately �21m a year - or an average of 3%.

"There continues to be scope for distribution companies to achieve further efficiencies in their day-to-day running costs, although not on the same scale as in previous reviews," the watchdog said.

The 1% increase represents an average and some electricity firms will be raising prices while others will be cutting them.

Among the leading electricity companies, United Utilities was told it can raise charges by 8% next year - up from a previous 6%.

Business fears

News of the price increase came as manufacturers urged Chancellor Gordon Brown to take action over soaring wholesale gas prices.

The Engineering Employers' Federation (EEF) warned that heavy users of gas in the UK were facing charges that were 25% higher than those of their competitors in Europe.

The group has urged the government to carry out a further independent inquiry into why wholesale prices are so high - despite studies by Ofgem and the industry itself.

Both concluded that surging crude oil prices had driven costs higher, resulting in increasing bills.

The EEF added that it was unhappy with the explanation as the UK is usually a net exporter of gas to Europe, yet prices on the continent remained lower.

"We have now got to the stage where it is difficult to understand the rationale for increases in gas prices on this scale," EEF director general Martin Temple said.