The Coventry-based group is said to be negotiating the purchase of the indebted Midlands distribution operation from its owners, Aquila and US-owned firm First Energy.

Powergen first tried to buy Midlands in 1996, but the deal was blocked on the basis it would be bad for competition.

At the time, the UK Government barred Powergen from making a further bid, but the ban has since been lifted.

A spokesman for Powergen, which is owned by German energy group Eon, declined to be drawn on a report in the Sunday Telegraph, saying: "We never comment on media speculation."

2m households

Powergen, which owns neighbouring distributor East Midlands Electricity, is understood to be considering the move after talks about a potential takeover of Midlands by Scottish & Southern Energy fell through.

The electricity billing arm of Midlands Electricity was sold to Npower in 1999, along with 1,300 employees and the brand name MEB.

The remaining part of the company and its 3,600 staff retained responsibility for the distribution of power across the network.

It distributes electricity to more than two million households and businesses across Shropshire, Staffordshire, the West Midlands, Herefordshire, Worcestershire and Gloucestershire.

Powergen, Aquila and First Energy are likely to complete the deal within the next few days, according to Sunday's newspaper report.

It would strengthen Eon's powerful position in the UK, where it is already number two in the energy supply market behind Centrica, and further boost Powergen's position in the Midlands.