Britain's energy regulator today put the industry on notice to improve its competitiveness to all customers or face a referral to the Competition Commission.

Ofgem has just completed a seven-month investigation into the energy industry, and said today that although it had found no evidence of a cartel, it was disturbed that some consumers - such as those living in remote areas, or on pre-payment meters - had no choice but to pay more for their energy.

It said it was particularly concerned by the behaviour of supply companies to the 4.3 million customers without a gas supply, which meant they did not have access to the most competitive offers on electricity.

The report, on which Ofgem will consult until December 1, proposes measures to ban unfair price differences such as those that exist between those paying by direct debit and prepayment meters or standard credit.

Ofgem's hard-hitting report came as a judicial review was due to open in the High Court in which the Government is being accused of failing in its legal duty to tackle fuel poverty among poorer households.

Alistair Buchanan, Ofgem's chief executive, said: “These are hard times and we are taking a hard line on behalf of disadvantaged consumers. We accept that global influences are pushing up costs but the suppliers must change their behaviour and cement consumer confidence. If they fail to satisfy our requirements voluntarily, then we can move to a Competition Commission reference.

“Initial findings from our energy market probe give us grounds to demand that companies end practices that hinder customers, especially the vulnerable, from getting the best deal. But we have found no evidence of a cartel.”

However, it said that competition was generating a wide range of tariffs and products and consumers were aware of the ability to switch suppliers and were happy to do so.

The average differential between customers of the six main suppliers paying by direct debit compared with pre-payment meters increased from £80 at the start of 2005 to £125 early this year, although it fell to £118 in the latest round of price increases.

The regulator also proposed tougher rules on doorstep selling and measures to guard against the "sharp practice" it had uncovered in the small business market.

It put forward proposals to guard against market abuse in the wholesale markets and called for the removal of barriers to small suppliers and new entrants, who complained of the difficulty of buying electricity at competitive prices due to poor liquidity.

Ofgem stressed that consumers could not be completely shielded from spiralling prices of global commodities, such as oil, gas and coal, but said it was concerned at the impact of the practice in European gas markets of indexing gas prices to those of oil.

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