Energy watchdog Ofgem has stunned power companies with tougher-than-expected demands for price cuts of up to 30 per cent.

Shares across the electricity sector slumped sharply as the City feared big cuts in dividend payments to shareholders.

The companies, though, said the proposals would not be accepted as they stand and are expected to appeal.

The regulator, Mr Callum McCarthy, is calling for a reduction in distribution prices for 2000/1 by between 25 per cent and 30 per cent, leading to an average reduction in customers' bills of five to 15 per cent next year.

The distribution charge is the amount levied to maintain the local network of wires of each regional electricity company.

Mr McCarthy's tough stance prompted an array of cautious comments by analysts on electricity groups' profitability, with the dividend outlook of Hyder in Wales and North West-based United Utilities under particular scrutiny as these two companies are facing the toughest price cuts.

"I regard these proposals as tough, fair and realistic," said Mr McCarthy.

However, analysts and electricity companies said the final report on distribution price cuts, to be published in November, may paint a slightly different picture.

Shares in the sector slumped badly. United Utilities bore the brunt of the sell-off falling 56p to 740p.

But the threat of margin-squeezing price cuts sent shivers throughout the utilities, with Scottish & Southern Energy down 15p to 540p, Thames Water down 28p to 870p and Hyder down 42p to 550p.

Analysts expect companies to try to negotiate a price cut at the bottom-end of their individual ranges. …