Energy regulator Ofgem has been accused of failing millions of hard up families after it emerged several energy firms were allowed to overcharge prepay meter customers by £464m over a three year period, in a potential breach of EU rules.

Lawyers for the National Housing Federation (NHF) say the energy firms that overcharged customers potentially breached EU directives introduced in 2004, under which they are only allowed to charge higher prices to prepay meter users if they are cost reflective.

Between 2006-08, millions of prepay meter customers were charged well in excess of the average extra cost for installing and maintaining gas and electricity prepay meters, estimated by Ofgem as being £87 over direct debit tariffs.

According to official figures, npower, British Gas, E.ON, SSE and Scottish Power all charged prepay customers more than the average cost of supplying meters – even though households with prepay meters only have an average income of £16,000.

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Ofgem is to finish consulting on the new regulations it hopes will stop energy firms from charging prepay customers more for their gas and electricity than the figure justified by the extra cost to the supplier of providing a meter.

Ofgem said its purpose in introducing the changes to the regulations was to "better reflect the EU directives and to address the detriment caused to consumers".

Under the two directives, member states had to ensure that any difference in terms and conditions reflected "the costs to the supplier of the different payment systems".

However, Ofgem, failed to ensure that all extra charges to prepay customers were purely cost reflective - with some prepay meter customers being charged up to £500 more than those paying by online direct debits.

The NHF believes the overcharging of prepay customers is the inevitable result of a lack of effective regulation of the UK energy market, which is the most deregulated in Europe.

During the last 12 months, the prepayment meter premium has either been eliminated by the energy firms or reduced, with the maximum excess charge now standing at £39 over quarterly bills. However, Ofgem's new rules would still allow the energy firms to charge prepay meter customers more for their fuel - if it was cost reflective.

NHF Chief Executive David Orr said: "It is an absolute scandal that Ofgem allowed energy firms to overcharge customers, and potentially breach EU rules for so many years.

"Ofgem has been asleep on the job, and it must urgently start defending the rights of ordinary people, instead of protecting the profits of big business.

"As a way of compensating prepay customers for the historic overcharging, Ofgem has a moral duty to go beyond the EU directives, and force the energy companies to equalise prepay meter prices with those for quarterly bills."

(CD/JM)