Power companies were told today that they can raise distribution charges by 1% from April to spur improvements to the network.

Under final proposals from industry regulator Ofgem, the firms will then be restricted to raising prices by no more than the rate of inflation until 2010.

Ofgem said its decision shielded consumers from unnecessarily large hikes in bills, but ensured £5.7 billion would be invested in the networks over the next five years.

Distribution charges - the price paid by suppliers to use the network to direct electricity to their customers - account for a quarter of electricity bills.

The increase in charges next year was equal to 6p a month on the average domestic bill in the first year following the review, Ofgem said.

Ofgem chairman Sir John Mogg said: "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 to be."

Ofgem said its decision to set the cost of capital at 4.8% would provide power firms with "sufficient incentive" to meet the £5.7 billion target for investment, which is 48% above current levels.

Operating expenditure - covering day-to-day costs - will be expected to fall by 3% on average, or around £21 million a year.

Each of the 14 distribution firms responsible for the wires that transmit electricity to homes and businesses have been given their own set of proposed charges.

Southern Energy will be able to increase the amount it charges by 9.3% in the first year of the price control.