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UPDATE 2-"Yellow vests" put French government on spot over power prices

* Proposed increase would be the highest in years

Comes as France grapples with protests over cost of living

* Government has three months to respond to CRE's proposal

* EDF shares up 3.4 pct, one of top performers in index (Adds CRE document, ministry comment, share price)

By Geert De Clercq

PARIS, Jan 30 (Reuters) - France's energy regulator is proposing a 5.9 percent increase in regulated power prices but faces opposition from the government which had promised not to increase the cost after the "yellow vest" protests.

Following the first wave of protests in November over the cost of living, the government scrapped fuel tax hikes planned for 2019. It also said last month that it would prevent utility EDF from raising power prices this winter.

But capping regulated power prices is more complicated as these are set by the independent CRE energy regulator via a formula which includes the cost of generation, transport and distribution. A third of retail power bills is made up of taxes.

The government has three months to respond to the CRE proposal, but said on Wednesday it would keep its promise.

"We will use legal delays in order to protect households from too big an increase in their power bill at a time of high consumption," an environment ministry official said.

Thousands of "yellow vest" demonstrators again marched in Paris and other French cities last Saturday in protests that brought sporadic clashes with police and suggested that President Emmanuel Macron has yet to defuse public discontent after 11 weeks of demonstrations.

Confirming a report in financial daily Les Echos, a CRE official said the regulator proposes a 7.7 percent increase excluding taxes from March 1, or 5.9 percent tax included.

The proposed increase would be the highest in years and would be applicable to the 25.6 million consumers who still subscribe to EDF's regulated tariffs.

EDF shares were up 3.4 percent and were the sixth-best performer in the SBF 120 index.

The proposed rise mainly reflects the increase of wholesale power market prices. A doubling of back-up power capacity prices also contributed.

Year-ahead wholesale power prices have risen from 35 euros per megawatt hour early 2017 to 41 euros early 2018 and 59 euros in December 2018.

EDF has been losing some 100,000 customers a month to competitors, but end September the former monopolist still had a 79.3 percent market share.

Power price freezes by previous governments have been overruled by the courts as smaller power vendors challenged them in court, saying they distort competition.

CRE said one way for the state to limit power bills would be to reduce the CSPE tax, which helps finance renewable energy subsidies and social tariffs for low-income families. It accounts for 15 percent of a consumer bills, and raised 3 billion euros ($3.4 billion) last year.

CRE said Spain and Italy were also increasing power tariffs by up to eight percent. At 171 euros/MW, regulated French pre-tax power prices are below the 200 euro EU average and just two thirds of the 300-290 euros paid in Germany and Belgium. ($1 = 0.8747 euros) (Additional reporting by Simon Carraud Writing by Geert De Clercq; Editing by Sudip Kar-Gupta/Keith Weir)