State-owned electricity networks should be privatised and new pricing introduced to reduce costs for consumers, a draft Productivity Commission report says.
The report, Electricity Network Regulation Frameworks, found regulation and ownership arrangements for networks needed overhauling.
Surging electricity prices in the last five years have been caused by the cost of the wires and poles that make up the network, it says.
The 50 percent hike could be attributed to spiralling network costs, industry inefficiencies and flaws in the regulatory environment.
Inquiry commissioner Philip Weickhardt said the current regulatory regime was undermining the capacity of network managers to run their businesses efficiently and it put up barriers to consumer involvement.
"There is no quick fix," he said.
"But our proposed reforms can deliver a more efficient system and potentially save billions of dollars."
Privatising all state-owned electricity networks - while continuing to strongly regulate them - would improve efficiency and avoid the conflicting mix of state government influence on their corporations, the report found.
There was no evidence these state-owned businesses outperformed their private counterparts in meeting the long-term interests of their customers, rather there was evidence to suggest the contrary.
Huge amounts of infrastructure were needed to meet peak demand in summer.
But flat network tariffs were hiding the costs of supplying peak capacity for the increased use of air-conditioning during hot spells, the report found.
"The upshot is that people who own air-conditioners (and use the appliance intensively at peak times) are subsidised by those that do not," it said.
The commission said increased consumer consultation, the phased removal of retail price regulation and the staged introduction of smart meter technology, as well as time-based pricing, could help avoid the critical peak requirements.
"This would defer costly investment, ease price pressures on customers and reduce the large hidden cross subsidies from people who do not heavily use power in peak times, to those who do."
The report also found the overarching objective of the regulatory regime - the long-term interests of consumers - had lost its primacy.
It suggested Australian governments create a new industry-funded body with the expertise to properly represent consumers.
The suggested package of reforms could result in estimated savings of $1.1 billion in NSW alone, the report said.
This would happen by deferring capital expenditure in the next five year regulatory period after taking into account consumer preferences for network reliability - a trade-off between a hyper-reliable system if they paid more or a less reliable system resulting in lower bills.
The introduction of critical peak pricing would produce savings of $100-$250 for each household each year, the report indicated.
Public feedback is being sought by the commission by November 23, with the delivery of the final report expected by the federal government in April 2013.