Electricity.

Electricity: Falling demand but rising prices. Photo: Robert Rough

Wholesale reform of electricity distribution is essential to ensure consumers are charged only for the costs incurred, while investment should be limited to matching demand, research by the Grattan Institute has found.

Specifically, it wants the guaranteed high returns of the likes of SP AusNet, DUET Group and Spark Infrastructure, which control Victoria's network businesses, holding the likes of Powercor, United Energy and CitiPower, to be cut.

The institute has released a study on the impact of falling demand as the Australian Energy Regulator agreed to a further round of price rises averaging 2 per cent for 2014, down from 5 per cent last year.

''Changes to average network tariffs vary between reductions of $11.40 to an increase of $48.30, depending upon which distributor the customer is connected to,'' AER chairman Andrew Reeves said.

Recent declines in electricity demand have not led to lower electricity prices, as would occur in most markets, the institute noted. Rather, the average household power bill has risen 85 per cent since 2006, even as demand has slid more recently.

''Australians are funding billions of dollars of infrastructure that falling consumption has made redundant,'' the institute said.

When consumption falls, power generators must sell at a lower price or reduce output.

''But network businesses - which carry power from the generator to the business or home - are regulated monopolies not subject to market forces.''

In all, they take about 45¢ of every dollar spent by the household on electricity.

''For years regulators have allowed these companies to earn excessive profits by setting tariffs that are too high given the low risk they face as monopolies,'' the institute said.

But, as electricity demand declines, the high cost of the network is then spread over the smaller volumes used, while continually rising prices may induce some users to disconnect from the network altogether.

''Enough disconnections would trigger a … 'death spiral','' it warned.

To avoid this, the institute said the Australian Energy Regulator, which is an arm of the Australian Competition and Consumer Commission, should cut the rate of return allowed for network companies, given the low level of risk they face.

''Network businesses have the incentive to build more infrastructure assets, and the customer bears all of the risk if they become redundant. If companies carried some of the risk of falling demand, they would have stronger incentives to avoid overbuilding.''