Origin Energy’s challenge to the way electricity prices are set in Queensland has failed, with the present methodology of the Queensland Competition Authority in setting power prices, upheld.

Responding to the Supreme Court's decision earlier today, Origin said it would not lodge an appeal.

Earlier this year, the Queensland government changed the way power prices are set, which lowered prices and pressuring the margins of electricity vendors.

In response, a number of smaller retailers have quit the Queensland market, with larger companies such as Origin and AGL also reducing their marketing effort.

The Council of Australian governments has requested the Australian Energy Markets Commission draw up a more transparent methodology for setting electricity tariffs in areas which have yet to remove all price controls.

Earlier this week, South Australia flagged it would remove all price controls from 2013, which leaves Queensland, NSW and Tasmania as the remaining states in the national electricity market with regulated tariffs for smaller users.

Electricity retailers argue the regulated electricity price should be set by taking into account the so-called long-run marginal cost of generating electricity.

However, the recent fall of the wholesale electricity price below the long-run marginal cost level has tempted some state governments to use the lower measure in a bid to relieve consumers from recent sharp rises in retail electricity prices, which have risen following large spending programs on network upgrades.

Following the move in Queensland, along with other pressures in the electricity market, early last month Origin revised its guidance for 2013 financial year earnings from around a 10 per cent increase to a 5–10 per cent increase in the underlying earnings before interest, tax, depreciation and amortisation.

Origin said the cost of electricity should reflect the cost of producing it and of supplying it to consumers.

‘‘The existing regulatory framework risks the long termviability and competitiveness of Queensland’s electricity sector and will ultimately lessen competition for consumers and stifle future investment in electricity generation,’’ Origin’s managing director Grant King said in a statement.

'Win for Queenslanders'

Queensland Competition Authority chairman David Watson said in a statement the Supreme Court decision was "a win for all Queenslanders not just the Authority”.

Origin argued before the court that retailers and generators were entitled to a return on any investment or contract it had entered into for the purchase of electricity, regardless of whether actual electricity prices in the national market were lower.

Had Origin's legal action succeeded, electricity prices in Queensland would have increased, the QCA said.

Dr Watson indicated that he was pleased that the Authority’s approach had been vindicated.

“It is also pleasing that consumers have been spared a further increase in electricity prices," Dr Watson said. "On its own estimates, Origin would have increased prices by $60 million had it been successful.

“Furthermore, the increases would have flowed on to the customers of other electricity retailers.”