Premier Denis Napthine announced on Tuesday that the inquiry would be headed by Justice Bernard Teague, AO, who will examine how the blaze started, the emergency response and the adequacy of regulatory requirements.

''Our government wants this inquiry to fully and appropriately examine all aspects of this fire,'' Dr Napthine said. The inquiry would have coercive powers and be able to compel witnesses to give evidence under oath and order documents to be produced.

The announcement came as Morwell residents were again told to shelter from heavy smoke on Tuesday, while others protested outside the Melbourne office of mine owner GDF Suez and marched to State Parliament.

The Environment Protection Authority said visibility in Morwell and Morwell South would be ''dramatically reduced'' because of high particle concentrations in the air.

But a spokesman at the Hazelwood incident control centre said that despite Tuesday's warm weather and expected strong wind change, the fire at the mine remained under control, and ''hopefully it can stay that way''.

Incident Controller Bob Barry said he could not predict when the smoke would end but firefighters were progressing extremely well and were ''90 per cent there''.

The terms of reference for the inquiry have not been finalised but the three-member board will begin work at the end of March and is expected to report by the end of August. The other two members have not yet been chosen.

Dr Napthine said the inquiry's cost was not an issue and he hoped the hearings would be public.

The inquiry will examine the health and emergency response and probe whether communities were given adequate information about the fire, which was deliberately lit and has been burning since February 9.

Dr Napthine said witnesses before the inquiry would be given the same protections as those before the Supreme Court. ''Witnesses will be able to speak freely, without fear or favour. This will ensure that the inquiry is fully and properly informed,'' he said.

Attorney-General Robert Clark said the board would have powers to compel companies to give evidence. If they refused they could be penalised and referred to the Supreme Court.

GDF Suez released a statement saying it welcomed the inquiry and would ''co-operate fully''. Vulnerable residents in parts of Morwell South are still being advised to stay away to avoid the smoke.

Deputy Premier Peter Ryan said the government would announce a ''basket of initiatives'' to demonstrate that the region ''was open to business''.

Opposition Leader Daniel Andrews welcomed the inquiry but said it must be public.

''It will be an opportunity to get to the bottom of just how botched Denis Napthine's efforts have been,'' he said.

Greens leader Greg Barber called on Dr Napthine to consult Morwell residents over the terms of reference.

With Nick Toscano