The ERA regulates third-party access to electricity, gas and rail infrastructure and administers licences for electricity, gas and water service providers.
The GRP dictates that LNG proponents must reserve 15% of production from each export project for the domestic market.
The regulator's report said that the policy reduced the availability of gas for future domestic or international use, perpetuated the existence of industries that may not have a comparative advantage in WA at the expense of other industries, increased reliance on subsidised gas prices and discouraged efficiency and technological innovation.
The Australian Petroleum Production and Exploration Association has jumped on the report, claiming that the shortfalls of the reservation policy far outweighed the perceived benefits.
"It is little wonder that governments elsewhere in Australia have rejected the need for reservation policies," APPEA chief operating officer western region Stedman Ellis said.
"Australia's ability to develop new gas projects is already threatened by rising costs at home and growing competition abroad.
"Policies that dictate where and how gas can be sold represent a further barrier to investment.
"As the ERA has found, government intervention in the form of gas reservation cannot be justified on the grounds of market failure.
"The reality is the policy is little more than a crude form of protectionism that places a simultaneous tax on gas production and a subsidy on gas consumption."
Market failure is addressed in the ERA's report as a situation in which LNG project investors, left to their own accord, would neglect the domestic market.
The regulator found that government intervention in the industry was unwarranted and that an unrestricted international trade would have natural flow on effects to the local market.
"Removing barriers and providing incentives for more investors to enter the market is more likely to achieve an efficient and sustainable market to the long-term benefit of consumers in Western Australia," the report said.
