The investigation by utility watchdog Energy Safety found a Western Power live conductor clashed with an earthwire and sparked the blaze on December 27, 5km from Tenterden, about 320km south-east of Perth.

The finding leaves the struggling utility open to massive compensation payouts which could top $20 million for the loss of property and the deaths of local women Judith Ward, 59, and Lorraine Melia, 46.

Hot metal falling from the overhead line when it clashed with the earth wire sparked the fire.

Locals have constantly complained to Western Power about power outages and faulty lines in the area the fire started and a repair crew was working on the pole on the day of the fire when temperatures reached 42C and winds were particularly strong.

After a four-month inquiry last year, the Energy Safety Directorate said $48.4 million was needed to upgrade the ailing electricity network to stop constant blackouts in country towns. Western Power has committed just $4.6 million.

"I consider the clashing of conductors points to either defective design or construction, Since conductor seperation should have been sufficient to avoid such a situation," said director of Energy Safety, Albert Koenig.

"Prosecution cannot be ruled out," he said.