The AEMC's proposed gas rules leave households and businesses to pay for network investors' bad bets

The Australian Energy Market Commission (AEMC) is consulting on proposed rule changes aimed at levelling the playing field as more consumers electrify and move away from gas networks. Find out why the AEMC's current direction needs to go much further to protect consumers, or make a submission to influence the outcome here.

Australia’s gas networks are at a tipping point. As more households go all-electric, their neighbours still connected to gas are left to pick up the tab for the pipelines under our streets.

To manage that risk fairly, Energy Consumers Australia and the Justice and Equity Centre asked the Australian Energy Market Commission to make several changes to the rules governing gas networks.

In late August, the Commission released its draft determination on arguably the most contentious of those rule changes, and took an approach directly opposed to what Energy Consumers Australia asked for. 

The rule change in question focuses on the ability of gas networks to charge households and businesses more today to reduce the networks’ risk of being stuck with underutilised and unpaid-for pipelines.

The Commission’s draft determination would strip discretion to limit consumer price impacts from the Australian Energy Regulator (AER), the body that decides how much monopoly gas networks can charge, and hand more power to the gas businesses themselves. 

Its justification rests on the questionable claim that network “incentives regarding the timing of capital recovery are likely, in most cases, to align with” the long-term interests of consumers. By stripping power from the AER, the Commission concedes what that assumption will cost: “today's gas consumers facing higher prices.”

The trade that the Commission has proposed works like this: Networks get a certain, immediate benefit — the right to increase the revenue they collect from consumers now, well above their historic projections. Consumers get an uncertain, conditional promise that prices won't spiral once nearly everyone who can leave the network has already gone.

The Commission argues this trade is justified because it allows networks “to continue operating and investing.” But nothing in the rules guarantees they will. A regulated monopoly facing terminal decline has every incentive to push prices as high as the rules allow for as long as it's profitable, and no obligation to stay in business a day longer than that.  

Our rule change asked for more immediate concessions from gas networks. If a network wants to bring forward cost recovery to manage its own stranding risk, it should first demonstrate it is absorbing some of that risk itself — for example, by writing down a portion of its own capital base — before asking consumers to pay more, sooner. 

That is a conditional trade that says consumers will wear some of the costs of the gas network decline if network investors agree to wear some too. The Commission rejected it without clearly explaining why, choosing instead to design a policy that gives more deference to gas networks.

Gas networks already know where their business is heading. In their most recent revenue proposals, networks sought to bring forward more than $1 billion in costs from consumers over just five years in the hopes of reducing their future losses; the regulator approved a little more than half. 

Under the Commission’s draft rule, the regulator no longer gets to say no on the strength of its own judgment about what's reasonable — it must approve a network's proposal unless it can itself prove a better alternative exists. Based on networks' past behaviour, even the Commission seems to assume more of that proposed cost will get through to consumer bills, not less.

While the Commission assumes the incentives of monopoly networks are well-aligned with their consumers, several recent proposals from the gas networks suggest otherwise. Jemena sought $300 million in accelerated depreciation from its NSW customers to guard against future stranding — while, in the very same proposal, asking those same customers to fund nearly $80 million in new biomethane connections. The AER rejected that funding outright, citing “significant uncertainty.”

Meanwhile in Victoria, Multinet is spending $408 million — 61 per cent of its entire five-year capital budget — replacing ageing gas mains, despite consumer groups warning that this scale of reinvestment “may increase stranding risk” in a shrinking network.

The Commission has misjudged who needs protecting; its allegiance should rest with consumers, not networks. Households already supply more than 90 per cent of gas distribution network revenue. 

As the customer base shrinks, the bills for remaining consumers grow — landing hardest on the people least able to do anything about it: renters with no right to swap appliances, apartment dwellers tied to a shared hot water system, and low-income households who cannot find the upfront cash to electrify even when it would save them money over time. 

The Commission’s reasoning leans on a “switching point” where rising prices are meant to push customers toward alternatives — but that discipline only operates on customers who actually have somewhere to go.

There is a better precedent sitting inside the Commission’s own recent decisions. Its final rule in response to Energy Consumers Australia’s rule change proposal requiring new gas customers to pay the full cost of their own connection upfront — rather than spreading it across everyone else's bills — is exactly the “beneficiary pays” principle missing from its approach to depreciation.

On our estimate, that single change will save existing gas consumers well over $250 million in just the next few years. It proves the Commission can get this balance right when it chooses to. On accelerated depreciation, it hasn't.

There is still time to fix it. Submissions on the draft determination close on 8 October, ahead of a final decision expected in December. As the gas network shrinks, the Commission’s rules will decide who pays for it: the households with the least ability to leave, or the investors who chose, with open eyes, to put capital into an industry now in decline.

Make a submission

This article was originally published in Renew Economy.