A package of reforms proposed to avoid a gas network death spiral, and to prevent customers from footing the bill for abandoned pipelines, has been described as a “profound disappointment” by consumer advocates, who say it weakens regulations while putting faith gas companies to “price reasonably.”
Energy Consumers Association (ECA), alongside the Justice and Equity Centre (JEC), requested a series of rule changes to protect consumers from a disorderly gas exit they say is already underway, as network companies long accustomed to “supernormal profits” scramble to recoup investments from a shrinking pool of customers.
The ECA and JEC sought firm changes to the settings that decide the total revenue a gas businesses can collect to cover costs, including to restrict the use of accelerated depreciation to manage network stranding risks and to cap the customer contribution to covering the cost of the network death spiral.
But in a draft rule published on Thursday, the Australia Energy Market Commission (AEMC) said it did not see the need for a fundamental redesign of regulation governing the five-year economic plans of gas networks, but rather proposes to refine, sharpen and bolster the existing rules.
The “centrepiece” of the package of reforms would require network companies to “explicitly identify, assess and explain” the long-term impacts of their investment and pricing decisions, via a regularly updated 20-year outlook submitted with each five-year Access Arrangement application.
The draft rule also clarifies the role of capital cost recovery tools, including a move to “neutralise” some of the terminology used to guide spending so that they longer assume “demand growth” for reticulated gas, but it doesn’t rule it out entirely.
The AEMC says proposed reforms would also update reference tariff arrangements, strengthen expenditure assessment requirements, expand the flexibility of the incentive mechanism framework and introduce supporting changes to access arrangement processes.
Essentially, the Commission says its aim is to ensure gas companies have the right rules, and the Australian Energy Regulator (AER) the right tools, to achieve the tightrope walk of an orderly exit from reticulated gas, as more and more consumers go electric and as gas companies face up to a new market reality.
“[This draft rule] is about recognising that overall, the outlook for gas distribution networks is complex, and trying to ensure that the regulatory framework can deal with the range of scenarios that might emerge,” AEMC chair Anna Collyer told Renew Economy on Thursday.
“Our ultimate objective is that customers that are remaining on the gas network for whatever reason can keep getting a safe and reliable supply of gas, but we also don’t think customers should be paying for assets that are no longer being fully utilised.
“So it’s trying to find the balance and recognising that it’s very much… a network by network case.”
Collyer says that one of the AEMC’s key considerations was to achieve a balance between allowing gas companies to recover enough costs that have the incentive to stay in business and keep delivering a safe and reliable service, while also “putting a very clear cap on that” to ensure costs passed through to customers do not drive up the price of gas to the point of triggering a death spiral.
The chief risk of a disorderly transition for gas consumers – which has been the focus of multiple rule change requests from ECA and the JEC – is rising and volatile gas prices.
Of particular concern is the diminishing group of customers – including those that face financial, technical or other barriers to going electric – left to foot the bill for running a largely abandoned gas network.
The key risk for the gas service providers, meanwhile, is that they are unable to fully recover the money they have sunk in the network, resulting in some or all of these assets being at risk of stranding.
There is also a risk “early exits” of service providers, like Solstice Energy in Victoria which last year announced it would shut down supply to around 1,145 homes after its isolated gas networks became too expensive to operate.
As Renew Economy has reported, this sort of outcome has few winners, least of all those customers who face barriers to getting off gas, and are suddenly faced with a choice between switching to bottled LPG or rapidly trying to electrify their homes.
“We don’t want prices to be the reason that people are leaving the gas network,” says Collyer. “We want them to have choices. Government policy may guide those choices, but generally speaking, we want to limit any price increases to the point where it becomes the reason to change and electrify all your appliances.
“We’re not talking about vulnerable customers. We’re talking about people who, for example, could afford to go out and get the new new appliances. Where is the gas price point where they would just go, ‘Okay, I’m going now’ – because that’s what triggers the death spiral.
“So we’ve deliberately said prices can’t be set above that, so we need to keep within that range so that we don’t trigger a death spiral.”
In the AEMC media release, Collyer puts it this way: “Service providers have a strong incentive to price reasonably – if gas costs more than the alternatives, customers will switch.
“However, if recovering the full cost of the network would push prices beyond what customers would pay for an alternative energy source, there would now be tools for the regulator to intervene.”
In this scenario, Collyer says, the AEMC draft package provides the regulator with the tool to reduce the value of a service provider’s asset base, meaning a clear reduction of prices for consumers if some parts of the network become underused.
For some gas networks, this could mean modest cost increases for those who continue to use gas in the near-term, giving gas providers a reasonable opportunity to recover their past investments, while reducing the risk of high and volatile prices for future consumers.
But if consumer demand falls significantly and parts of the network become underutilised, the plan is that the costs of these assets will not be transferred to households and businesses.
But the ECA is not convinced this is how things will pan out under the proposed package of reforms. Instead, says ECA CEO Brendan French, giving gas network businesses the “benefit of the doubt” on how fast prices rise leaves consumers “more exposed to the risk this rule change was meant to address.”
And the ECA is particularly concerned with part of the AEMC’s draft rule that would require the AER to approve a network company’s revenue proposal unless there is an alternative that better contributes to the National Gas Objectives (NGO).
This goes against the advice from the AER and the wishes of consumer groups like the ECA, which argued for depreciation decisions to remain “firmly in the hands of the regulator.”
“What this means in practice, and what we’ve seen in in recent years, is gas networks are increasingly seeking to bring forward more cost recovery,” says Adam Collins, the ECA’s executive manager of advocacy and policy.
“So, in the most recent Access Arrangements across the east coast gas network, they’ve sought to bring forward about a billion dollars in cost recovery from consumers. And the regulator has not approved all of it – they’ve approved about half of it, which is still quite a significant amount.
“But our concern is with with this proposed change, the regulator would have very little discretion to reject what a gas network proposes to bring forward in cost recovery, and what that will mean is gas networks will to bring forward even more costs, and that will significantly impact consumers’ bills.”
“Under the draft decision, the regulator’s ability to manage price impacts would be much more limited, with the AEMC instead putting its faith in gas networks to price reasonably,” adds French.
“The AEMC itself has said that its draft decision will mean that today’s consumers face higher prices, calling this a timing shift rather than a real cost. But … the AEMC’s draft doesn’t just move the timing of the payment, it moves who pays it from investors later to consumers today.
“While we welcome some aspects of the AEMC’s draft decision, such as the new rules to restrict unnecessary network spending, much more must be done to support households and small businesses as gas networks decline,” French says.
“The AEMC has an opportunity to change course and put the interests of consumers first in its final decision in December.”
The JEC, while welcoming the draft rule as another step towards an efficient transition, also raises concerns about potential constraints on the AER’s ability to protect consumers from unfair costs.
“The draft puts the focus on extending businesses opportunity to recover more from consumers through accelerated depreciation and inflation changes,” says energy and water justice director Douglas McCloskey in a statement.
“When many people have no choice but to stay connected to gas, it is unfair to increase costs to consumers now, to avoid a hypothetical future of ‘unsustainable prices.’
“We acknowledge regulatory changes alone can’t solve the problem. And we agree with the AEMC that governments must play a crucial role in helping manage the decline of the network going forward.
“We’re calling for stronger recommendations in the final determination to more clearly define the action required.”
In an emailed response to Renew Economy, Collyer said the draft proposal would give the AER “greater guidance and access to more tools to manage unreasonable pricing increases.
“By implementing these reforms, we are ensuring consumers remain at the centre of energy transition by providing the right regulatory tools to support a clear reduction in prices if parts of the gas network become under-used.”
The AEMC is now seeking feedback on the draft rules, before publishing a final determination and final rule, expected in December 2026, Submissions are due 8 October 2026.
