“Not fair” to force consumers to pay for gas death spiral, says advocate

Anger over rising fees to pay for future stranded gas infrastructure is building, with another consumer advocate demanding regulators better manage the new cost on customers. 

The Justice and Equity Centre (JEC) says in a new submission that it’s not fair to charge today’s gas users for tomorrow’s problems when gas network owners can’t even identify what the exact cost to future consumers might be.

It’s arguing that “accelerated depreciation” – dropping the value of assets faster so customers can be charged more, earlier – is being used to pay for more than just stranded asset risk, and gas networks need to give a full accounting to justify risk-based hikes.

“Accelerated depreciation has inappropriately been presented as a tool to manage intergenerational equity, often to the exclusion of any other consideration,” says the JEC’s rule change request to the Australian Energy Market Commission (AEMC).

“We contend it is inherently inequitable for today’s consumers to bear investors’ potential future costs, particularly when there is no certainty as to what specific asset risks these costs relate to. 

“If the fair cost to future consumers is not established, then it is not reasonable for existing consumers to assume an increased cost.”

The push for electrification is causing a death spiral for gas networks, as rising gas prices and an awareness of the benefits of electric appliances is resulting in more households and customers moving off gas.

The problem for industry and regulators is who will pay for stranded gas pipelines and other infrastructure when a dwindling number of people remain using them – most likely renters, apartment dwellers, and others who cannot afford to make the switch to electrify their homes.

But consumer advocates say it’s just as unclear which assets will be stranded, and when.

Gas companies want to be paid earlier for a declining asset

Gas network owners leapt on the concept of accelerated depreciation as they attempt to claw back billions of dollars in investment before their assets become worthless. 

Pipeline owners have asked the Australia Energy Regulator (AER) for $800 million in accelerated depreciation, AER chair Claire Savage told the ABC last week.  The AER has agreed to not quite half of that, she said.

Last year in Western Australia, the Economic Regulation Authority (ERA) decreed that gas network tariffs in the mid-west and south-west systems could increase by 7.8 per cent a year over the next five years.

In Victoria, AusNet Services tried – but ultimately failed – to charge customers an extra $70 million over the five year period starting in 2028.

But the sheer scale of the financial burden pipeline owners are asking to put on gas users, without appearing to share in any of those costs, is driving the wave of rule change requests from the likes of the JEC.

Tighten up the rules

There is intense debate about what many see as an intractable problem. The former head of the Energy Services Commission in Victoria, Ron Ben-David, says that no regulator has found an answer.

He has suggested one solution is to effectively pass the costs over to electricity consumers. He discusses that idea in a recent episode of the Energy Insiders podcast. See: Energy Insiders Podcast: Dealing with the gas death spiral

The JEC wants its proposed rule changes – to limit the use of accelerated depreciation, redefine what is a “redundant asset”, and set up a system for deciding how costs are shared – to be considered alongside another request issued earlier this year by Energy Consumers Australia. 

The AEMC has started to consult on the ECA request, which wants gas networks to show where disconnections are likely to be and use that to start avoiding more capital investments in those areas. 

It also wants accelerated depreciation rules tightened so consumers aren’t charged if networks don’t have a plan in place to reduce the risk, and a plan to make users pay up front for new connections so the cost isn’t socialised across existing consumers – a practice already in place in Victoria. 

The JEC wants to build on these ideas, and it says there are already methods under the National Gas Rules (NGR) to manage the kind of risk gas infrastructure companies are worried about. 

These are the rules already covering depreciation schedules and capital redundancy, but the JEC’s request says these need to be updated to cope with the rising numbers of people quitting gas.

The JEC wants depreciation schedules to be updated to limit the use of accelerated depreciation to only sharing the cost and risk of stranded assets.

And it says capital redundancy – stranded assets – should be updated to expand what a stranded asset is and add the new concept of ‘anticipated redundant assets’. It also wants that rule to include a structure for how costs can be equitably shared between customers and investors.

“The AER has stated in recent decisions that it believes governments, networks and consumers should ‘discuss’ how to pay for asset stranding costs as network use declines and assets become redundant,” the JEC’s rule change request asks. 

“We agree and see this change to the gas rules, along with other changes, as an important contributor to that discussion. Our proposals are compatible with government involvement to support cost sharing but, importantly, do not rely upon it.

“It is not fair on the regulator, investors or consumers to continue a situation whereby these issues are dealt with using inadequate tools.”