25-06-2025
As gas use declines, pipeline companies are shifting extra network costs onto consumers
Clare Savage might be reluctant to acknowledge she is something of a veteran of Australia's energy industry.
But for more than 20 years, she has held senior positions within it, including the past six as the chair of the industry's top watchdog — the Australian Energy Regulator (AER).
During that time, many things have transformed.
Governments and ministers have come and gone, policies have chopped and changed, and the very mix of Australia's biggest electricity system has been radically reshaping.
There has also been another, fundamental shift in Australia's energy landscape.
Australian households are using less gas, with some getting off the fuel entirely.
When it comes to the business of gas pipelines — how much they are worth, how they are regulated, who pays for them and how — Ms Savage says this trend changes everything.
"The whole gas regulatory framework was built upon the belief that you would have a growing network," Ms Savage says.
"And so all of the tools that we have, or most of the tools that we have, are founded on the belief that we'll have a growing network and that sharing the fixed costs of a network amongst a growing customer base is the best possible thing to do."
Indeed, official and unofficial forecasts show declines to varying degrees in the number of customers connected to Australia's various gas networks.
According to the Australian Energy Market Operator (AEMO), the body which runs the country's power and gas markets, a tipping point is at hand.
The agency forecasts the number of household and business customers connected to gas networks is set to fall from almost 5 million now, to barely 4 million by 2030.
AEMO says this number will collapse to as few as 1.5 million by the middle of the 2040s.
Experts says a precipitous decline in gas connections will completely break the model used to regulate the networks.
Under that model, gas pipeline owners are able to recover the huge cost of buying or building their networks — plus a profit margin — by charging a "fair" price to everyone connected to the network.
How those prices are set, and the way they are apportioned to consumers, is determined by regulators.
Ms Savage says the model had always been based on the notion there would be more customers joining the network.
Courtesy of that assumption, she explains there are cross-subsidies that have helped keep costs low and encouraged ever more connections.
Among them is a subsidy — paid by all existing users — that makes the cost of a new connection artificially low.
Ms Savage says this way of regulating the industry and allowing pipeline owners to get their money back had worked relatively well — while the number of connections grew.
"Then when we find ourselves with a customer base that might be changing or shifting or shrinking through time, we find that we've got less tools available," she says.
"From that perspective, it makes the job harder."
Faced for the first time with falling connection numbers, regulators including the AER are turning to novel ways of determining a "fair" price for owners and consumers alike.
One of those tools is increasingly in vogue — and increasingly controversial.
It is called accelerated depreciation and refers to the accounting treatment in which a company is able to fast-track the process of writing down the value of an asset.
Crucially, by writing down the value of the asset in this way, the owner can pass on the cost to the consumer.
And the costs can be considerable — hundreds of millions of dollars for the business and hundreds of dollars for individual consumers over a five-year period.
While consumer groups have railed against its increasing use, retailers are not happy, either.
Jeff Dimery is the longstanding boss of Alinta Energy, which is one of Australia's biggest electricity and gas providers.
Mr Dimery says he can understand the arguments for accelerated depreciation — he just does not think gas companies should be allowed to write down their assets so quickly.
"We would certainly encourage regulators to consider and to revisit accelerated depreciation on the basis of how smooth and how quickly this transition to a low carbon economy is actually occurring," Mr Dimery says.
"We've been on the public record saying that we think the transition is behind schedule.
For his part, Mr Dimery questions whether people will disconnect from the gas network as quickly or in as many numbers as authorities are forecasting.
He notes that in some cases, pipeline owners are seeking to bring forward the lifetimes of their assets dramatically.
However, he thinks the transition away from gas will happen more gradually.
And for industrial customers that rely on gas to make their products, he says the shift could take many decades.
As such, Mr Dimery says pipeline companies' depreciation claims should be treated with caution.
"I think an important element of that also then needs to be the pace of change and this transition," the Alinta CEO says.
"Let's not run down the hill here and stumble, let's walk down the hill and get it right.
"And if that means that we take a longer-term view of these assets and there's a slightly slower transition and that eases the burden on consumers during a cost-of-living crisis, we don't think that's a bad thing."
Ms Savage insists the AER is taking a tough approach.
She points out that, collectively, pipeline owners have asked for as much as $800 million in accelerated depreciation.
But she says the regulator has barely given them half of that.
"We are, of course, balancing the needs of network businesses and consumers," Ms Savage says. "That's our job."
Pipeline companies are sticking to their guns.
Australian Pipelines and Gas Association chief Steve Davies says falling gas use is a real issue for owners, particularly distribution networks that service smaller customers like households.
Mr Davies notes pipelines are typically built to last at least 40 years and there was little doubt that much could — or would — change in that timeframe.
He says pipeline companies are not seeking to price gouge or generate windfall profits but simply recover their costs in a reasonable way and within a reasonable time.
"We need to encourage infrastructure investment in Australia," Mr Davies says.
"The regulator sets those rates of returns. They are acceptable and in line with the risk associated with investing in utility infrastructure, which is fairly low.
"But we are talking about the recovery of the money that has been put into these infrastructure assets and that is a separate question from the rates of return which you achieve when you invest in the assets.
"So there's return of capital and return on capital."
Mr Davies argues the use of accelerated depreciation reflects the fact the regulatory system for gas pipelines was not designed for the circumstances it now faced.
To that end, he suggests a broader shake-up of the system is needed.
"In this changing environment, this is a challenge that hasn't been faced in Australia before," he says.
"It is a fundamental question that needs to be managed properly."
On this point, Ms Savage from the Australian Energy Regulator firmly agrees.
Ms Savage says the watchdog was among the first of its global peers to recognise the implications for regulators of the shift away from gas.
Chiefly, she says, the trend risks saddling an ever diminishing group of users with the full cost of building and maintaining a vast and expensive network of gas pipelines.
Worse still, she says many of those household users who will be left picking up the tab are those unwilling or unable to get off gas and electrify.
She says the regulator will continue to "use the tools we have available under the current … framework".
Ultimately, though, it would like to see a revamp in the way the industry was overseen.
"Our job is to worry about not just the consumers we have today, but the consumers we're going to have in 5, 10, 15 and 20 years' time, and 50 years' time," Ms Savage says.
"How much should a connecting customer pay to the gas network?
"What kind of contribution should a new customer make towards the assets that are being invested in on their behalf?
"We think that's a really interesting and very important question to get to the bottom of."
