2017 ENA Regulation Seminar speech: Working together to restore confidence in energy regulation

I want to start with the consumer. The end user. The happy person in the ads.

The term ‘average Australian’ is often bandied about as lazy shorthand.

The ‘average Australian’ according to the 2016 Census is a 38 year old female homeowner with a mortgage, two kids and two cars.

All energy consumers—individual or business—have three simple and entirely reasonable requirements; safe and reliable supply at a reasonable price within a transparent system.

The average consumer will also have some indirect investment in energy resources through their superannuation and want a reasonable rate of return on that investment. Australia has the world’s fourth largest super pool at $2.2 trillion1.

At a micro level therefore, individual energy consumers in Australia understand, or should understand the competing interests at the heart of a regulated energy environment.

The ‘average Australian’ energy consumer has been elevated into a hot button political issue in recent years.  Energy policy, price, supply and investment have never been more prevalent in the public debate in Australia. This is an issue that dominates kitchen tables and is being responded to at the Cabinet table.

This is not surprising given Australian electricity prices have increased significantly since 2008. Further significant increases in retail electricity and gas prices since the start of July have really bought the issue into sharp focus.

Perhaps more than ever, the consumer has a market voice as well as a political voice. The context in which we now operate has seen the political optics around ‘the average consumer’ dramatically amplified. That can no longer be ignored.

This has a number of implications...

Firstly, the Government’s recent announcement of an extra $67.4 million to the AER over the forward estimates is in many ways a game changer. It is a strong affirmation of Finkel’s acknowledgement that a well-resourced regulator is critical to the proper functioning of the Australian energy market.

This represents a 60 per cent increase to our ongoing funding. It will also take our staff level from 124 to 193 this year, ramping up to 217 from next year.

Secondly, the Commonwealth Government has proposed to abolish the Limited Merits Review from AER decisions setting network revenues.

Combined, these funding and policy responses will change the way we do business. That change will happen is a given.  And it can and should result in a more transparent and positive interaction between the market, the regulator and that most important component of the jigsaw—the consumer.

So, what are the challenges for regulators?

In balancing the competing interests of stakeholders, regulators the world over will necessarily hold dualistic and equally competing identities. This was neatly summed up by Professor Malcolm Sparrow who argued “regulators, under unprecedented pressure, face a range of demands, often contradictory in nature”:

Be less intrusive, but be more effective.

Be kinder and gentler, but don’t let them get away with anything.

Focus your efforts, but be consistent.

Process things quicker, but be more careful next time.

Deal with important issues, but do not stray outside your statutory authority.

Be more responsive to the regulated community, but do not get captured by the industry.

In seeking to balance these conflicting interests, it becomes almost impossible to be all things to all stakeholders, which is why there is a structural tension built into the regulatory model.

Difficult to reconcile? Yes. Impossible to reconcile? No. Moving forward as an organisation we must be guided by six key principles that enable us to do our job. Simply stated they are:

  1. Being independent
  2. Having a proper and clear purpose
  3. Acting within authority
  4. Having relevant expertise
  5. Achieving effective consultation and communications
  6. Being transparent and accountable.

To be frank, as an organisation, we could be all these things every day, yet the subjective optics of different stakeholders will, as a matter of course, lead to differing perceptions of our effectiveness.

To give a simple example, our 2016 stakeholder survey suggests a total of 77 per cent of respondents are satisfied with how we perform our functions as a regulator. However, break that number down, and you see the figure drops to just 66 per cent when considering the views of network providers alone.

Maybe this is predictable; but you are less likely to be satisfied with our performance if you take issue with our decisions.

The opportunity is clear: we all need to engage earlier with each other in a more proactive fashion. We need to identify issues in dispute and work together to resolve them.

This opportunity was something Cristina, my fellow AER Board member, flagged in her speech at this event last year. And it ear marked the beginnings of a journey that we are now starting to see evidence of and outcomes from our joint efforts and progress to date.

We have had a highly adversarial culture around energy regulation in Australia.  In fact I was quite shocked at the intensity of that culture when I arrived here three years ago and it’s been a conscious effort of mine to move away from it.  This adversarial approach needs to change if we are to achieve mutually acceptable outcomes to investors and consumers; outcomes that are in the long-term interests of consumers.  I know that many of you agree that a more constructive working relationship with us is essential if we are to move on from an inefficient and ultimately unsustainable adversarial approach.

If the game isn’t working—and there are parts of the game that aren’t working—we need to change the game.  And I think many of us are already moving in the right direction…

Let me give you a simple example of how the old system was less workable than the future we are all moving towards.  During 2015, for eight energy businesses we received over 100,000 pages of submissions requiring a response that ran to over 7,000 pages. 

100,000 pages.

I don’t know how many of you have read ‘War and Peace’. Try reading it 90 times. That’s what 100,000 pages looks like.

There are a number of reasons driving this volume, including preparing for potential appeals, but irrespective of the reasons, the effect on the process is extremely detrimental. As the regulator, it is a huge challenge to be able to engage with that volume of material properly. For consumers and their representatives, it is impossible and provides an almost insurmountable barrier to participation in making these very important decisions.

There is, of course, another way…

Australian Gas Networks has continued the genuine stakeholder engagement it began with its South Australian access arrangement in the context of its Victorian access arrangement.  This is an approach we have encouraged more businesses to adopt. 

ElectraNet has also undertaken significant consumer engagement in the development of its regulatory proposal. This included the publication of a Preliminary Revenue Proposal and a series of meetings considering aspects of its proposal and hosted by an independent facilitator. ElectraNet’s engagement has been supported by consumer representatives, the government and business.

Similarly, TasNetworks is undertaking significant consumer engagement in the development of its regulatory proposal and has been consulting since May 2016, about one and a half years before the proposal is due (January 2018).  Its consultation has included surveys, workshops on aspects of the proposal and will conclude with the development of a preliminary proposal for consultation in August.

We are also seeing change outside of the reset process. Last year we consulted on the development of a new electricity distribution ring-fencing guideline. Our challenge was to introduce a single guideline that established the obligations on distributors to separate their regulated electricity services from the services they offered in competitive markets. Electricity retailers, third party service providers and distributors all had strong commercial interests at stake in the development of the new guideline given the impact and adoption of new technologies such as smart metering and batteries.

Our approach to consultation went much further than what was required in the Rules. Aside from the usual discussion papers and draft decisions, we held numerous industry and stakeholder workshops at which the most contentious issues were discussed openly and constructively.  This allowed us to get to the nub of the competing arguments and address how we would resolve them.

Feedback from stakeholders on the process to develop the guideline has been positive. Importantly, participants tell us they felt heard.  We have adopted a similar approach in consulting on the new demand management incentive scheme this year.

What we have learned is that consultation ‘on the papers’ is not sufficient. Importantly those that are affected by our decisions need an opportunity to be heard and we must demonstrate that we have listened and understand.

We will not always agree. Indeed, if we did always agree, the AER wouldn’t need to be here. But; better dialogue—that is, timely and transparent dialogue—will undoubtedly lead to better outcomes for all stakeholders.

The ENA just last week noted that there is increasing effort and collaboration across customer advocates, energy networks, engagement specialists and the AER which is informing new approaches.

In a news article written by Irina Umback, the ENA stated that ‘There is widespread recognition that genuine consumer and stakeholder engagement goes beyond simply providing an opportunity to stakeholders to express their views. Customers must have clarity about what decisions they can influence, trust that their views are heard and understood, and be able to see how those views have been taken into consideration.2

We want to engage with you and with consumers earlier in the process. We want to identify key points of disagreement early and we want to work collaboratively to resolve them. In my experience, the sooner you can all agree on the issues of a proposal, the areas of contention, the easier it is to resolve them.

It is a new way; and in a post Limited Merits review world; I would suggest it’s the only way.

So there are a number of things that need to change and I want to spend some time on that now.

First: Our new funding model is not simply about upsizing the organisation but about changing the way we operate.

This is the single most significant change in scale since the inception of the AER and will require careful planning, time and close consultation.

We are essentially kicking off AER 2.0

So, as Chair of next-generation AER, I welcome the opportunity to being able to invest more heavily in those areas of work that may have been deemed lesser priority to date because of their discretionary nature. These resources bring significant opportunity.

Across the AER (and in the parts of the ACCC that support us) there will be additional resources available to devote to work that we have had to put off or haven’t been able to do as much as we would have liked particularly in the proactive space.

Let me give you three examples where our increased resources will make a real difference.

In retail markets – we can achieve best practice consumer engagement and outreach, including development and distribution of AER information materials about customers’ rights and options in relation to their energy supply, as well as specific campaigns on the rights of exempt customers and protections and assistance available for vulnerable customers.

In wholesale markets – we will have greater capacity to incorporate the impacts of any rule changes into our compliance framework in a more considered, consistent, systematic and comprehensive way and to allow effective risk assessment of all changes.

In Networks, the AER did not publish discrete performance reports for energy network businesses in 2015–16 because of our heavy reset workload. However, performance reporting is an important function. We have an ongoing role in monitoring network business performance and operations, to which significant resources can now be allocated.

This capacity for increased knowledge capture across the entire supply chain will provide stakeholders with valuable market information and enhance our internal capabilities, better preparing us to fulfil a key role in the broader energy policy debate.

We can now meet our organisational potential to provide expertise to the COAG Energy Council, work more closely with other market bodies and contribute to wider policy reviews.

We can now be the agency that is better equipped to provide consistent evidence-based decision making in a policy space where that may not have always been the case.

In essence, we will now have the resources to complete our journey.  The destination is clear—to be a world class regulator that is independent and open minded.

To do this; we need your trust.

A reputation for trustworthiness is only achieved through a robust governance structure that encompasses culture, people and processes, and practices that embed the principles of good governance in everyday operations.

Critically, the AER needs to maintain, at all times, a clear and proper purpose.  And our purpose is to make all Australian energy consumers better off, now and in the future.

This drives the values and culture of the AER from the highest level through to all staff.

If we are to understand the perspectives of those that our decisions affect most, then we need to engage with them more proactively and in a more effective manner.

In the past our engagement with network businesses has been driven, in part, by the existence of Limited Merits Review (and businesses’ interest in engaging with Limited Merits Review). This led to a more adversarial relationship. However most of us have already taken steps to rebuild this relationship among all stakeholder groups. We’ve seen this effort reflected in many outcomes.

Let me return to the AGN exemplar of collaborative stakeholder engagement for its Victorian gas access arrangement. AGN fulfilled its objective of submitting a proposal that delivered for the consumer, was underpinned by effective engagement and on the whole has been accepted by the AER.

This means that although the AER’s decision is still at draft stage, AGN can begin implementing its regulatory plan ahead of a final decision. It also means AGN will incur minimal remaining regulatory costs of the access arrangement process. The AGN process was still the subject of our robust and independent review process. But we highlight that customers did get the added benefits of being engaged early through improved transparency and the sharing of relevant information.

This was not ”War and Peace”; and everybody won.

Recently we kicked off a collaborative engagement process with Energy Consumers Australia and Energy Networks Australia to help facilitate a dialogue aimed at supporting improved engagement around regulatory issues and innovation. In a facilitated workshop between the parties last month, all parties acknowledged the challenges in past engagement between networks and the AER but recognised that:

  • The networks as a group are a ‘broad church’ so a spectrum of engagement levels and outcomes has been present.
  • Where good examples were observed, these were often outside the reset processes.

The discussions demonstrated a shared commitment to work together on important issues facing the sector; to focus on good outcomes and more constructive ways to engage in order to achieve them. Even the process of exploration was an important outcome of the meeting in itself.

Our goal is to incentivise and reward well-evidenced, transparent and reasonably costed regulatory proposals. Further, this process could save us, consumers and the businesses significant resources, and promote greater regulatory predictability. I think AGN would agree that the approach they took in their Victorian and South Australian gas reviews led to a much more streamlined process for all involved.

Our Rate of return guideline review will commence shortly with the release of a consultation paper outlining the intended process for the review.

COAG Energy Council has now agreed the AER’s Rate of return guideline will be binding and we will be developing it in consultation with stakeholders.

Stakeholders have already offered some great ideas about the process for the review which we will be exploring further in our consultation paper. Some of these included:

  • an independent panel review process to provide confidence in the rigour and integrity of the Rate of return decision
  • ‘hot-tubbing’ of consultants to highlight material issues of agreement and disagreement between experts to aid us in consideration of submission material
  • establishment of a consumer reference group to be responsible for facilitating community consultation forums and consumer input throughout the rate of return guideline consultation process
  • review of the guideline by a sub-panel of our Consumer Challenge Panel that will provide substantive direct feedback and operate as a consumer-focussed consultant.

While I was at the Ontario Energy Board we introduced the ability for the Board to require two or more experts to appear together as a concurrent panel—a version of hot tubbing—in our hearing process and for the purpose of answering questions from the Board and others and commenting on each other’s views. This process allowed the Board to more easily distil complex technical matters and pin down areas where experts differ.

We’ve also kicked off the remittal process for re-determining operating expenditure allowances for the NSW/ACT networks. In the past we have conducted these processes largely on a bilateral basis with the regulated businesses involved. This was a relatively easy process because the Tribunal had made clear and narrow directions for the remittal and as a consequence these decisions were remade within six to ten months.

This remittal process, however, is a little different than past processes because of the scope of issues raised by the Tribunal, the relative discretion the AER has to implement the Tribunal’s directions and of course the likely greater public interest.

As a first step, the AER will hold a roundtable early next month to begin our active engagement with key parties, the distribution businesses and various consumer groups to discuss, collectively, options for how we can cooperatively work together in remaking the decisions.

So this covers much of the AER’s outward engagement with stakeholders but what drivers should propel us in our future work toward achieving our purpose and priorities? We have identified five strategic objectives.

First, we need to drive effective competition where it is feasible.

For example, the purpose of our ring-fencing guideline is to separate the competitive and regulated parts of network businesses to protect the long term interests of consumers. It supports the development of competitive markets for energy services and efficient investment in network and customer services.

Second, we need to provide effective regulation where competition is not feasible.

We encourage businesses like yours to operate efficiently, undertake efficient investment and provide reliable services, through our ‘reset’ processes and ongoing oversight.

We encourage and enable innovation by network businesses and show the same spirit of innovation in our own work. For example, much of our Better Regulation work several years ago was about enhancing our approach to network regulation. However, even though we have developed the framework considerably in recent years, it’s not a ‘set and forget’ process. Working with the AEMC, we are continually assessing the regulatory regime to make sure it is fit for purpose and that it is robust to the transformative changes occurring in the industry.

Third, we need to equip consumers to participate effectively, and protect those who are unable to safeguard their own interests.

We are continually encouraging consumer engagement in the reset process and use our Customer Consultative Group and Consumer Challenge Panel as additional consumer voices.

Fourth, we need to use our expertise to inform the debate about Australia’s energy future, the long-term interests of consumers and the regulatory landscape.

We provide an independent, authoritative view to government and other market bodies and policy-makers, based on our in-depth, practical experience of how the market is working now and how well-placed it is to deal with immediate and longer-term challenges.

We work closely with the COAG Energy Council and our partners—the other market bodies, state based regulators, Energy Consumers Australia and energy ombudsmen schemes—on emerging issues and regulatory strategies.

Finally, we need to take a long-term perspective while also considering the impact on consumers today.

We want to foster confidence among stakeholders that the energy system is working well for them, as levels of public trust now can have a long-term impact on consumer engagement and the effectiveness of competition.

So, looking forwards, we see a playing field where the umpire’s decision and authority is not consistently undermined by a default appeals process. That is a fundamental game changer and it means that we are all going to have to get used to consulting and listening to each other a whole lot more.

We will continue to undertake extensive consultation throughout each of our regulatory processes. This includes general approaches such as holding public forums to discuss proposals, issuing discussion papers and draft decisions and requesting submissions on these. 

By any measure, we don’t run a closed shop.

Consultation is not something we pay lip service to. It is foundational to our ethos, and the new playing field we are all about to step on to means we’re all going to have to do a whole lot more of it.

At the AER we recognise that the decisions we make and the actions we take in performing our roles and activities affect a wide range of individuals, businesses and organisations. Effective and meaningful engagement with all our stakeholders across the range of our functions is therefore essential to fulfilling our role.

Our revised Stakeholder Engagement Framework will provide a clear and transparent model as to how we can all have a more meaningful conversation in a less adversarial environment.

This open dialogue and more constructive way forward will be increasingly important as we move forward through the energy sector’s transition and into a less clear future.

So what will the world look like in a decade?

Who knows; I certainly wouldn’t have predicted it would be like this today a decade ago. So how confident are we that we will know what it will look like in decade from now, especially with the technological changes and related cost reductions we have seen. Nobody would bet against solar being even cheaper and batteries even more feasible, at a domestic level at least.

These transformational changes mean many consumers will have more choices in the future; they will have better tools to take more control of their energy consumption and bills.

What this means for us is the need to be flexible and adaptive to these changes. To use the opportunity of the new game, additional resources and an ongoing commitment to genuine engagement to deliver outcomes in the long term interests of consumers. No matter what energy evolution, or transformation, takes place.

Turn on the radio and you won’t have to wait long to hear a discussion about energy supply and pricing. Yes, this is the consumer who is confused about why their bills have increased seemingly exponentially. They are genuinely concerned about reliability of supply.

I echo the sentiment of the ENA that ‘a more constructive dialogue is more important than ever in today’s dynamic energy market environment.3

Which is why the conversation between us, and you, and yes, consumers is so important to have now.

We look forward, at the Australian Energy Regulator, to speaking with you a great deal more.

Thank you.


Footnotes

[1] http://www.invest.vic.gov.au/news-and-events/2017/jan/melbourne-a-world-leader-in-super
[2] Irina Umback, ‘Green shoots’ emerge in networks customer engagement, ENA news release, 20 July 2017
[3] Irina Umback, ‘Green shoots’ emerge in networks customer engagement, ENA news release, 20 July 2017

Conference: 
Energy Networks Australia Regulation Seminar 2017
Issued date: 
26 July 2017
AER reference: 
AS 01/17