Hardship and Affordability Conference: Perspectives on energy and water speech

10 July 2013

In a speech to the South Australia Council of Social Service (SACOSS), AER Chairman, Andrew Reeves discusses initiatives designed to build consumer confidence in energy markets.

Transcript

Thank you to SACOSS for the invitation to participate in its hardship and affordability conference today.
There is no getting away from the fact that rising energy prices are putting a financial strain on households – not just here in South Australia, but across the country.

This has sparked a debate around whether the market has been functioning efficiently, whether consumers were paying more than necessary for a safe and reliable energy supply, and what more could/should be done to ease the pressure on Australian households. We have all come under the spotlight – government, regulators, and industry.

We may not have a “quick fix”, but the debate is generating results. In addition to jurisdictions beginning to implement the National Energy Customer Framework (which in itself is a very significant aspect of reform), over the last 12 months, there have been reviews across the full spectrum of regulation. These reviews have covered:

  • a wholesale review of the rules that set out how network prices are determined, which was initiated by the rule changes lodged by the AER (and the EUAA)
  • a review of the effectiveness of the Australian Competition Tribunal
  • how the underlying drivers of cost might be addressed, including extensive work to address the issue of rising peak demand
  • a spotlight on the efficiency of public and private NSPs
  • how the long term interests of consumers can be better integrated with the regulatory process.

I don’t propose to go into great detail about these reviews, but it is important to impart that the overall essence of these reforms is summed up in the title of the Standing Council on Energy and Resources’s report to the Council of Australian Governments –“Putting Consumers First.”

Better Regulation Program

Better energy regulation, better investment decisions and better consumer engagement will result in a more efficient energy sector – a sector that will give consumers greater protections, greater choice, and greater control over their energy costs.

Today I would like to briefly touch on the impact of some of the significant changes we are seeing and share what the AER is doing in the areas of (retail) energy regulation and consumer engagement to develop an energy sector that is more able to deliver in the long term interests of energy consumers – a sector where consumers feel empowered and confident to become involved.

This is not the answer to the issue of energy affordability – this is a bigger issue for all governments to tackle. Nevertheless the AER will ensure that it fulfils its responsibilities under the Retail Law. These responsibilities include protecting consumers by ensuring retailers implement and maintain hardship policies to assist customers experiencing financial hardship. I will say more about this later.

Changes both to the rules framework and to the AER's processes are a part of making the energy market work better for consumers. In essence, the initiatives underway are intended to promote an interactive process in which consumers, the AER and network businesses are all involved in ensuring the services that are valued by consumers are the ones that are provided.

The Retail Law commenced in Tasmania (electricity only) and the ACT in 2012; in South Australia on 1 February 2013; and in New South Wales most recently on 1 July 2013.

The Retail Law aims to promote retail competition and empower customers to find energy contracts that suit their needs. It strengthens the position of customers in areas such as hardship, retailer failure, access to easy to understand information, and disconnections.

The Retail Law complements the consumer protections provided through the Australian Consumer Law, for example, in relation to door-to-door selling. We have assisted our ACCC colleagues in enforcing these provisions and welcome the results achieved to date.

Confident consumers

We are strong advocates for effective retail competition. We believe that effective competition provides strong incentives for business to operate efficiently and deliver innovation and prices that benefit consumers. Effective competition relies on consumers having and exercising their choice. But it must be an informed choice.
However consumers can find energy markets challenging and many are yet to experience the full benefits that a competitive market can deliver.

The complexity and structure of retail offers can make it a difficult task for even the most discerning energy consumers to make comparisons and exercise informed choice when entering into contracts. This complexity can deter consumers from engaging fully in the market by lack of access to good information and high search costs.

As the national retail energy market regulator, we are focusing on improving consumer confidence and information to strengthen their engagement (and choice) in the retail energy market. The National Energy Retail Law provides the framework underpinning this focus.

Of particular importance in informing and empowering consumers is the AER's energy price comparison website, Energy Made Easy. We launched Energy Made Easy on 1 July last year to provide consumers in those states and territories where the Retail Law has commenced with independent, objective and free comparisons of energy offers to help them work out which is the best energy deal for them – it’s helping consumers compare ‘apples with apples’.

I expect many consumers would be surprised to see just how significant the range between offers can be in any one distribution zone – over the course of a year, there can be a significant difference between the cheapest and the most expensive offer. For any consumer, this is quite significant – in fact similar to the value of an annual energy concession.

If you are not already familiar with Energy Made Easy, I would encourage you to join the break-out session later this morning. It’s a very simple tool to use, and one that I hope many of you are beginning to use with your clients.
The website also provides information on the energy market, energy use, and consumer rights and obligations.

We are working hard to establish Energy Made Easy as a key source of trusted information for consumers on available retail energy offers, consumer protections, and on the energy market. Customers are able to download energy price fact sheets which allow consumers to more easily compare offers.

To support Energy Made Easy and grow our presence in the consumer space, we are looking to strengthen consumer awareness and understanding by publishing educational materials on matters such as understanding retail energy offers, consumer protections and obligations (such as door to door selling, cooling-off provisions, customer hardship). These will include fact sheets, pamphlets and merchandise.

We are developing targeted strategies for effective engagement including small businesses and disadvantage and vulnerable customers and we will consult with you – our consumer stakeholders – to develop materials in accessible formats such as audio, to ensure our consumer education initiatives reach a broad cross-section of the community.

We are investing in building valuable relationships with the consumer groups that are often at the ‘front line’ of consumer engagement — you are providing us with opportunities to leverage your knowledge to develop and disseminate educational information that meets gaps in consumers’ understanding of energy markets.

To build consumer confidence, we need consumers to trust that they have access to clear, simple and correct information.

Billing review

We understand that energy bills are notoriously confusing for customers. Clarity and simplicity is important, but complete and accurate information that is compliant is paramount.

We currently have a review of the billing provisions of the Retail Rules underway. Participation by retailers is voluntary, but we encourage retailers to participate as it presents them with an opportunity to review their own practices for compliance with the Law and Rules and look at ways of optimising their practices.
 

The review will enable us to:

  • examine areas of concern around billing including clarity, accuracy and timeliness that we’ve become aware of through market intelligence (from ombudsman schemes, CCG, complaints to the AER);
  • explore retailers’ practices and highlight the impact of different practices on business outcomes;
  • examine how information retailers must include on bills is presented, with a view to discussing best practice approaches; and
  • build a common understanding between the AER and industry as to what these obligations mean in practice.

We will publicise the results of the review in our future compliance reporting, including any relevant follow up actions.

Fostering regulatory compliance

A high level of industry compliance, particularly by energy retailers, is also paramount to building consumer confidence in energy markets – not to mention delivering fair and just outcomes to consumers.

Our general approach is to provide guidance on good industry practice and to work co-operatively with businesses to promote a culture of compliance with effective internal practices. An aspect of this work is to identify the boundaries of unacceptable conduct and clearly communicate our expectations to energy businesses.

Ideally, we would prefer compliance matters to be voluntarily raised by energy businesses and resolved through agreed outcomes, without the need to exercise statutory enforcement powers or seek financial penalties. However targeted and timely enforcement action may be necessary and appropriate in certain circumstances.

Our core approaches include market monitoring, targeted compliance reviews and engagement with other regulators and agencies. The Retail Law and Rules outline a range of information that retailers and distributors are required to publish on their websites. This includes important information such as contracts, energy price fact sheets, complaints and dispute resolution procedures, and payment assistance available for those customers experience hardship and financial difficulty.

We conduct periodic reviews of retailer websites to check that all the required information is published. Our most recent review has coincided with commencement of the Retail Law in New South Wales. Each business remains responsible for regularly reviewing the information and documents on their website to ensure that it meets all of the requirements of the Retail Law. The AER works with energy retailers to ensure that these obligations are met. We seek to improve standards across the industry by identifying and sharing examples of good practice to drive better outcomes for consumers.

Late last year we took our first enforcement action under the Retail Law for conduct that caused life support customers’ energy to be cut-off. This area of the Retail Law remains a priority for the AER. The potential risks to these vulnerable customers is high and we expect businesses to put in place all appropriate measures and take all appropriate steps to comply with these obligations.

Compliance reporting greatly enhances transparency and accountability and provides incentives for businesses to improve performance over time, which contributes to better outcomes for consumers.

More generally, however, we are largely satisfied with the compliance outcomes of the first six months of the Retail Law and Rules. In over 92 per cent of the cases we investigated, we resolved breaches of the Retail Law and Rules without drawing on our statutory enforcement powers. In each case we received commitments from the business to address identified issues in appropriate timeframes.

Public reporting of our compliance monitoring and activities are another means of enhancing transparency and accountability in the market – ultimately to the benefit of the consumer. For example, it allows us to:

  • identify areas of weakness in compliance by retailers and distributors
  • clarify our expectations regarding compliance, and provide suggestions on how businesses can better manage the risks to their customers and to their business
  • promote discussion about the operation of the Retail Law and Rules and their effectiveness in meeting the long term needs of consumers
  • help consumer intermediaries to navigate the Retail Law and Rules when advising their customers.

Hardship review

Over the next six months, we will also be conducting a review of retailers’ approved hardship policies. We have reviewed and approved hardship policies to ensure that they comply with the minimum necessary obligations under the law. In some cases, we have also suggested improvements, which have been taken up. However, this review will help us to determine how retailers use their customer hardship policies to identify and assist customers experiencing payment difficulties.

As a first step, we have approached our consumer stakeholders inviting them to comment on their understanding of customers’ experiences with retailers’ hardship policies and propose their priorities for the review. Our intention is to develop a terms of reference for our review through this process and to then engage with retailers in a series of face-to-face and group forums to discuss the overarching matters relating to their hardship policies.

I would really encourage you to actively contribute your experiences to this review.

Performance reporting

As many of you are aware, we also report regularly on hardship indicators in our retail market performance reports.
Performance reporting on energy businesses greatly enhances transparency and accountability. It provides incentives for businesses to improve both their performance over time and their performance relative to other energy businesses, which contributes to better outcomes for consumers.

Since the Retail Law commenced in Tasmania and the ACT on 1 July last year, we have published three quarterly retail performance reports. Our most recent report included data for energy retailers in South Australia for the first time since the Retail Law commenced there on 1 February. The reports, which are available on our website, provide an overview of the energy market and analysis of retailers’ activities, including a number of indicators that show how they handle customers experiencing payment difficulties.

These indicators—including the number of customers with an energy bill debt (and the size of that debt), the number of customers on a payment plan, the number of customers on a hardship program, and the number of disconnections due to non-payment—provide useful information about how energy retailers assist customers experiencing financial hardship and payment difficulties.

Our annual report, which we will publish for the first time later this year, will include a wider range of indicators and a report on energy affordability which I will come back to in a moment.

The indicators also serve to signal to us the potential areas of concern regarding retailers’ performance in relation to fulfilling their obligations to assist customers with payment difficulties. If retailers submit data to us that raises concern, we question that data and ask for an explanation. And if those concerns become systemic or indicative of a trend that we are not comfortable with, we will investigate.

In the short time that we have been collecting this data, we’ve noticed what seems to be a great deal of variation between retailers in how they deal with customers experiencing payment difficulties. While it’s still too early to comment on this, as our reporting extends across more jurisdictions and more retailers, our ability to draw inferences will become stronger.

We expect that information gathered from our hardship review and growing performance indicators data set, will enable us not only to highlight and address any areas of concern, but also to identify and share examples of good practice and innovation in the financial hardship space. It presents a great opportunity for retailers and the regulator to work together to raise standards across the industry to better help those who need it most.

Energy affordability report

I mentioned previously that our annual performance report will include a report on energy affordability.

The Retail Law and Rules require us to prepare this report, but are not prescriptive regarding its parameters. We have therefore sought to define a scope that will enable us to provide analysis in this area that adds value to, but does not duplicate, the contribution to energy affordability reporting offered by other government, industry and community stakeholders.

In our analysis, we do not define the point or level at which energy is or becomes ‘affordable’ or ‘not affordable’. Rather, we consider the following main areas of analysis for each state and territory:

  • estimated average annual energy bills for a range of consumption levels;
  • the proportion of household income that these bills would comprise across a range of income levels and considering the energy rebates or concessions available; and
  • pricing diversity of generally available energy offers in each electricity distribution and gas pricing zone.

This approach provides us with the opportunity to discuss key differences between the states in terms of demographics, climate, availability of natural gas, and other factors that can influence the size of customers’ energy bills.

Our first report will include data collected in the 12 months to June 2013, when we had commenced our reporting role. As we collect more data over time, we anticipate greater scope for analysis and comparison, and to demonstrate changes or trends more clearly.

Our report will be published in November this year, and your feedback will be valuable in shaping the direction of future reports.

Increased consumer participation and engagement in regulatory processes

A key area of focus for recent energy market reforms has been on increased consumer participation and engagement in regulatory processes. Before I conclude, I would also like to briefly touch on this.

The complexity of the energy market and the regulatory processes that make up much of the AER’s work have made it difficult for consumers, or even their representatives, to participate meaningfully. I believe that this has led to reduced consumer confidence in the energy market, its regulation and the outcomes it has delivered. It is difficult for the regulator to be confident that a network business’s proposal will deliver the services that consumers want, if consumers don’t have a real opportunity to affect that proposal.

From our perspective, there is work on a number of fronts designed to give consumers a greater voice and empowerment in the regulatory process.

Most significantly, the new rules framework requires network businesses to consult with their consumers in the development of their regulatory proposal and the AER is now required to take into account this consultation when considering the proposal.

The AER is also developing a number of new strategies to better engage with consumers. 

  • Consumer Reference Group - We have established a Consumer Reference Group, to make it easier for consumer representative groups to have input into the Better Regulation reform program without necessarily writing formal submissions. The AER is investing heavily in this less formal approach to consultation and believes that it has much to add to the guideline development process.
  • Consumer Challenge Panel - members of the Challenge Panel were announced on 1 July. The Panel will sit within the AER, providing expert advice as part of the AER’s assessment of energy network businesses’ regulatory proposals. It is designed to ensure that consumers’ views, particularly those of residential and small business consumers, are properly considered by the AER throughout these technical and complex regulatory processes.
  • These groups are in addition to the Customer Consultative Group (CCG) - The Customer Consultative Group’s role is to advise the AER on issues affecting energy consumers in participating jurisdictions. The Group continues to serve us well.

There are also a range of reforms to regulatory process and practice designed to facilitate improved consumer engagement. There is now more time allowed in the regulatory process for stakeholders to prepare submissions and put their views forward. There is also more emphasis on consumer-focused written documents, including AER issues papers and requirements on the businesses to include overview papers with a consumer focus.

And we are developing benchmarking reports, so consumers can assess how their network business is performing in comparison to others.

I also note that the Standing Council on Energy and Resources – made up of Ministers from all Australian governments – agreed in principal to establish a national energy consumer advocacy body, the Australian Energy Consumers Organisation, with initial set up from 1 July 2014. The establishment of such a body would ensure that the views of all customer segments can be represented effectively in the new regulatory environment and the impacts upon consumer groups could be appropriately considered and reflected in decision making.

We believe there is a compelling case for such a body and look forward to developments in this space.

Conclusion

Taken together, the measures I’ve discussed today – a new regulatory framework with a focus on better consumer involvement and engagement – represent a major development in the market.

These changes have the potential to establish a better and more efficient energy sector – one that delivers in the long term interests of consumers.We must continue to work cooperatively to break down the barriers to consumer engagement, and get more consumers feeling confident and empowered to be active participants in the market.