Engagement and energy regulation in a dynamic environment

In a speech at the 2016 Energy Networks Association Regulation Seminar in Brisbane, AER Board member, Cristina Cifuentes discussed how engagement practices have improved over recent years, both by the AER and network businesses, as well as opportunities for further change.

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Introduction

Thank you for the invitation to speak with you today. Unfortunately Paula couldn’t be here as planned and sends her apologies.  On the bright side, whilst we’re not perfectly substitutable, our views on the challenges facing economic regulation are pretty much aligned.

At the AER, we have quite a bit of experience with our regulation being “under challenge”, particularly our network determinations. We currently have 12 decisions under review, with 24 matters either before the Federal Court or the Australian Competition Tribunal.

Not surprisingly, we’ve been reflecting on the impact of the reviews of our decisions and the engagement processes that in part informed and guided our decisions in the first place.  As part of this, we’ve spent quite some time considering how the energy landscape has developed and changed over the years and how our policies and practices, as well as those of the businesses, have changed in response.

When we overlay this with our understanding of changing community expectations and consumer behaviour, what we see is a world that is vastly different, more complex and sophisticated than what it was, at least when I first started in energy regulation some 20 years ago.

In looking at this, and the legal challenges by the network businesses to many of our recent revenue decisions, we see that our shared history and culture has impacted and entrenched how we as a regulator work and engage with the businesses. Similarly, we can see that it also impacts and entrenches the way in which network businesses work and engage with us.

Which brings me to the challenge I want to talk about today. The challenge of how we improve our engagement: with each other - as the regulator and network service providers - and with consumers, their representatives and the people affected by our decisions.

This is a challenge that is becoming increasingly important to delivering effective regulation given the dynamic environment and current transformation occurring within the sector.

But with challenges come opportunities. Today, I want to start a conversation with you about our opportunities for change:

  • How can we engage differently to challenge the status quo and the way we have worked in the past?
  • To have better regulatory processes and build a more constructive dialogue?
  • To drive improved outcomes for consumers?

Our recent stakeholder survey has been an important part of this process and has highlighted opportunities for us to improve how we engage, particularly with network businesses. I’d also like to share with you some of the better examples of engagement that we have seen from network businesses both with us and their consumers.

Finally, I’d like to conclude with a call to action. Let’s start a genuine and open dialogue about what we can each do to reset the environment in which we work and to rebuild trust amongst all stakeholder groups to drive improved outcomes.

What is stakeholder engagement?

I think we can all agree that a genuine commitment to constructive engagement is essential if it’s to be more effective as the market and regulatory frameworks evolve. Consumer choice is driving much of this evolution. We share a responsibility and an obligation to understand the needs and priorities of consumers to ensure that regulation and the services provided by network businesses adapt and continue to provide for the long-term interests of consumers. We must engage genuinely with consumers, and with each other, so that these interests are reflected in network businesses’ spending proposals and in our decisions.

What does this emphasis on more genuine engagement mean? For us, it means doing more than just providing an opportunity for the parties affected by our decisions to express their views. Our stakeholders must have trust and belief that their views are heard and understood and to be able to see how these have been taken into consideration as part of our decision-making process.

Over the past few years we have expanded our regulatory tools and methods. As part of our 2013 Better Regulation program, we embarked on an unprecedented level of consultation and engagement with network businesses and consumer groups so that we could explain why the changes were needed and how they would work. In terms of our approach to regulation and engagement, we developed a series of guidelines that publicly set out our commitments and expectations.

A critical aspect of this has been our Stakeholder Engagement Framework where we have sought to develop and implement tools and processes for embedding stakeholder participation across our work.

The aim of this is to inform better decisions that reflect the interests and concerns of the range of stakeholders affected.

The Framework is principles-based and allows us to engage across our work in a consistent, transparent and meaningful way. The four principles set out that our engagement should:

  • Have clear, accurate and timely communication
  • Be accessible and inclusive
  • Be transparent, and
  • Be measurable.

It requires us to be clear on the nature, aims and expectations of our engagement. Across the possible spectrum of engagement, this can range from simply ‘Informing’ stakeholders about our work through to ‘Consulting’ and ‘Involving’ them in our decision-making, by seeking views and submissions on issues and taking these into account when we make our decisions.

Given our role as a regulator we are unlikely to operate at the ‘Collaborate’ and ‘Empower’ levels of the spectrum which entails sharing or delegating our decision-making. However, the Framework does provide us with flexibility to design and tailor processes that enable stakeholders to have the information they need to participate in a meaningful way.

Finally, the Framework commits us to transparency and measurability – by this we mean, better explaining and communicating our decisions to stakeholders, including how their views and input affected our decisions and to monitoring our progress.

As part of this we have tried to better tailor the information we provide regarding our processes and our decisions in a bid to improve their accessibility. Whilst the actual decisions still run to many hundreds of pages, we now publish easy-to-read fact sheets and 50-page overviews that summarise the key points in our draft and final decision documents.

In addition to the Engagement Framework we also introduced two additional consultative initiatives:

  • a Customer Reference Group, to help build knowledge and capacity in consumer organisations and to reduce the burden by coordinating consumer input into the development of our Guidelines; and
  • Our Consumer Challenge Panel whose role is to provide consumer insight and perspective into our regulatory determinations to better balance the range of views considered. We created a distinct role for the Panel to engage with network businesses’ proposals and to advise us on the effectiveness of businesses’ engagement with their consumers.

Did this lead to more constructive dialogue and drive improved outcomes for consumers?

Clearly, based on the number and range of appeals, it hasn’t been perfect nor is the process complete. However, we believe it has helped us make considerable progress over the past two years.

I think we can confidently say that the process is helping us to understand the concerns of businesses and consumers and build this into our understanding of the issues and possible solutions.

Firstly, we are seeing increased engagement in our regulatory processes.

In the revenue determinations and access arrangement decisions we completed in 2015, we received an unprecedented 505 submissions on the proposals. And for the first time last year, consumer groups participated in the merits reviews of our decisions before the Australian Competition Tribunal.

We are also seeing a more positive perception of our work as reflected in the improved results from our recent stakeholder survey, which some of you would have contributed to.

These surveys provide important feedback to us on stakeholders’ perceptions of how we perform and engage as an organisation, so thank you to those of you who did participate.

We will be publishing the survey results at the end of next month, along with our views on how we take forward the areas identified for further improvement.

But I’d like to give you a brief snapshot of some of the results which suggest we have made progress in terms of our commitment to more effective consultation and engagement.

Overall, 77 per cent of stakeholders were satisfied with how effectively we perform our functions as a regulator. This is a strong increase in positive sentiment from our previous survey in 2014, where the positive rating was just over fifty percent.

Our stakeholders also had a generally positive perception of their interactions with us - 85 per cent felt their organisation has a positive working relationship with us and 81 per cent were satisfied overall with our communication.

Perceptions of our consultation procedures were generally favourable, with 87 per cent feeling that there had been good opportunity for input and 70 per cent satisfied overall with our stakeholder consultation and engagement.

What are our challenges and opportunities?

Obviously it’s important to us that we are perceived to run predictable, transparent and open processes. But we know there is still more we can do to improve in this area and the survey results did highlight some key areas where we can improve.

One such area is around perceptions regarding our decision-making which were generally more mixed. Whilst most stakeholders rated us positively in relation to operating within statutory legislation and timeframes, stakeholders were less positive regarding the transparency of our decision-making.

This will be a focus for us as we explore what we can do to better explain to stakeholders how their input was considered in our decision-making.

The majority accepted the AER as an independent, evidence-based decision maker that understands the implications of its decisions. However, confidence in the predictability, consistency and accuracy of our outcomes and decisions was subdued as were stakeholders’ perceptions of our understanding of energy consumers. Again, this is an important area that we will be looking to improve on.

Digging a little deeper into the numbers, we also found that perceptions were quite different depending on the sector you are involved in or the role that you have.

Two key trends stood out. First, our network business stakeholders rated us least favourably across a range of measures, when compared to other AER stakeholders (for example, those in government or from wholesale or retail areas).

Although there has been some improvement since 2014, on average, less than half of this group held positive views about providing information to the AER or about the AER’s outcomes and decisions.

Second, those in policy development/advice or CEO roles rated us more favourably than those in compliance or regulatory roles.

Now many of you may not be surprised by these results.

It does however, highlight the extent of the challenge we will need to overcome if we are to engage better in the future.

Sometimes the very nature of our roles will make it difficult to engage. The complexity of the issues and the fact that there are competing interests amongst stakeholders adds to this. And then there is the plain fact that on a practical level individual personalities can also play a part in the quality of engagement.

Our role as an economic regulator is to look at a network business’ regulatory proposal and to test it. To robustly challenge it and ensure that it is as rigorous, prudent and efficient as possible.

We ask you to open your books and explain your business decisions and then we apply the Rules and our judgement to that.

In many ways, this can create an inherent conflict or barrier towards better engagement. This is something that we need to be mindful of as we think about the scope and nature of our future engagement.

Whilst I can confidently say at the most senior levels of our organisations we have a culture of positive and open engagement, the challenge is embedding this same culture into the day-to-day operational level where most of the detailed work gets done.

Another barrier to better engagement is our past. A history of decisions being appealed has created something of a culture of distrust and cynicism and perhaps a lack of openness or willingness to trust and try again, on both sides.

This is something that we need to address to move forward, particularly at that operational level.

The importance of trust in developing effective engagement was reflected in the mixed feedback from our stakeholder survey. Examples of what we heard include:

  • We have been in the fortunate position where we have been able to build some trust with the AER which has led to some positive outcomes for both parties—efficiencies, speed, constructive dialogue and relationships.
  • [The AER] needs to learn how to build trust with the businesses it deals with. There is space for scepticism but I think at times the AER is cynical which means it operates from a position of distrust.

We know that this is an important issue for network businesses.

We have seen a recent example from Australian Gas Networks where it elected not to appeal our recent decision on its gas distribution access arrangement for South Australia.

AGN advised us that whilst it did not agree with every aspect of the decision, overall it felt it was in its best interests, and its consumers’ best interests, to accept the decision. AGN reflected that, in doing so, it would free up time and resources to engage with the AER on other issues of more significance and importance to it and to continue to build trust and respect between our organisations.

These steps can help to create a positive and constructive environment for network regulation and move us away from the entrenched mode of engagement of the past. We will always need to have an environment where we can robustly test network businesses’ proposals, to hear and understand the views of networks businesses and consumers. We need to approach this with an open mind tempered by a healthy degree of scepticism.

There are other examples where we have begun to see a genuine commitment from both network businesses and the AER to engage more constructively to achieve better outcomes—a real willingness to do things differently from the past.

We have recently committed to participate in ElectraNet’s early engagement approach for its revenue proposal for 2018–23. Its purpose is to deliver better outcomes through an improved engagement model and Consumer Advisory Panel. This seeks to build a shared understanding of network challenges and customer concerns; deliver greater trust and confidence in regulatory outcomes; and to reduce resources engaged in the regulatory process.

Another example is our most recent engagement with AGN who have commenced a stakeholder engagement program for its next Victorian gas access arrangement. AGN’s overarching objective is to submit a proposal that delivers for its consumers, is underpinned by effective engagement, and is capable of being readily accepted.

As well as this, we are engaging with AGN and other gas businesses on a new incentive framework for Victorian gas distributors.

These processes should be encouraged and have the potential to deliver:

  • More preferable outcomes that reflect input from consumers from the earliest stage
  • Smoother regulatory processes
  • More open, constructive dialogue, and
  • Opportunities to build shared knowledge: of business challenges, consumer concerns, the regulator’s role and the framework under which we operate.

However, we must also be mindful of our role as an independent regulator with the obligation to ensure that our decisions are in the long-term interests of consumers. Some stakeholders, for example, have raised concerns about what our role in this type of early engagement may mean for our formal assessment processes of revenue determinations or access arrangements.

Our view is that participation in these processes does not pre-empt or prevent the AER from undertaking a robust and independent review when making our decision. We also consider that other stakeholders can benefit from this early engagement through improved transparency and the sharing of information. This should lead to a better understanding of the network challenges and customer concerns for all involved. And it should lead to a more straight-forward regulatory process and a good decision.

Engagement by network businesses

Consumer engagement is a factor we can consider when setting businesses’ expenditure forecasts. Evidence of good engagement between a network business and its consumers can, and should, have a positive influence on the engagement between that network business and us, as the regulator. We find it particularly useful when businesses can show how their engagement with their consumers has helped to shape their proposal.

As part of our Better Regulation program, we published our Network Service Provider Consumer Engagement guideline. This is based on the same engagement principles that we apply to ourselves.

It sets out our expectations around how network businesses will engage with their consumers, at all times and especially when developing their spending proposals.

A constructive customer engagement strategy will recognise that there are likely to be diverse views and interest amongst your consumers. The process should involve not just getting out there and informing them about your spending proposals, tariffs, or service levels but rather building an understanding of the challenges within your networks, any options and trade-offs there may be and the impact of these on consumers.

Most importantly, effective and genuine consumer engagement means actively seek their views and testing options and being able to show how you’ve done this.

When we get a regulatory proposal from a network business and look at the stakeholder engagement undertaken—as our Consumer Challenge Panel members do—we want to see that there has been genuine inquiry into consumers’ preferences.

We look at the “who”. What different customer cohorts were identified and consulted? Was it inclusive? Was there sufficient representation of consumers?

We then look at the “what”. Were the objectives and processes followed robust and appropriate? Did the business identify the relevant priorities and consult on the right matters? What was included in the terms of reference?

Finally, we consider the “how”. Does the engagement undertaken reveal unbiased results? Has the full range of views elicited been considered? How has the business demonstrated that these results influenced their proposal?

We are seeing some businesses being clear in their commitment to more constructive engagement with their consumers, as well as with us.

In AusNet Services’ current determination, our CCP commented that it has made significant progress in its consumer engagement and has shown considerable goodwill in this area. We see this as a very positive step.

Whilst AusNet Services acknowledged that its stakeholder engagement practices are in a developmental phase, we could see how the consumer engagement undertaken to date has built on the program undertaken in its previous review.

Our CCP found that AusNet Services had been reasonably responsive to consumer views in some areas, like capital and operating expenditure, and less so in others, such as accelerated depreciation. Whilst the CCP was disappointed with this latter outcome, AusNet Services noted that where stakeholder preferences had not been incorporated, it had provided an explanation as to why.

We have also heard significant positive feedback in response to TasNetworks’ customer engagement program, Voice of the Customers. It was clear that TasNetworks took a very inclusive approach that recognised the diverse segments of their consumer groups.

At the core of its engagement program was TasNetworks seeking to ‘earn the trust of its consumers’ and to build a culture of ‘putting the customer first’. The program highlighted that cost and affordability were the greatest concerns for its consumers.

Our CCP found it noteworthy that TasNetworks heard this clearly, recognised these concerns and prioritised this perspective in developing its regulatory proposal. Using this feedback, TasNetworks reduced its proposed planned capital expenditure by $40m. Our CCP recognised that this was a good start in proposing expenditure in line with consumer expectations.

We are seeing developing and improving consumer engagement programs from network service providers. We are starting to see how these are increasingly being used to inform regulatory proposals, so that consumers and network businesses’ interests align more closely. We are also seeing more constructive engagement between ourselves and networks businesses.

The question and challenge therefore becomes, where to from here? What are our opportunities and challenges for even better engagement moving forwards?

Where to from here?

As a starting point, we intend to look again at the way we engage across all of our stakeholders and across the breadth of our work. In light of the findings from our stakeholder survey, we will be undertaking a review of our Stakeholder Engagement Framework in the coming months. Having put this in place in 2013, with a commitment to review it in three years, this review is now timely.

Our survey findings tell us:

  • That there is more we can do to tailor our communications.
  • That we can better explain how the input we sought was considered as part of our decision-making.
  • That we can more clearly set out the evidence behind our analysis, our understanding of consumers and the impact of our decisions.
  • That we can better demonstrate how we show leadership in pursuing and promoting priority issues in the energy sector.

The challenge for us in addressing this feedback will be three-fold. Firstly, how to do this in a way that doesn’t double the number of pages in our decision documents!

Secondly, we will not be able to do this alone. We will be looking to work with our stakeholders to understand, consider and address this feedback, including through consultation on our Stakeholder Engagement Framework.

And finally, something which is a constant challenge for everyone, finding the time and resources to dedicate to this.

In this increasingly complex and dynamic environment, we must be able to engage openly and constructively with network businesses and our other stakeholders—both as part of regulatory determination processes and also across the wider range of issues and work in the network space.

Over the next twelve months we will have a number of critical projects to take forward which we will be consulting on. This includes our ring fencing guidelines, businesses’ tariff structure statements, demand management incentive scheme, as well as refining our benchmarking and information requirements.

These are significant areas that support the transformation occurring in the sector. It’s important that together we develop a genuine and open culture of engagement as we undertake these key initiatives. Input from all stakeholders will be critical to achieve the best outcomes for consumers.

For us, finding time and resources is always a particular challenge. Our reset and remittal schedule leaves fewer gaps for these broader policy discussions. However, we understand the importance of these issues to the sector and we are committing to engage on these wider issues (outside of individual determination processes).

We will also continue to participate in network businesses early engagement processes, recognising the potential for this to promote more effective processes and outcomes.

In terms of our compliance role, whilst we appreciate the need to be clear about how we will engage with each other in some instances, we are limited in what is possible. We will need a shared understanding of what we mean when we are ‘engaging’ and to be clear on what is achievable given our roles and the relevant circumstances. We will seek to articulate this more clearly as part of our Framework review.

We have also recently commissioned an independent review of our Consumer Challenge Panel which found strong support for its objectives and operation across a wide range of stakeholders. We are looking at further enhancing the CCP’s role through process improvements which promote greater consistency, collaboration and clarity of the CCP function. We recently published documentation setting out the revised role of the CCP and seeking Expressions of Interest for members.

As you can see, our focus on improving the way we engage will remain a priority for us over the coming period.

My challenge for each of you is:

  • What else can you do to meaningfully involve your consumers in the development of your regulatory proposals? To better explain the challenges in your network, to better understand your consumers’ needs and concerns and to reflect those in your proposals and the services you deliver?
  • What practical steps can you and your organisations take to work with us to improve how we engage with each other?
  • To ensure that the regulatory process delivers on, and promotes, the long-term interests of consumers.

“Regulation is under challenge” like never before. Our sector and the broader context and environment in which we work has never been more dynamic, and consumers are driving this change. Better engagement, between network service providers, consumers and the regulator, has never been more important. Let’s put ourselves “under challenge” to take a step forward and engage better together.

Conference: 
2016 Energy Networks Association Regulation Seminar
Issued date: 
4 August 2016
AER reference: 
AS 01/16