Looking back and looking forward, an AER Chair perspective

My tenure as the Chair of the Australian Energy Regulator is soon to end and it’s with great timeliness and relevance that I have been asked to provide my reflections on network regulation.

Five years ago I set out with a clear focus on the regulation of networks – putting new tools into practice (launching the Consumer Challenge Panel, benchmarking efficiency, and implementing the 2013 Rate of Return guidelines) and calling for a more collaborative approach that would put consumers at the heart of our decisions – bringing them in to the process rather than asking them to watch from the sidelines. I wanted to foster a process that focusses on understanding and testing proposals and on delivering decisions that everyone can understand.

And when I look back today, I am satisfied that we’ve made great strides in that regard. We’ve moved away from a highly adversarial process based on a presumption of I win/you lose to one that is truly more collaborative.

But there is more than can be done.

Looking forward

I’d like to suggest that we need to look at ways we can move away from regulation that focuses on the engineering and financial characteristics of assets to the services that the assets can deliver and that consumers value. Gone are the days of the paternalistic approach to the propose-respond model of businesses telling the regulator what consumers need and the regulator agreeing to what is economically efficient. This may have been acceptable when consumers expected a basic homogenous service at an affordable price. But technology has changed that dynamic and consumers want a lot more from infrastructure. Without downplaying the importance of energy as an essential service for vulnerable customers (providing bill relief and protection for vulnerable customers needs to remain a critical focus of regulators and government), for many Australians energy is more than an essential service – it’s also a lifestyle service. As such it’s no longer a homogenous service either.

But consumers still want it at an affordable price. The regulator and businesses have to move away from determining what consumers can have to working out how consumer preferences can be delivered most efficiently.

This starts well before the network determination process.

It starts in the board room.

Successful businesses have the most satisfied customers

In regulating network businesses, the public interest is served when shareholder and consumer interests are aligned; that is, when pursuit of the shareholder interest simultaneously advances the consumer interest. We all know that regulation seeks to mimic competitive forces. And ultimately in a workably competitive market the most successful businesses have the most satisfied customers.

When I spoke to you last year I suggested that considering a business’ corporate governance can help reassure consumers that their interests are being considered alongside those of shareholders.

In his Report of the Financial Services Royal Commission, Commissioner Hayne argued that any suggestion that companies owe it to shareholders to maximise returns is wrong. It is not right to treat the interests of shareholders and customers as opposed.

I think the aim of Energy Charter to deliver energy in line with consumer expectations goes a long way to address this. Through the Charter over 20 companies have committed to lift accountability and restore trust in the energy sector. The signatories’ commitment to publicly disclose how they are delivering against the charter’s five main principles - improving culture, energy affordability, sustainability and the customer experience along with providing more support for vulnerable customers should help with consumer confidence that their interests are as important as shareholder interests.

And we are seeing this cultural shift within some businesses, a shift that is clearly being led from the top and filtering down through the ranks. These businesses are showing a willingness and ability to listen to their customers, incorporate their needs and preferences into their business process and setting out proposals to how they intend to deliver energy services in the most efficient way.

Sadly, some businesses remain unconvinced and stuck in that paternalist and deterministic approach to setting out in their proposals what they determine consumer need. This regressive approach is in nobody’s interest and I am hopeful they will soon realise this themselves.

Flexible approach

It also means we need to be flexible in our approach.

Turning away from an input based approach to working out how consumer preferences can be delivered most efficiently requires us to be flexible in our approach to regulation without compromising the predictability that consumers, businesses and investors need.

I think the approach we took with consumers and businesses in remaking the appealed NSW / ACT decisions provides a good example. Out of the adversity of the appeal process, came efforts to deliver more constructive regulatory processes that better engaged consumers. The NSW / ACT businesses worked with consumer groups to understand their preferences and expectations and together they arrived at outcomes that were timely and capable of acceptance by all parties.

The success of the remade NSW / ACT decisions paved the way for AusNet, the ECA and the ENA to introduce the New Reg process. This joint initiative is exploring ways to improve engagement, and identify opportunities for regulatory flexibility and innovation – to provide a mechanism that ensures that consumer preferences drive energy network businesses proposals and regulatory outcomes.

I trust that the New Reg process is a sign of things to come.

This is a big step in the right direction to improve trust between consumers and network businesses – trust that needs to be rebuilt and is vital in ensuring the transformation of the sector happens in a way that delivers positive outcomes for consumers, businesses and the community more widely.

The stakes have never been higher.

The need to understand what lies behind network proposals, understand consumer preferences and take a more flexible regulatory approach is becoming increasingly important:

With the increased penetration of distributed energy resources, networks are seeking better visibility and control in delivering safe and reliable energy services to their increasingly heterogeneous customer base.
There is a massive amount of investment needed to connect the 50 GW of proposed generation that is expected over the next 10 years. The identified need for transmission investments is no longer solely based on serving load but also to meet public policy objectives such as renewable energy targets and job creation. This will have implications for how costs and benefits are assessed.
While not subject to regulation by the AER, non-scheme gas pipelines are subject to a form of dispute resolution in how they set prices. This regime was introduced to address concerns that non-regulated pipeline businesses were earning excess returns.

The stakes have never been higher – the energy industry is operating with low social licence. When you look at studies such as the 2018 KPMG - AICD trust survey, we are facing a crisis of trust in institutions including those across the energy sector – with legitimate affordability, security and reliability concerns.

A culture for the future

I said that five years ago I set out with a clear focus on the regulation of networks. I also wanted to grow the organisation so that we had the size, ability, culture and governance structures that would enable us to deliver on the AER’s expanding role. Given this is an ENA conference and I’ve been asked for my reflections on network regulation, I haven’t ventured into other areas of our mandate – all of equal importance to network regulation.

But I do want to finish off with a couple of points on culture. The culture I wanted to lead was one that:

Fostered listening to understand, not to position our own arguments and
Underscored the importance of clear communication with all stakeholders

Let me elaborate a little on these two elements and leave them with you to ponder.

Listening

First - listening to understand, not to position our own arguments.

Amidst all this change, populist reaction, 24 hour media cycle we seem to have lost the art of truly listening to each other. I have too often found myself in a meeting thinking “hang on, I don’t think we are disagreeing about the same thing or I think we are more closely aligned than each of us think”. Yet, particularly in times of change we lose sight of the need to listen to understand as opposed to listening to reply. The solution on how to most effectively and efficiently move through this energy transition does not rest with one person or one organisation. Not one person holds all the answers. We each hold a piece of the puzzle. So please, listen to understand.

Clear communication

Second - the importance of clear communication with all stakeholders

I have never been more acutely aware of the responsibilities we carry as a regulator. In a market under massive transition, a market increasingly scrutinised, it is more important than ever that we focus on communication. For the AER’s part, a trustworthy and respected regulator is one that is able to communicate in a measured and strategic way. Our audience expands well beyond those that are into the technical and complex detail of regulation.

With the support of my board, my CEO, my staff and many of you I believe we’ve started to move the goal posts.

It’s certainly been the most challenging five years of my professional life. But it’s also been the most enjoyable.

Thank you.

ENDS

Paula Conboy, AER Chair

Energy Networks Australia Regulation Seminar 2019
State Library of Queensland, Stanley Place, South Brisbane.