Regulatory innovation and collaboration in a dynamic environment

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The Australian Energy Regulator (AER) Chair, Paula Conboy delivered a speech at the Energy Networks Australia Regulation Seminar 2018 on 25 July 2018. In the speech Ms Conboy talked about ‘regulatory innovation and collaboration in a dynamic environment – what has been achieved and where to from here’.

Photo by James Pond on Unsplash

By Anne Wardell, Regulatory Specialist, Compliance Quarter.

Ms Conboy refered to the five strategic objectives set out in the AER Strategic Statement, published on 22 August 2017:

  1. Drive effective competition where feasible
  2. Provide effective regulation where competition is not feasible
  3. Equip consumers to participate effectively and protect those who are unable to safeguard their own interests
  4. Use our expertise to inform debate about Australia’s energy future, the long term interest of consumers and the regulatory landscape, and
  5. Take a long term perspective while also considering the impact on consumers today.

These objectives form the basis of the AER’s approach to regulatory collaboration and innovation, so it is important for all market participants to be aware of them.  Over the last year the AER has been focused on changing the adversarial culture around energy regulation which Ms Conboy had observed. She believes that progress has been made in this regard but it continues to be on the AER’s radar.

The AER Chair considered the following three areas in some detail:

  • Challenges, for corporate responsibility and governance in the network sector;
  • Regulatory process and business operations; and
  • Consumer engagement.

Ms Conboy believes that ‘[t]here are real challenges for network boards’ in ensuring they effectively replicate the discipline of operating in competitive markets. This is absolutely essential in achieving the best outcomes for their consumers’. She wants boards to be seen as playing a greater role in delivering consumer value; understanding what the consumer needs and driving this from the board level down.

‘I think our incentive based regulatory framework provides companies with opportunities to demonstrate this discipline.  When we are reviewing proposals we count on the incentive regime to encourage businesses to move towards efficient costs.  We, of course, couple that with other tools at our disposal such as benchmarking and predictive modelling. Having the Consumer Challenge Panel and consumer groups at the table also helps provide that discipline.

But I also think that considering a business’ corporate governance can help reassure consumers that their interests are being considered alongside those of shareholders’.

Regulatory process and business operations

Under this heading Ms Conboy reminded members of boards that their role includes increasing the confidence of all stakeholders including customers and regulators. Instead of being a burden, the regulatory process should be seen as a way to increase customer confidence. If the regulator can be confident that a company has good and effective corporate governance, then it will have greater confidence in the ability of the company to carry out effective business planning and investment. All staff need to be engaged in compliance, from the Board and Senior Management to the junior.

The speech provides a useful insight in to the questions which the AER will ask:

‘At times, in the past, it has felt like that the AER, as the regulator, was asking the questions that the board should have been asking. Questions like –

  • Where is the business case for this proposed investment?
  • What have you done to find alternatives to this level of investment?
  • Where is the risk assessment – why have you assumed that there is a 100% likelihood of this occurring despite the fact it hasn’t happened before?

If those matters had already been considered by the board, then it wasn’t obvious in the material provided to us and consumers through the regulatory proposal’.

Ms Conboy referred to the AER Demand Management Incentive Scheme and commented that some networks were not using the tool as effectively as they should. A new tool which is being introduced is the AER Report on network profitability.

‘This annual report will provide an important opportunity to build trust with consumers as it will support greater transparency about issues that consumers have been very concerned about. Network businesses will be able to engage with their customers and help them understand the results.

Reflecting early engagement with consumers and the AER back into regulatory proposals demonstrates responsiveness to consumer views.

New processes we are undertaking, such as the capital deep dives, provide just such an opportunity. The idea of capital deep dives is a good one: you spend time working through capital forecasts before you file your proposals with us. The deep dives involve detailed discussions on proposed capital expenditure. I think on the whole they will be useful in giving stakeholders such as consumers (and the CCP) and the AER a good understanding of the capital cost forecasts prior to submitting a proposal.

They can give networks a good feel for where our concerns may lie with what they were proposing to put forward and give them an opportunity to address these issue before the formal process begins’.

Consumer Engagement

Ms Conboy noted that network businesses were making real progress in their engagement with customers and this was reflected in the proposals being submitted to the AER.

To demonstrate recent consumer engagement, the AER Chair referred to the New Reg project and the AusNet trial as good examples of the move toward a productively collaborative approach. These initiatives were discussed in the June 2018 AER Newsletter.

‘It has shown that we are able to work together – discussing, disagreeing, listening, agreeing, trialling, assessing, refining, developing and then starting all over again on the next issue – to try and achieve regulatory excellence.

This is how we move away from the adversarial culture of the past, through working together and then sitting down afterwards and considering, well, that was useful, how can we improve the process for next time?  What worked, and what didn’t? What’s a new way of doing things we could try next time?

When we hit bumps in the road – as we will – we need to go over them, not have them turn into road closures – driving us back down paths that aren’t going to get us anywhere’.

Ms Conboy also noted the importance of regulatory professionals and regulators working with integrity, competence and importantly empathetic engagement. Regulatory organisations also need to have ‘the necessary resources, training, clarity of mission and overall management vision articulated by leaders who themselves uphold the values of integrity, competence and engagement’.

The AER Chair referred to the structure of the AER, part of which involves employing two new General Managers and concluded that:

‘Our new structure will enable a new approach to engagement with stakeholders and enhance our ability to communicate more effectively with consumers, businesses and broader stakeholders. It will position us to more actively participate in the policy debate and the design of the regulatory regime.

I can assure you, the AER is working hard to achieve our goal of regulatory excellence.

Consumers will be looking to the network businesses to demonstrate their commitment to putting their customers’ interests at the centre of their corporate responsibilities. They will be looking for evidence of utmost integrity, stellar competence and empathetic engagement. The regulatory processes provide businesses with that opportunity.

I very much look forward to working with you all to achieve a system of regulatory excellence that places consumers at its heart’.

A copy of the speech is available on the AER website here.



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