Engaging consumers in regulatory decision-making

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Engaging consumers in regulatory decision-making
Engaging consumers in
             regulatory decision-making
Mark McLeish, Director, Consumers and Markets, Australian Energy Regulator
       Tom Hallam, General Manager, Regulation, AusNet Services
         Tony Robinson, Chair, AusNet Services Customer Forum
          Roger Witcomb, Chair, Ofgem RIIO-2 Challenge Group

   Panel Chair: Calum Gunn, Principal Adviser, Regulation, Commerce Commission
Engaging consumers in regulatory decision-making
The evolution of consumer
 engagement in energy
 network regulation in
 Australia
Mark McLeish, Director, Consumers and Markets Branch
Competition Matters Conference, July 2019

                                                       aer.gov.au
Engaging consumers in regulatory decision-making
Timeline – evolution of process for consumer
            engagement in regulatory determinations

         Pre 2012                       2012                            2013                            2014

State of play              15 November - AEMC final       Jan to December - AER            Application of new rules –
                           rule determination ‘Economic   implements new rule              2014-19 NSW / ACT resets
•   Formal consultation    Regulation of Network          framework in better regulation
    processes in rules     Service Providers’             work program
         • Public forums
         • Submissions                                    •   New benchmarking
                           20 November - SCER
                                                              models, incentive schemes
•   Funding via consumer   ‘Putting Consumers First’
                                                              and guidelines
    advocacy panel         •   Consumer Challenge
                               Panel
                                                          July 2013 - AER establishes
                           •   National Energy Advocacy
                                                          first Consumer Challenge
                               body
September 2011 – AER                                      Panel
seeks changes to energy
network regulation                                        November 2013 - AER
                                                          releases Consumer
                                                          Engagement Guideline

                                                                                                                    aer.gov.au
Engaging consumers in regulatory decision-making
The Consumer Challenge Panel (2013)

 • Design strongly influenced by models used by Ofgem and Ofwat

 • Objective
    – Advise on:
        • if revenue proposals are in the long term interests of consumers
        • effectiveness of network customer engagement
 • Role
    – input and challenge the AER on key consumer issues
    – facilitate the consideration of the consumer perspective
    – not a decision-making forum, nor is its role to negotiate or
      advocate on behalf of consumers or industry

                                                                     aer.gov.au
Engaging consumers in regulatory decision-making
Energy Consumers Australia (2015)
  National voice for residential and small business customers

  Work to promote the long term interests of end users

  A number of activities, including:

     • Participate in National Electricity Market issues and influence regulatory
       activities and energy market reform to benefit consumers
     • Engage with consumers and consumer advocates
     • Build national and jurisdictional expertise and capacity through research,
       knowledge development and educate consumers in energy markets
     • Fund and manage grants to build knowledge and sectoral capacity supporting
       policy development and consumer education in the national market

                                                                     aer.gov.au
Timeline continued…

                                                                                                         2018
            2015                           2016                          2017
                                                                                                        onwards

                              February – Tribunal asks        May – Federal court upholds      March - New Reg directions
April – AER releases final    AER to remake NSW/ACT           most of tribunal’s decision      and approach papers publicly
decision on 2014-19 NSW /     2014-19 decision                                                 released
ACT proposals                                                 June - First meeting AER,
                              March – AER seeks judicial      ECA and Energy Networks          March – First meeting of
May – Networks apply to       review of Tribunal’s decision   Australia exploring              Customer Forum
Australian Competition                                        opportunities to work together
Tribunal for merits review    May - AER releases NOUS                                          November – Essential
                              review of first Consumer        July 2017 - AER 2.0 speech       Energy wins ECA / ENA
May – Public Interest         Challenge Panel                 ‘working together to restore     consumer engagement award
Advocacy Centre (PIAC) join                                   confidence in energy
appeal                        September – Second CCP          regulation’
• ECA provides funding for    established
  PIAC participation in                                       October – Limited merits
  appeal                                                      review abolished

                                                              November – ElectraNet wins
                                                              first ECA / ENA consumer
                                                              engagement award

                                                              December – AusNet
                                                              commences trial of New Reg
                                                              process

                                                                                                                              aer.gov.au
Collaboration with consumers and networks

Context: Regulatory process perceived as adversarial, complex, issues not
narrowed, unclear if proposals adequately reflect consumer interests

New Reg – enabling consumers to shape the regulatory proposal

Joint program board – CEOs of AER, ENA, ECA and AEMC and an
independent member

                                                                   aer.gov.au
What is the New Reg process?

   1. The Plan
   - Agreement to AusNet’s Early Engagement Plan

        2. Credible counterparty

              3. Governance
              - A MOU was signed by the AER, AusNet and the Customer Forum

                    4. The Consumer Perspective

                          5. Reaching Agreement

                                                                             aer.gov.au
Vision and trial objectives

Overall vision - for energy consumers’ priorities to drive energy
network business proposals and regulatory outcomes.

Trial objectives
• Can the AER substantially agree with the proposal?
• What are pre-requisites for a successful negotiation?
• How much of this needs to be specified?
• What is the right role for the AER?

                                                           aer.gov.au
Outcomes

• Focus on outcomes rather than inputs

• Understanding and evidencing the customer perspective

• Testing of positions with stakeholders

                                                          aer.gov.au
Negotiating meaningfully with customers
The Network Perspective

Tom Hallam, General Manager Regulation
Competition Matters Conference July 2019
Industry Background:

 Retailers were split from distributors post industry restructuring in the
  1990s, taking customers with them

 Retailers “own” the customer relationship in Australian energy
  regulation. Distributors encouraged to deal with retailers not customers

 Sector as a whole losing public trust, consistent with decline in trust for
  many other large organisations

 Past regulatory processes setting prices and service levels “secret
  expert business” separate from direct customer input

                                                                                12
Volunteering for the NewReg Trial
What were our objectives:

   Help drive culture change

 Cultural change underway but needed a big statement from leaders
 Explore practical ways our staff could respond
 Highlight and recognise customer knowledge in the business
 Public accountability on commitments at all levels of the business

   A Proposal that reflects what customer want

 What customers want, not what we think they want or should have
 Encourage iterative processes – an ongoing conversation

                                                                       13
Volunteering for the NewReg Trial
What were our objectives:

   Open and transparent process

 Clear line off sight between feedback and business decisions
 Negotiation outcomes subject to review and scrutiny by stakeholders

   Successful negotiation outcomes

 Demonstrate customer facing experts and not just industry insiders can play a
  constructive role, with regulator support, as credible counterparty for negotiation
 Demonstrate complex trade-offs can be successfully explained and debated
 Demonstrate outcomes with broad customer and stakeholder support to facilitate
  light handed review
 Customer experience discovery process, uncovers and measures material issues
  for the business

                                                                                        14
Using the Customer Forum/engagement
What did we find out about ourselves?
 Customers value things we weren't recognising adequately
 › Convenience, avoiding disruption, information, advice, community outcomes,
   local economy, retailer/distributor processes working

 We are to difficult to deal with
 › Bureaucratic and complex
 › Multiple uncoordinated entry points – difficult to speak to the right person or
   the same person
 › Difficult to understand public documentation, too technical
 › Poor institutional memory

 Communications have been poor
 ›   Too much or not enough information
 ›   Not provided at the right time or on the right medium
 ›   Don’t have the right customer information
 ›   Do not sell the good things we do                                               15
What are we doing about it?
 Culture
 › Dedicated GM responsible for customer experience
 › Regular contact between leaders and customers
 › More customer focused training, reward and recognition

 Customer Engagement
 › Ongoing customer research and satisfaction tracking
 › Dedicated customer relationship managers for business, councils and community groups
   – single entry point for large organisations

 Better Processes
 › Customer involved in improving key processes – complaints, connections, outages
 › Quicker and cheaper

 Different trade off decisions reflecting research
 › Better information rather than expensive improvements to service levels
 › Short term price relief prioritised for upcoming period
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Is it being noticed?

“The Customer Forum has probably spent more time considering the
regulatory proposal than any previous consumer focused group in
Australia”

“We are impressed by the impact which the Customer Forum has already
had in realigning AusNet Services business towards a more customer-
centric mode of operation”
Customer Challenge Panel Report for the Australian Energy Regulator

“AusNet is taking part in an AER trial to allow a small customer group to
collectively bargain on tariffs ... we see two advantages offsetting tariff
risk: 1) reduced regulatory risk given AusNet will be directly driving more
affordable outcomes for consumers, and 2) building trust in the community
so that AusNet have a social license to operate with respect to being a
facilitator of distributed energy resources.”
Citibank Investor report

                                                                              17
Conclusion

Our Customer Forum invited customers into our thinking in a
 credible, strategic and respectful way

This was different to BAU customer engagement

While potentially confronting, their advice was evidence
 backed, actionable and has strengthened our commitment to
 improve customer outcomes

We are pleased to share our lessons with the industry and
 believe this will benefit all customers

                                                               18
Tony Robinson, Chair
AusNet Services Customer Forum
 Competition Matters Conference, July 2019
Consumer engagement in UK
network price control (RIIO-2)
                 Roger Witcomb
      Chair, Ofgem RIIO-2 Challenge Group

                                            23
Issues for Ofgem

1.   Outputs – ie what do users/consumers want?
2.   Costs and returns
3.   Whole system considerations
4.   Energy transition

                                                  24
Consumer engagement usually concentrates
on Outputs
1.   Safety
2.   Reliability
3.   Customer service
4.   Treatment of consumers in vulnerable circumstances
5.   Environmental performance
6.   Value for money

Consumer engagement groups have had some success in assessing value for
money at the margin, eg cost benefit analysis of improving customer service
or system reliability

                                                                          25
And RIIO-2 has a full suite of traditional
user/consumer engagement groups

• A group for each company
• Selected and resourced by the company
• Remit is to challenge every aspect of its company’s plan (except
  WACC and financial outcomes)

                                                                     26
But for many network regulators the biggest issue
has been high ex post returns to the companies

• Companies have underspent their cost allowances (both opex and
  capex)
• And where there are specific incentives they tend to come out on the
  positive side
• WACC has been set “too” high

                                                                     27
Chronic problems for all network regulators

• Asymmetry of information – the companies always know more than
  the regulator
• Imbalance of resources – the regulator has fewer resources and its
  staff are less experienced
• The companies have significant political clout
• Generally the appeal option is a one-way bet for the companies

                                                                       28
Ofgem has sought to address some of these
issues by setting up a RIIO-2 Challenge Group

• Appointed and resourced by Ofgem
• No statutory basis - purely advisory
• 12 members – experienced and expert across the whole range of
  issues
• Reasonably well paid
• Free rein to go anywhere
• Able to challenge both the companies and Ofgem

                                                                  29
Challenge Group membership
•   Former General Counsel at the Competition Commission
•   Project finance expert from a major investment bank
•   Chief economist at the National Infrastructure Commission
•   Senior associate of Sustainability First
•   Senior executive from Citizens’ Advice
•   Former director of Consumers’ Association (Which?)
•   Former Engineering Director of an electricity network company
•   Experienced specialist in gas networks engineering
•   Former senior executive at Ofgem
•   Experienced regulatory accountant
•   Professor of Energy Networks at Imperial College
•   Energy network business entrepreneur

                                                                    30
Ofgem has also introduced a Business Plan
Incentive into the process

• Up to 2% of totex available for a “high quality” plan, including:

   • Responding constructively to Challenge Group requests
   • Producing full Business Plan drafts and generally making information available
     in a timely way
   • proposing ”sensible” expenditure plans
   • etc

• And up to 2% penalty for a “poor quality” plan
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Process is quite demanding
•   Challenge Group requested historical data on costs (now received)
•   Companies produced first drafts of their Business Plans on 1st July
•   CG meetings with companies next week
•   Feedback to companies mid-August
•   Companies produce 2nd draft on 1st October
•   Same process (hopefully less intense)
•   Final business plans by 9th December
•   Open hearings with companies in Q1/Q2 2020
•   Ofgem draft determination in June 2020
•   Ofgem final determination in November 2020
•   Start of new price control 1st April 2021

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Will it work?

• Who knows? But it’s worth a try

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