Consumer participation in revenue determinations and

associated regulatory processes

Consultation paper on consumer resourcing

5 October 2017

Submissions are invited on this consultation paper by 03 November 2017. Electronic submissions are preferred and can be sent to the COAG Energy Council Secretariat at energycouncil@environment.gov.au.

Those who wish to provide hard copies by post may do so by addressing their submissions to:

COAG Energy Council SecretariatGPO Box 9839 Canberra ACT 2601

All submissions will be published on the Council website (www.coagenergycouncil.gov.au) unless stakeholders have clearly indicated that a submission should remain confidential, either in whole or in part.

Please note that this paper does not provide legal advice about any of the laws discussed in it, and it should not be relied on for any purpose. It is intended as a consultation paper only. It does not reflect the final views of officials or Council policy.

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ContentsIntroduction....................................................................................................................................................................................... 4

Making a submission................................................................................................................................................................. 5

Issues.................................................................................................................................................................................................... 5

Current funding sources for supporting consumer participation........................................................................5

The Adequacy of current resourcing for facilitating effective consumer participation..............................7

The quality of consumer participation processes........................................................................................................8

Box 1: Changing the culture of engagement...................................................................................................................8

Consumer engagement by the Australian Energy Regulator..................................................................................9

Consumer engagement by energy network businesses............................................................................................9

Coordinated stakeholder engagement across the sector.......................................................................................10

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Introduction

In July 2017, the Council of Australian Governments (COAG) Energy Council agreed to consult on options to improve resourcing available to consumer groups to support more effective engagement in the Australian Energy Regulator’s (AER) revenue determinations and access arrangement decisions under the national electricity and gas laws and rules.

Consumer engagement is regarded as critical to ensuring effective economic regulation of energy network businesses. The importance of consumer engagement was outlined in the Energy Networks Australia (ENA) Customer Engagement Handbook. The handbook highlighted the role of engagement as a means to reflect consumer preferences in a competitive market, a tool to educate consumers about the energy system, a means of building trust, and should be included as a key part of the network’s and regulator’s strategy and ongoing operations.1 As such, the AER and energy network businesses within the national energy market are increasingly seeking consumer input in the development of their business strategies and revenue determination and access arrangement proposals.

Consumers are engaged in the AER’s processes through a range of methods. These methods range from participating in ongoing consultative committees run by the networks to commissioning independent expert analysis on the financial and technical aspects of networks’ revenue and service settings. Many networks are also exploring new collaborative processes like deliberative forums, such as a citizen juries, to better understand consumer preferences on price, reliability and other issues.

Effective engagement through these channels requires those being consulted to have the knowledge, skills, time and resources to participate effectively. While the focus of this consultation paper is effective engagement in the AER’s economic regulatory decision-making, it is important to understand the competing demands on consumer advocates’ time. For example, consumer groups are also asked to engage in multiple policy and regulatory processes at a jurisdictional and national level to ensure their diverse priorities and needs are being considered and acted on by decision makers.

Upcoming consultation processes directly related to revenue setting include the AER’s innovative approach to consultation on the review of expected inflation, the AER’s roundtable discussion on the remittal process for re-determining operating expenditure allowances and debt for the New South Wales/Australian Capital Territory (NSW/ACT) networks and the joint initiative with the AER, the ENA and Energy Consumers Australia (ECA) exploring ways to improve network sector engagement and regulatory processes. Further, the AER has also commenced consultation processes for developing its next rate of return guideline (in line with requirements in the National Electricity Rules and National Gas Rules). It is anticipated the revised guideline will become binding once legislation is passed to implement the COAG Energy Council decision of 14 July 2017.

How consumers are resourced for these processes includes but goes beyond funding. Other ways consumers groups can be resourced to support more effective engagement include capacity building, the structure of engagement processes, such as those that integrate explanation and training on complex issues, as well as other non-financial means of improving consumer engagement in revenue determination and access arrangement decisions.

Consumer participation in revenue determination and access arrangements decisions was specifically highlighted as an issue in the 2016 Review of the Limited Merits Review Regime (the LMR Review) for the energy sector. The LMR Review identified significant barriers to consumer participation in revenue determination and access arrangement processes, including a significant resourcing imbalance with the network businesses who engage multiple economic, financial and engineering consultancies.

This paper seeks feedback on key issues associated with resourcing for consumer participation, both in terms of funding and other aspects (such as staff levels or staff capacity to engage effectively), including:

The effectiveness of current resourcing arrangements for supporting consumer participation;

1 ENA Customer Engagement Handbook page 12-13. 4

The adequacy of current resourcing levels for facilitating effective consumer participation;

The quality of consumer participation processes and how they can be improved to maximise the outcomes achieved with existing resources; and

Building the capacity of consumer representatives to participate in complex, technical revenue determination and access arrangement decision-making processes.

Making a submission

Stakeholders are invited to provide written submissions on the consultation paper by close of business on 03 November 2017.

All stakeholder submissions will be published on the Council website unless stakeholders have clearly indicated that a submission should remain confidential, either in whole or in part. Electronic submissions are preferred and can be sent to the COAG Energy Council Secretariat at energycouncil@environment.gov.au.

Those who wish to provide hard copies by post may do so by addressing their submissions to:

COAG Energy Council SecretariatGPO Box 9839 Canberra ACT 2601

Should you have any queries, please contact the COAG Energy Council Secretariat at energycouncil@environment.gov.au.

Issues

Current funding sources for supporting consumer participation

Resourcing and funding for consumer engagement in energy sector policy and regulatory processes comes from a range of sources, with ECA being the main source of funding at a national level. ECA was established in 2015 by the COAG Energy Council to promote the long-term interests of consumers in matters of importance to consumers, and to build knowledge and capacity amongst consumer groups, including, but not limited to, the provision of grants.

A key purpose in establishing the ECA was to give small consumers, both residential and small business, a stronger voice in the energy market. To that end, a key objective of ECA is the provision of funding to build knowledge and energy sector capacity in the consumer advocacy sector and, support policy development and consumer education in the national energy market. ECA currently provides grants for a number of purposes:

Advocacy: to support advocacy on issues of material importance to residential and small business consumers, including through multi-year grants.

Research: to inform and support advocacy by providing a robust, topical and well-informed evidence base, and to build knowledge among advocates, decision-makers and industry in the long-term interests of consumers.

CEO Grants (up to $10,000): to enable consumer engagement and advocacy in urgent government, regulatory, or industry decision-making processes; and, to enable advocates to research relevant international programs, policies or initiatives that advance the long-term interests of consumers.

ECA provides support for consumer advocates, community and welfare organisations, researchers, business peak bodies and environmental groups, amongst others. The budget for ECA grants for these purposes is approximately $2.1 million per year. However, the range of projects and organisations seeking

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funding has increased significantly since ECA assumed the grant-making function.2 The type of grant funding requests is also changing, with an increasing number of organisations seeking multi-year grants in order to provide greater funding certainty for strategic work programs. There are currently seven multi-year grants, which includes projects undertaken by the Consumer Action Law Centre, St Vincent De Paul Society and Council of the Ageing.

The range of projects funded from the ECA Grants Program since ECA’s establishment has supported advocates participating in broader energy market priorities and reform processes. This has meant that the funding sought by advocates to participate in processes relevant to network regulation and revenue determination and access arrangement processes has fluctuated. In 2014-15 the proportion of funding approved for network priorities was 31 per cent. This increased to 35 per cent in 2015-16, but in 2016-17 this decreased to 12 per cent (including funding allocated for multi-year grants). Limited merits review (LMR) funding, which was substantially to fund legal representation for in appeals of the AER’s NSW electricity determinations was 16 per cent, 23 per cent and 5 per cent in these years respectively.

ECA was established with the proviso that an independent review of its role and activities would occur within the first three years. This review is due to be completed within 2017-18 and will include a range of topics, including the grants program. The current consultation will examine ECA’s grants program including with respect to providing support for advocates to participate in the revenue determination and access arrangement processes.

Further, a number of State and Territory governments provide funding for energy research and advocacy. This includes the NSW Government funding of the Energy and Water Consumer Advocacy Program of the Public Interest Advocacy Centre. The ACT Government provide funds for consumer education and awareness, and capacity building programs. The Queensland Government has committed $1.62 million over four years from 2016-2020 to the Queensland Council Social Services to build capacity in supporting vulnerable customers on energy issues. However, participation in the revenue determination and access arrangement decisions is not a key focus of this funding. Recently the Victorian Government increased funding and expanded the remit of the Consumer Policy and Research Centre (formerly Consumer Utilities Advocacy Centre) for research on consumer issues including energy.

Consumer organisations may also receive funding from a range of other sources that enables them to represent consumers’ interests effectively. Feedback is being sought on the range of funding and potential funding sources currently available and the scope of that funding.

Feedback is also being sought on the current framework to support effective consumer engagement in network engagement and regulatory processes, as well as the range and scope of funding that is currently available for this purpose.

Consultation Questions:

How effective is the current resourcing framework for funding consumer engagement in energy regulatory processes, particularly the AER’s revenue determination and access arrangement processes? How can it be improved?

How can the current framework better contribute to increasing the capacity of consumer representatives to engage effectively in the AER’s revenue determination and access arrangement processes, noting the complex and technical nature of the subject matter?

What other resources, including non-monetary support programs or funding sources, are currently available to support consumer engagement in the AER’s processes?

In previous consultation processes on the review of the LMR regime, some stakeholders suggested the option of introducing a ‘purpose built’ fund to which all regulated businesses would contribute funding to support consumer participation in the AER’s determination and access arrangement process. It has been suggested that contributions could be calculated as a percentage of the regulated businesses’ total annual revenue. Such a fund may provide a more cost-effective and

2 The ECA took over the grants function from the Consumer Advocacy Panel, formerly established within the Australian Energy Market Commission6

sustainable approach to resourcing consumer engagement in the AER’s process.

o Given regulated revenue amount to billions of dollars, is a small contribution by regulated business to support consumer advocacy justifiable?

o What do stakeholders consider are the advantages and disadvantages of the proposal?

The Adequacy of current resourcing for facilitating effective consumer participation

The Australian energy market is undergoing extensive transformation and consumer participation is being encouraged by both market bodies and networks. Consumer organisations need to be resourced adequately, both in terms of staff numbers and quality of resources (i.e. skill base) in order to participate effectively in regulatory decision-making. Consumer groups have reported that current resourcing constraints have meant they need to be selective about the allocation of staff, time and funding to processes they participate in. They have noted that a key requirement is for access to expert support and advice in undertaking their advocacy work, such as legal, engineering or economic regulatory expertise, and that their modest resources are a significant barrier to accessing such expertise, either through training for staff or through third party contractors. Many consumer advocates work on a range of issues, beyond energy, or are only employed on a part time basis. In these circumstances, they are choosing to focus on areas and issues which are the most pressing, such as issues of affordability, consumer protection and transformation, rather than participating in revenue determinations and access arrangement decisions. However, regulated revenues are in the order of billions of dollars and these costs are recovered from consumers. Consumers benefit from revenue determinations and access arrangements that better reflect the long-term interest of consumers.

The abolition of LMR may reduce the pressure on consumer resourcing to some extent as participation in LMR appeal process will not be needed. However, the removal of merits review rights places even greater importance on effective engagement in the development of changes to the economic regulatory framework and processes. For example, consumer engagement will be required in the AER’s development of a binding rate of return guideline as a key component of the revenue setting process. Consumer representatives are likely to require access to appropriate expertise, such as through commissioning expert reports to participate effectively in this process.

Consumer organisations have raised concerns about their ability to attract, retain and train staff to represent consumers’ interests in regulatory processes effectively. Timing and security of funding is likely to be an important factor in this regard.

Feedback is being sought on how current resourcing levels affect consumer involvement in regulatory processes.

Consultation Questions:

What are the barriers to effective consumer engagement in revenue determinations and access arrangement processes?

What are the priority energy issues on which consumer engagement is required across the sector?

Is the key issue the amount of resources or the quality of resources for providing effective consumer engagement?

What are appropriate methods of measuring the impact of consumer engagement? How can improvements to engagement be measured to ensure success?

Is it feasible to build/maintain the complex technical knowledge required for effective participation in the revenue/access arrangement processes within consumer group staffing, or is it likely to be more

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cost-effective and more practical to outsource this expertise as required?

The quality of consumer participation processes

Consumer engagement in the broader regulatory process has increased significantly since the Power of Choice Review and the AER’s Better Regulation Program identified consumer engagement as a critical part of the economic regulation of energy businesses.

Network businesses are assessed by the AER on their consumer engagement practices during the development of revenue determination and access arrangement proposals and the tariff structure statements. Given the complex and technical nature of revenue determinations and access arrangements and the funding and capacity constraints consumer organisations face, the quality of consumer engagement is of material importance. To help guide this engagement the AER published a Consumer Engagement Guideline for Network Service Providers in 2013.

In 2013, the AER also established the Consumer Challenge Panel (CCP) to provide input on issues of importance to consumers in revenue determinations and access arrangements. The CCP advises the AER on whether the network businesses’ proposals are in the long-term interests of consumers and on the effectiveness of network businesses’ engagement activities with their customers. The CCP provides input and challenges the AER on key consumer issues to improve the AER’s decisions. The role of the CCP in revenue determinations and access arrangements differs from that of consumer organisations, which advocate for what they believe will deliver better outcomes for their constituents, whereas the role of the CCP is to focus on the long-term interests of all consumers.

There may be scope to improve the quality of consumer engagement in regulatory processes further, including through improved engagement strategies with additional actions to enhance consumers’ capacity to participate, such as customer training programs run by the networks. The AER, ENA and ECA announced on 11 August 2017 a collaborative project to develop and trial innovation in engagement within the revenue determination making and access arrangement processes (see Box 1).

Box 1: Changing the culture of engagement

The AER, ENA and ECA have recently announced a collaborative project to develop an ‘alternative path’ for network businesses to take in building their regulatory proposals, and for the AER in approving those proposals. The three organisations aim to explore ways to improve sector engagement and to identify opportunities for regulatory innovation. In the context of rapid changes in the sector driven by new and improved technologies, this project is also about shifting the cultural mindset of the AER and network businesses to be increasingly focussed on consumer views and preferences.

The first stage of this joint initiative will involve significant consultation with stakeholders to ‘collect ideas’ and develop a proposed new regulatory approach that incentivises meaningful, early engagement between the network business, consumers and AER. Through this early engagement, the parties could identify key issues and work collaboratively to resolve them—even before a regulatory proposal is submitted to the AER. Such an approach is expected to increase confidence in the legitimacy of the business’ proposal, potentially allowing the AER to streamline or expedite its formal revenue determination if the proposal clearly promotes the long term interests of consumers. The goal is to undertake trials of this proposed new regulatory approach and ‘learn by doing’. This process of exploration may identify reform opportunities, including possible changes to the Rules.

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Consumer engagement by the Australian Energy Regulator

As mentioned, the AER developed a stakeholder engagement framework in 2013 which sets out the principles that the AER’s public engagement will follow. It recognises that different levels of engagement are appropriate, depending on the issue. The AER is currently reviewing its stakeholder engagement framework with a view to strengthening engagement of consumers across the regulatory space and within specific projects. The AER stated on 7 September 2017 “Our revised Stakeholder Engagement Framework will describe how stakeholders can participate in a more productive discussion about energy regulation in a less adversarial environment”.

The AER in its July 2017 consultation paper regarding the development of a binding rate of return guideline, indicated it will run additional training and information sessions for interested stakeholders, including consumers. Early conversations on these training and information sessions indicate they were a positive step in the right direction. These will take place in the early stages of the process to ensure consumer advocates are better positioned to participate in the more detailed discussions as part of the review of the guideline. However, the creation of such opportunities puts further pressure on consumer groups to participate in the increasing number of processes and will require the engagement of expert support. The AER will also need to consider how it incorporates the consumer input into its decision making.

Feedback is being sought on how the AER’s engagement with consumers can be improved to enable more effective consumer participation including with respect to the proposed changes to the economic regulatory frameworks and the AER’s revenue determination/access arrangement processes.

Consultation Questions:

What support does the AER currently provide to assist consumer participation in regulatory processes?

How can the AER facilitate improved consumer engagement in regulatory processes?

How can the AER help build consumers’ knowledge skills and capacity to better participate in regulatory processes?

Is the key issue the amount of resources or the quality of resources for providing effective consumer engagement?

How successful has the AER’s CCP been in contributing to improved outcomes for consumers?

What have been the advantages and disadvantages of the CCP process?

Consumer engagement by energy network businesses

It is important that networks engage with consumers and consumer groups in a meaningful and effective way. Network businesses are increasingly investing significant time, effort and resources in diverse consumer engagement processes. For example, Australian Gas Networks, Powerlink, ElectraNet and TasNetworks have all undertaken extensive consumer engagement in the development of their regulatory proposals and this has been noted by the AER. Collaborative engagement processes with both consumer groups and the AER are the desired norm for all engagement practices by networks. ENA’s Electricity Network Transformation Roadmap and Customer Engagement Handbook also highlight key actions, including the sharing of engagement practice and industry wide evaluation tools.

The AER’s Consumer Engagement Guideline for Network Businesses provides a high-level principled approach to consumer engagement. The guideline is flexible so that network businesses are able to tailor consumer engagement to the needs of their consumers. There is value in a non-prescriptive guideline to

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ensure networks are able to adapt to the changing needs of consumers and promote innovation. However, it is important that networks share learnings and outcomes within the sector to build on previous work undertaken to facilitate continual improvement across the sector. Critically, the guideline indicates that networks should proactively build consumers’ capacity when a matter’s complexity is hindering engagement in order for consumers to understand the issues, processes and potential impacts of a decision. The guideline also suggests that networks develop an understanding of consumer advocates’ capacity and where required provide resources or education to consumers or consumer advocates to help them be more effective.

Feedback is being sought on how networks’ engagement with consumers in revenue determination and access arrangement decision processes can be improved from both a network and consumer perspective.

Consultation Questions:

What support do network businesses currently provide to assist consumer participation in revenue determination and access arrangement processes?

How can network businesses facilitate improved consumer engagement in revenue determinations and access arrangement decisions processes?

How can network businesses help build consumers’ knowledge skills and capacity to better participate in revenue determination and access arrangement processes?

How can networks demonstrate that consumer engagement they undertake is incorporated into the regulatory determination and access arrangement decision processes?

Under the existing framework, are there sufficient incentives for network businesses to invest in consumer engagement?

Coordinated stakeholder engagement across the sector

Some of the State and Territory governments run consultation processes on jurisdictional energy issues, and have the potential to play an important role in building consumer group capacity to participate in the AER’s regulatory processes. The Australian Energy Market Commission and Australian Energy Market Operator (AEMO) also run engagement programs as part of their roles. While those run by AEMO will not specifically relate to revenue setting for network businesses they could play an important role in building consumer groups’ capacity to understand energy market issues and frameworks.

Given the time constraints on consumer groups, ensuring engagement processes across market bodies are effective will free up time and resources to enable consumers to participate in the revenue determination and access arrangement processes if that is where consumer groups wish to focus.

Retailers are not subject to economic regulation, however they do run engagement programs and have an interest in the outcomes of revenue determination and access arrangement decisions. There are some areas where consumers and retailers objectives overlap as they are the interface with the customer and pass through the regulated network cost in consumer’s energy bills. Retailers have the opportunity to use their expertise to provide support to consumers. An example is where the AER sets terms and conditions for reference services in gas access arrangements, retailers may be in the better position to negotiate these on behalf of consumers.

There is scope to examine how the engagement programs across the sector work together to ensure that their efforts are aligned to decrease the burden on consumer groups. An important step in this process is to ensure that all stakeholder expectations of roles and responsibilities are aligned.

Feedback is being sought on how other market stakeholders’ engagement with consumers can be improved to enable more effective consumer participation including with respect to changes to the economic regulatory framework and the AER’s associated processes.

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Consultation Questions:

What support can other stakeholders provide to consumer groups to build capacity in energy market issues?

How can other stakeholders help build consumers’ knowledge, skills and capacity to participate more effectively in revenue determination and access arrangement processes?

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