Effective economic regulation essential to ensuring sustainable investment in infrastructure
Check against delivery
Thank you for the invitation to take part in today’s forum.
By way of introduction, the ACCC and AER are the main economic regulators of infrastructure services in Australia. We are not regulators of technical or safety standards, but rather our focus is on ensuring that infrastructure services are delivered in a way that is in the long term interests of consumers.
I could speak at length about the importance of the governance of regulators in promoting investment in infrastructure. But instead I want to touch on the concept of customer stewardship in infrastructure delivery, which builds on good governance practices.
Arguably, infrastructure delivery has, in the past, focused primarily on the assets that deliver services rather than the services themselves and whether the needs of customers are being met.
Engineering design, financial viability, construction, the efficiency of system operations, and ongoing asset management have been the driving factors in many infrastructure decisions. For the most part, this has served the community well, particularly at a time when the services needed were reasonably basic and affordable. Consumers by and large were satisfied with what they were being offered and had confidence in the decisions being made by others on their behalf.
In the past 10 years though, we’ve seen the emergence of the more assertive consumer spurred on by poor service experience, rapid technological change, changing expectations and ability to give voice to concerns.
Customers are still primarily concerned about prices, but in addition, they want a much broader range of more sophisticated services still at affordable prices. Moreover, they expect that their infrastructure will meet a range of social, economic and environmental objectives as well.
While this is not unexpected, it has been accompanied by a significant loss in confidence in the decision chain that delivers infrastructure. Consumers have lost faith in the traditional delivery model where the asset itself was the primary concern and the asset owner or operator, the primary decision maker.
There is a growing demand for a customer-driven culture of infrastructure design, delivery and operation, which puts at the forefront the service needs of customers and the community rather than the physical assets that will be used to deliver those services.
Engineering design, operational flexibility and financial viability will still be critical in infrastructure investment decisions. This is particularly so given the heightened risk to investors of disruptive technologies and the implication for their ability to recover huge capital investments should their investment become technologically obsolete.
However, if the community is to have confidence in these decisions, there must be an acknowledgement that responsibility for the quality of infrastructure services and long-term investment decisions must be shared by government, regulators, consumers, infrastructure operators and investors. As importantly, this has to be backed up by processes that support that chain of responsibility.
So what do we mean by customer stewardship in this context?
The University of Sydney’s John Grill Centre for Project Leadership launched a 'Better Infrastructure Initiative' some years ago. One of their recent projects has been to develop the concept of customer stewardship with a range of infrastructure service providers across sectors such as water, transport, the arts, airports, rail, ports and roads.
The core of their concept is what they describe as the Five pillars of practice, which create a cycle of trust through:
Connectedness where infrastructure works as a coherent, integrated system bridging physical, technological and information dimensions of infrastructure service and service provision.
An example is the inter-connectedness of various transport modes and supporting infrastructure such as intermodal connections, advanced traffic management systems, payment systems and, in the future, interconnectedness with 5G networks to support driverless cars.
Information for customers in a form that is useful for them so that they can understand the options before them and the consequences of their choices. For investors, information about customer needs, preferences and willingness to pay as well as risk tolerances should inform decisions such as allocation of capital, trade-offs between capex and opex, and risk management practices.
For example, in the energy sector customers may indicate a willingness to accept a higher number or longer duration of power outages in return for greater affordability or price stability.
Adaptability reflecting the fact that infrastructure assets and networks are part of a dynamic and changing environment and should be capable of being repurposed or resilient in the face of change.
In this sense, it’s important that commercial and regulatory practices don’t act as a barrier to innovation and growth. By way of example, the telco industry is undergoing massive change and spectrum repurposing for future allocation auctions will be an essential part of the 5G transformation.
The integration of distributed energy resources into existing energy networks is another example of the need for legacy infrastructure to adapt and for regulatory frameworks to facilitate this.
Transparency in terms of decision making, performance measurement of infrastructure services and accountability of those involved in the delivery chain including regulators and service providers. Transparency is essential if the community is to regain trust in the process and practices of decision makers and confidence that their interests are being looked after.
Inclusiveness or serving the whole community, which encompasses social and economic inclusion as well as environmental sustainability. This is manifest in terms of approaches to universal access, affordability, protection of vulnerable or disadvantaged customers, and environmental concerns.
Most of these concepts seem quite intuitive and have to a greater or lesser degree been adopted in some infrastructure processes.
However, the level of community dissatisfaction with government, regulators and infrastructure service providers suggests that we still have a long way to go in taking these from worthy and aspirational concepts to actually embedding them into our practices.
So what does this mean in practice for a regulator?
At the heart of the five pillars is the need to engage with the community at all levels. In the energy sector we have been talking about the need for consumer engagement with energy businesses at various points on the supply chain for many years.
Effective stakeholder engagement is not just communication. And it should not be seen in terms of one-off transactional processes, for example, seeking one off input into a five yearly tariff setting process.
Effective engagement has to be continuous and contiguous across all activities which affect consumers. Most importantly, it has to occur well before critical decision points are reached. It must also recognise the role of intermediaries in service delivery, not just final customers.
Effective consumer engagement has to be truly collaborative, not a vehicle for telling consumers what you will deliver, but asking them what they want you to deliver and how.
The AER’s approach to consumer engagement has evolved over the past 10 years and has taken key elements from other regulators and other countries. A good example of this is the use of Consumer Challenge Panels that we and the businesses deal with directly, which was an idea which we took from the UK’s Ofgem.
Other elements in the evolution of Australia’s approach are:
- identifying key consumer and user representative groups
- early and constant engagement with these groups
- developing best practice guidelines for our engagement with consumer groups
- using formal and informal methods such as discussion papers, public hearings or forums, and explanatory statements as well as informal 'sounding out' meetings
- providing financial and educative assistance and resources to consumer groups to develop their capacity to engage meaningfully with government, ourselves and the regulated businesses.
In addition to our own engagement processes, we have issued guidelines for energy business on our expectations of their engagement with their customers and the community. We have built their engagement results into our approval processes for their expenditure and cost recovery proposals, their hardship policies and tariff structures and other business proposals.
We also publicly hold the businesses to account for their engagement strategies including commentary on our assessment of their performance in our reports.
The response from businesses has been very mixed. At best, they really engage with customers and build their customer preferences and views into their proposals. At worst, they dress up information sessions as consultation with little real attempt to take customer views into account.
However, we have had some encouraging results in a number of recent regulatory proposals. This followed a period of intense, lengthy and costly litigation between the businesses and ourselves.
Recognising that this wasn’t serving the interests of consumers, we embarked on a new process where we facilitated a three-way engagement process between ourselves, consumer groups and the regulated businesses on their revenue proposals and the way we’d assess them.
These were limited decisions rather than full expenditure and cost recovery proposals but nonetheless the businesses achieved a high degree of acceptability and even endorsement from consumer groups prior to the proposals being lodged for our approval.
We are now taking this a step further with a new approach involving the establishment of a Consumer Forum to directly negotiate elements of a business’ regulatory proposal and influence its engagement with consumers. If successful, the regulatory approval process should be more streamlined providing more certainty for consumer and investors.
On a final note, the energy industry itself is responding to the heavy criticism that has been directed at it over the past few years by developing an industry charter.
The purpose of the Energy Charter is to progress the culture and solutions required to deliver a more affordable, sustainable and reliable energy system for all Australians. It’s focused on embedding a customer-centric culture and conduct in energy businesses to create improvements in affordability and service delivery.
It too has five key principles:
- putting customers at the centre of their businesses and the energy system
- improving energy affordability for customers
- providing energy safely, sustainably and reliably
- improving the customer experience
- supporting customers facing vulnerable circumstances.
Behind the principles are measures that can be taken to achieve the principles including commitments around governance, engagement, transparency and accountability.
Energy businesses who commit to the Energy Charter are required to publicly report against the Principles and Actions, outlining how they are meeting or making progress towards their Energy Charter commitments.
The reports will be assessed by an independent accountability panel and reported on publicly. The scheme started this year and the first of the assessment reports, which will be for the first six months of this year. There are currently around 30 businesses across wholesale, distribution and retail that have signed up to the Charter.
We’ll be watching this with great interest, particularly as the compliance or performance metrics are being left to the businesses to decide on.