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2019–20 review: AER Chair, Clare Savage

Photo of Clare Savage

Never before has a reporting period contained so many unexpected events. The financial year of 2019–20 has been defined by drought, bushfires, super storms and the COVID-19 global pandemic.

In this time of uncertainty, the statutory remit of the AER has never been more important in ensuring the interests of energy consumers are protected. The AER has shown great leadership at a time of significant organisational change.

In October 2019 I had the tremendous privilege of assuming the role of AER Chair. I thank my predecessor, Paula Conboy, for her outstanding contribution not only to the AER but also to the sector more broadly. Also during this financial year, long-time AER Board member Cristina Cifuentes stepped down as part of the transition from a three-person to a five-person Board. Cristina’s insight will be missed. We experienced further generational change with the retirement of our inaugural Chief Executive Officer, Michelle Groves. The AER is, without question, Michelle Groves’s legacy. The continued growth and strength of the AER, and its role within the broader governance framework, is testament to her tenacity and foresight.

Our new Chief Executive Officer, Dr Liz Develin, commenced in May 2020 as COVID-19 lockdowns came into effect across Australia. Liz would be one of few chief executive officers in Australia to commence in such extraordinary circumstances. I warmly welcome the dedication and experience she brings to the AER.

In this financial year we also welcomed a new and bigger Board that includes me as Chair, Jim Cox PSM as Deputy Chair, and Eric Groom PSM, Justin Oliver and Catriona Lowe as members.

In addition to significant leadership change, the number of employees in the AER grew from 253 to 272. We have had a special focus on increasing the breadth and depth of the skill set within the AER. Our workforce is 49 per cent female and 51 per cent male; 19 per cent are culturally and linguistically diverse; and 4 per cent identify as having a disability.

Despite such significant change both internally and across the energy sector, I am proud that we have continued to work hard at serving the long-term interests of energy consumers.

We have continued to deliver above and beyond our statutory remit. I want to pay special tribute to all the employees working from home at this time. I appreciate that, for many, it feels like they are living at work. There is no question this has been, and will continue to be, a tough time for our employees—schooling children, looking after at-risk relatives and living with isolation and uncertainty while also remaining committed to their roles in the AER.

I am especially proud of how quickly we released our Statement of Expectations of energy businesses in the early days of the COVID-19 pandemic in March 2020. Our statement sets out our expectations of market participants to offer payment plans to all residential and small business consumers in financial stress and to prevent their disconnection. Pleasingly, both network service providers and retailers quickly adopted these expectations. Energy providers were also asked to provide more information on consumer payment plans, hardship, disconnections and credit referral activity.

With the potential for increased volume of deferred payments from energy consumers, the AER also submitted a proposal to change the National Electricity Rules to help reduce the risk of retailer failures by allowing them to defer payment of network charges. Significant work was also undertaken between the AER and Australian Energy Market Commission on the financial resilience of retailers, and the AER will continue to monitor and report on this going forward.

Our market and regulatory frameworks exist to serve Australian energy consumers. There remains a significant portion of Australian consumers who either cannot or do not want to engage in a complicated energy market. To protect these consumers from unjustifiably high prices, the Australian Government introduced the Default Market Offer (DMO). The AER sets the DMO in south-east Queensland, New South Wales and South Australia. From July 2019 to January 2020 standing offer prices for residential consumers fell by 11–13 per cent in New South Wales, 12 per cent in South Australia and 10 per cent in south-east Queensland. Our second DMO decision, which further reduces prices in Queensland and South Australia, came into effect on 1 July 2020.

During the year we completed our $8 million project to enhance the Energy Made Easy website. New features include translation into more than 30 languages, factoring solar tariffs into plans, and easier uploading of energy bills.

During the reporting period the AER commissioned a study from the Consumer Policy Research Centre (CPRC) on vulnerability. Vulnerability is multifaceted and all consumers can move in and out of vulnerability at different points, as demonstrated by the COVID-19 pandemic. The CPRC report was published in February 2020 and will help inform our future approach to consumer vulnerability.

The AER actively monitors and reports on energy market participants and takes action to ensure compliance with the law and rules. In 2019–20, for the first time, the AER set out five compliance and enforcement priorities. Since 1 July 2019 the AER has instituted eight civil proceedings against six energy businesses and secured enforceable undertakings from three energy businesses. Six energy businesses have paid a combined $500 000 in infringement notice penalties. In addition to its enforcement action, the AER completed 10 retail compliance audits targeting life support and explicit informed consent obligations. The AER also published guidance on implementing new, more stringent hardship protections and ensuring consumers are not denied energy supply due to poor payment history. Further, the AER required a number of retailers and distributors to undertake audits of compliance with life support obligations and to address identified areas for improvement. This is almost twice as many compliance and enforcement actions as the AER has initiated in the past.

We have a range of obligations to monitor and report regularly on the performance of the national wholesale electricity and gas markets. In the last year a number of sentinel reports have been released, including the first wholesale markets quarterly and the annual retail market reports in November 2019. Quarterly reporting on performance issues is a fundamental part of fulfilling our reporting obligations. It bridges the gap between our shorter term high price event reports and our longer term biennial Wholesale electricity markets performance report.

The AER also produced a report on affordability in retail energy markets. We continue to publish reports on high wholesale electricity prices across the National Electricity Market (NEM), including two relating to events in January and one in March this year.

All of our work over the past year has been underpinned by exceptional market and consumer insight. There are few better examples of this than the AER’s signature publication, State of the energy market. This report is in its 12th year and continues to serve as a valuable resource for market participants and decision-makers across the policy, legal and regulatory spheres.

We continue to prepare annual benchmarking reports as required by the National Electricity Rules to examine the relative efficiency of distribution and transmission network service providers. We use this information to inform our network revenue determinations. We have also continued to make a greater level and better quality of information available to stakeholders so they can test the value of their investment in networks. We have published the raw data submitted to us by network businesses. We are now in the late stages of preparing our performance report for electricity businesses, which will highlight the main trends we are seeing across the sector.

As an economic regulator, a key feature of the AER’s work is determining appropriate levels of network revenue. This role will need to change and evolve as the culture of regulation changes and as regulated businesses and stakeholders find new, more cooperative ways of working together.

However, network regulation currently remains very intensive and is high volume, with numerous revenue determinations, pricing proposals and tariff structure statements to be decided each year. This year was no different, with 21 tariff proposals approved and five completed revenue decisions.

In June 2020 we issued our final electricity distribution determinations on how much revenue SA Power Networks, Ergon Energy and Energex can recover from consumers in South Australia, regional Queensland and south-east Queensland respectively over the 2020–25 regulatory period. Our determinations ensure that consumers pay no more than necessary for a safe and reliable electricity supply and that projects are delivered as efficiently as possible. Consequently, electricity consumers in South Australia and Queensland will see a reduction in their distribution network charges in the first year of the next regulatory period.

In June 2020 we also issued our final decision on revenues for Jemena Gas Networks (JGN), which will be likely to result in gas bills for New South Wales consumers falling for almost 1.4 million homes and businesses to which JGN distributes gas.

During the reporting period the AER released our first financial reporting guideline for light regulation gas pipelines. This will help improve transparency and facilitate mutually beneficial negotiations between shippers and pipeline service providers. We continue to monitor non -scheme pipeline operator compliance with the reporting guidelines.

This is in addition to our continuing work in supporting the development of a Regulation Impact Statement to revise the tests used to apply gas pipeline regulation, examine the number and forms of regulation, and examine the governance arrangements for pipeline regulation.

We also maintain public registers for exemptions from Part 23 reporting obligations for non-scheme pipelines, and published five exemptions and revisions to exemptions in 2019–20. In recognition of the potential for significant change in the gas industry, the AER recently supported the future recovery of Jemena’s investment in trialling the production of hydrogen from renewable energy for injection into its Sydney network.

This year we released the final report on our first Value of Customer Reliability (VCR) Review. This is the largest VCR study ever conducted in Australia, with more than 9000 residential, small business and industrial energy consumers completing the survey.

In December 2019 we released and invited stakeholder feedback on our first rate of return annual update, specifying how we determine the allowed rate of return on capital invested in regulated electricity and gas networks for the following four-year period.

We have released a discussion paper on our treatment of inflation in our regulatory framework. The discussion paper invited stakeholder feedback and explored the treatment of inflation in our determination of revenue and prices for electricity and gas network services. Importantly, we established the Consumer Reference Group for the Inflation Review 2020 and Rate of Return Instrument Review 2022. The group will play a critical role in representing the perspectives and interests of consumers in these important review processes. We also published a document setting out the process for reviewing the Rate of Return Instrument along with an early working paper on the treatment of debt.

Increased volumes of renewable energy continue to present both opportunities and challenges. This year we approved innovative network tariffs, such as the SA Power Networks’ ‘solar sponge’, to encourage energy use when the supply of renewable energy is high. We also approved, in record time, the cost benefit analysis for two transmission interconnectors that will support the more efficient transportation of renewable energy to meet the future needs of consumers. Our approval of the Contingent Project Application for the proposed $230 million upgrade of the Queensland to New South Wales Interconnector will allow TransGrid and Powerlink to increase the availability of reliable electricity across the national grid.

The AER has been an active participant in policy development and has regularly engaged with its partner regulators, the Energy Security Board (ESB), the Australian Energy Market Commission (AEMC) and the Australian Energy Market Operator (AEMO) to progress the development of regulatory frameworks to support the energy transition. This includes contributing to the ESB’s NEM 2025 market design project. The AER also submitted a rule change proposal to the AEMC on system restart arrangements which contribute to the overall resilience of the power system by enabling recovery following a major blackout. The AEMC accepted the rule change proposal. The AER also raised a proposal seeking arrangements for the deferral of network charges payments by retailers in the context of the COVID-19 pandemic.

The AER also made 19 policy-related submissions, primarily on AEMC rule change processes, including on issues such as wholesale demand management response and the coordination of transmission and generation investment.

During the year we released an issues paper that presents analysis on the Council of Australian Governments (COAG) Energy Council’s request for us to develop two rule change proposals to support system security in the NEM. The AER is consulting on the proposed rule change(s) before submitting them to the AEMC. AEMO’s management of the power system depends on being able to rely on participants providing energy as forecast, and on which the total market dispatch solution and price has been predicated.

Also at the request of the COAG Energy Council, the AER has worked with the ESB on the development of new, actionable rules to provide a coordinated whole-of-system plan for the efficient development of the power system. In May 2020 the AER began consultation on the draft Integrated System Plan guidelines to support these new rules.

The AER has published guidelines to support the Retailer Reliability Obligation (RRO). Four interim guidelines—the Reliability Instrument Guidelines, the Market Liquidity Obligation (MLO) Guideline, the Contracts and Firmness Guidelines, and the Forecasting Best Practice Guideline—were published within three months of commencement of the RRO. A fifth guideline—the Opt-in Guideline—was published in June 2020.

The MLO in South Australia commenced on 7 February 2020. The AER is receiving ‘traffic light’ reports from the Australian Securities Exchange (ASX) while additional data-sharing arrangements between the ASX and AER are being finalised. At this stage it appears that participants are meeting their MLO obligations. We are also ensuring that classification of MLO generators and groups remains accurate during this interim period while we develop final MLO guidelines.

It has been a challenging but exciting year for the AER. We have managed to do some excellent work and achieve some amazing outcomes in a changing environment and in unusual times.

I am proud of what we achieved this past year and I am very grateful to all our employees for their incredible dedication and contribution to making all Australian energy consumers better off now and in the future.

Clare Savage
Chair, AER

AER year in review 2019–20 EME website engagements 2 835 980 AER website views 530 000 Infringement notices paid 25 Percentage of offers published on EME website within two business days of receipt 100% Weekly electricity and gas monitoring reports 52 Targeted reviews of compliance with the national energy rules 3 Retail authorisations assessed 22 Individual exemptions assessed 14 Retailers’ hardship policies and proposed amendments assessed (13 new and 46 amending existing retailers’ policies) 59 Completed revenue decisions for electricity networks and gas pipelines 5 Published State of the energy market 2020