Australian Energy Regulator only ‘partly effective’, audit finds

By Shannon Jenkins

September 4, 2020

The car parks affair has shown the incalculable value of the ANAO as an instrument for honesty and accountability in public administration.
The car parks affair has shown the incalculable value of the ANAO as an instrument for honesty and accountability in public administration. (Image: Adobe/FiledIMAGE)

Collecting structured feedback from stakeholders can help regulators identify and manage key sector-wide risks, according to the Australian National Audit Office.

The advice was among six key messages outlined in the ANAO’s latest performance audit report, and aimed at all federal government entities.

The report assessed whether the Australian Energy Regulator has been effectively regulating the National Energy Market, comprised of wholesale electricity and gas markets, the transmission and distribution networks, and the retail sector.

The audit was undertaken due to the AER’s ability to affect energy prices, security and reliability through its decisions. It found the organisation has only been a “partly effective” regulator of energy markets.

“It could have been more strategic in prioritising activities, particularly in adopting risk-based approaches to compliance and enforcement,” the report said.

“Performance reporting arrangements have not enabled the AER to demonstrate it is meeting its purposes, such as promoting the efficient operation of energy services for the long-term interests of energy consumers with respect to price, quality, reliability and security.”

The AER has only been “partially effective” in undertaking regulatory activities, identifying compliance risks, identifying and resolving non-compliance through education, compliance monitoring and enforcement activities, the report concluded.

Governance arrangements to oversee the AER’s National Energy Market regulatory responsibilities were only “partially appropriate”, the report noted.

“The AER has not established a performance monitoring, measurement and reporting framework that enables it to clearly demonstrate its effectiveness in regulating energy markets,” it said.

However, ANAO pointed out that at the time of the audit, the AER was in the process of implementing a range of recommendations from previous reviews aimed at improving its governance, management and risk approaches.

In light of the audit findings, ANAO has offered a number of key messages to all federal government entities on governance, risk management, performance and impact management, including:

  1. Where multiple institutions operate in an industry, regulators need clarity about the extent of their roles and influence on market outcomes. They should reflect those in governance, risk management and performance reporting frameworks.
  2. A transparent approach to shared risks that reflects cooperation between stakeholders and an understanding of the various tolerances and priorities of the market institutions can help ensure a broad perspective is taken to manage those risks.
  3. Obtaining structured feedback or intelligence from stakeholders can help regulators identify and manage key sector-wide risks.
  4. Regulators’ compliance activities should be based on clearly articulated risk-based priorities. This assists in providing assurance that regulators are appropriately allocating resources to identified risk areas.
  5. To promote transparency and accountability, regulators should publicly report on the number and outcomes of core compliance activities such as compliance assessments. They should also report on the extent to which regulated entities comply, and fail to comply, with obligations under the legislation.
  6. Clear articulation of program objectives provides a basis to evaluate the extent to which outcomes are being delivered. This is particularly important for discretionary activities, so as to provide assurance regarding the proper use of public resources.

Read more: Grappling with customer-centricity, the energy sector is recalibrating how it consults with stakeholders. Regulators can facilitate choices efficiently by aligning conflicting interests

The auditor-general also made six recommendations to the AER in relation to risk management, performance measurement, tools to support assessment processes, an information framework for compliance activities, and decision frameworks to streamline enforcement approaches.

The AER said it was committed to implementing the recommendations and to improving the “efficiency and effectiveness” of its operations and governance arrangements. In its response, the regulator noted that it had already started to address some issues identified by the ANAO.

For example, it has undertaken a “significant” amount of work on risk management, and has begun developing an AER-specific corporate plan. It has also been rolling out a new project management framework which would assist in projects being managed in a more consistent, structured and effective way.

The regulator has also begun implementing recommendations from an internal review of its compliance and enforcement function since July 2019, which were “broadly consistent” with some ANAO recommendations.

“For example, we have developed a new agency-wide policy for assessing non-compliance, implemented improved governance arrangements and are currently developing a new risk assessment model,” it said.

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