Shaping the Future of Regulators

Adapting to significant change through growth in functions and resourcing: Case study on the Australian Energy Regulator (AER)

Context

The role and detailed work of any regulator is inevitably shaped by developments in the markets it regulates. In energy, the market is in transition, with significant technological, behavioural and systemic change underway at all levels, and so the Australian Energy Regulator (AER) has to evolve and grow to meet new challenges.

Recognising the importance to the economy of a properly resourced regulator, and following an external consultants’ review commissioned by government along with the findings of a review into the future security of the National Electricity Market undertaken by Australia’s Chief Scientist Dr Alan Finkel, both of which found a case for enhanced resources, the Australian Government in 2017 significantly increased the AER’s budget and headcount. Over the following two years, its staffing rose by almost 75%. It was also given new responsibilities, with the new resources for example enabling fresh work developing a mechanism for a default market offer, putting a value on reliability and ongoing reform in the regulation of gas networks.

The AER decided to grow in a careful and considered way, recognising that bringing in the right skills and expertise, and properly scoping and engaging on new projects, would be vital to long-term success for the regulator.

As a first step it committed to expanding existing teams to improve timeliness and apply resources to areas where its effectiveness had been constrained in the past. Following this, the AER decided to build key capabilities that it had previously been unable to establish fully.

Alongside this, the AER published its first Strategic Statement in August 2017, and it knew it needed to make changes to give practical effect to this significant document. It sets out the regulator’s purpose as working to make all Australian energy consumers better off, now and in the future, and it includes five strategic objectives.

To embed the Strategic Statement, deliver its new responsibilities and make the most of its new funding, the AER established an ambitious program, with a series of work streams, to change how it operates. This ranged from its structure and workforce, to governance, culture and ways of working.

Issues

Adapting to significant change: growth in functions and resourcing

The AER’s most recent stakeholder survey1 found that 79% were satisfied with how effectively the AER performed its functions as a regulator (slightly up on 2016), with only 5% dissatisfied. Eighty seven percent said that the AER was trustworthy, and 81% said it had a clear direction and purpose. However, it always knew it could do more if it had more resources. In 2017, following a consultants’ report and a major review of the future security of the National Electricity Market, the government recognised this with a significant funding boost and an expansion of the AER’s roles and responsibilities.

This meant the AER could grow its teams, building on its existing cohort of talented and motivated individuals, and open up opportunities for development and capacity in areas that had previously been under-resourced. But while this was an exciting opportunity, it came with challenges too:

• The major growth in the organisation meant the AER would have to find entirely new ways of working.

• Its organisation had not just become bigger but also broader, with a much wider range of responsibilities.

• It had a very diverse staffing mix, with one-quarter of staff (and half of its senior people) having been in the organisation for more than a decade and so used to working in a particular way, and one-quarter being with the AER for less than a year.

• The organisation was already extremely busy, with more functions being added, but the process of change would itself demand more time and effort from staff.

• The context the AER was working in was not static – with an increase in functions and resourcing even as its review and restructure were underway.

• The change process was taking place against a backdrop of unparalleled political and public interest in the energy sector.

Community expectations of what a regulator does have altered and the AER had to adapt. It was a long way from the stereotype of an expert, economic regulator sitting alone making highly technical decisions. It had to understand consumer attitudes, experiences and needs, work in an open way, and move beyond consultation to true engagement. In addition, it had to collaborate with all its stakeholders while maintaining its independence.

Approach and intervention

The AER’s Strategic Transformation Program

The AER commissioned external consultant, Nous Group, to work with it on identifying the skills and expertise most needed to deliver for consumers, and how best to structure the larger organisation to accommodate new functions and deliver on its broadened remit. This was framed by the Strategic Statement and a series of discussions about what a high-performing regulator looks like.

Nous ran an extensive program with staff, senior management and Board members – there were for example around half a dozen all-day sessions with the SMT and Board throughout the life of the project. This process considered the current state of the organisation, what it could be like in future, likely external challenges, desired ways of working and priorities in terms of new capabilities. This resulted in a discussion paper with Nous’s initial analysis and conclusions, which formed the basis for further staff engagement. Nous then produced a further, final paper setting out its recommendations for change. These centred on three key areas:

• Governance – regulatory and operational decision making

• Organisation structure

• Workforce priorities.

Following further discussion, the AER’s Strategic Transformation Program, which had been established alongside the Nous review, translated the recommendations into a detailed plan of action, which ran throughout 2018 and 2019. The AER decided to focus first on introducing important new capabilities, making structural changes to enable this. It adopted all of the Nous proposals on structure, with a few relatively minor changes, then moved onto governance and ways of working changes.

While maintaining critical functions the AER decided to establish new or enhanced capabilities in strategic communication, policy development and influence, consumer insight and engagement, and compliance and enforcement. It also decided to embed an ongoing change function in the structure, so that its Strategic Transformation Program (the Program) was not simply a one-off.

This led to a very different structure for the AER, which became operational in July 2018. It moved from five to eight branches, each led by a General Manager reporting to the CEO:

• Policy and Performance – to help the AER develop its insight and perspectives on key energy and regulatory issues, and provide analytical services to the whole organisation and support how it develops as an organisation.

• Strategic Communication and Corporate Services – to manage the AER’s communications and relationships, and ensures it has the services it needs to support its work.

• Compliance and Enforcement – to develop and implement a strategic, risk-based approach to compliance, so that all regulated businesses meet their obligations.

• Consumers and Markets – to provide challenge on consumer issues, expertise on consumer engagement and insight, retail market consumer protection, and regulation of emerging business models.

• Market Performance – to monitor and report on retail and wholesale businesses’ performance and lead an organisation-wide approach to data systems.

• Distribution – to lead the AER’s strategy in relation to electricity distribution businesses, including delivery of network revenue determinations (resets).

• Transmission and Gas – to lead its strategy in relation to transmission and gas businesses, including delivery of resets.

• Networks Finance and Reporting – to support the Distribution and Transmission teams with specialist finance and modelling expertise, and lead on network performance reporting.

The AER then undertook significant recruitment, with a series of recruitment rounds in 2018 and 2019. This was a chance both to bring new people into the organisation and promote existing colleagues, but was in itself a significant amount of work.

Alongside this the AER initiated several important pieces of work on governance and ways of working:

• It created new operational priorities, to provide a bridge between its high-level Strategic Statement and detailed project planning. It also created new policy priorities.

• It developed new approaches to portfolio management, along with enhanced risk management and business planning processes.

• It put in place regular reporting to its Senior Management Team (SMT) and Board through a new organisational health and performance dashboard.

• It undertook a major review of its compliance and enforcement work, with a new Compliance & Enforcement policy and priorities supported by different ways of working.

Results, impact and lessons learnt

Through the Program the AER made some significant changes to the organisation, establishing new functions, structures and ways of working. Having periodically reviewed the effectiveness of the changes, the view of senior staff and Board was that together these changes have made the AER a more effective organisation.

The AER recognised in the design of the program it needed to support its wider leadership team to play a key role in the change process. Over the course of a year, it ran an extensive leadership program, “Leading through change”, delivered by external consultants. The leadership program comprises all-SMT workshops, one-to-one coaching with each General Manager, group workshops with directors, facilitated sessions with each branch’s senior leadership team, and all-staff sessions in selected new branches. It aimed both to establish effective leadership teams at senior management and branch level, and develop the change skills of individual leaders.

As the AER took on new functions and started to work differently, it was cognisant of the major impact this type of change could have on its people. The senior management team has had a strong focus on staff wellbeing. Amongst other things, a new People, Culture and Wellbeing Committee was set up, with representation from across the organisation. It developed practical initiatives to support a positive culture in the AER, as well as acting as a bridge between staff and management for effective feedback and identification of any emerging issues.

Other lessons learnt include:

• The Program did not proceed at the planned pace, largely because its scope broadened considerably. The AER did not for example initially know when or if the Board would be likely to increase in size and experience a major change in membership. The Program operated flexibly to accommodate this.

• Similarly, significant new functions and resources were added by government while the program was underway, so the planned structure and capabilities had to allow for some flexibility.

• The pressure of substantive work meant the AER had historically underinvested in corporate functions in the organisation, and although the new structure aimed to remedy this, the change process itself was run on a tight budget.

• Staff adapted well to the new structure and were keen to see some of the new ways of working put in place. They were heavily engaged in the early stages of the Program but this faded somewhat and the AER had to refresh the Program’s internal profile as it undertook further work in 2019.

• A highly experienced and close-knit leadership team, which understood its own need for change and embraced new colleagues from outside the organisation, was a key success factor for the Program.

Postscript

This case study was written in early 2019, and presented by the AER Board member Cristina Cifuentes at the OECD Network of Economic Regulators event. But as noted above, the change process is never one with a defined end point, and much has happened since then.

The Strategic Transformation Program was concluded as a discrete programme of work at the end of 2019. A new Chair, Clare Savage, joined the organisation in September 2019, and following legislative change the Board expanded to five members in early 2020, four of whom were new – Catriona Lowe, Justin Oliver and Eric Groom, along with Clare. Jim Cox was appointed Deputy Chair. Cristina herself stepped down from her AER Board role as part of this process. A new CEO, Liz Develin, joined in May 2020.

The Board has established four committees, covering Markets, Networks, Enforcement & Compliance, and Policy & Governance. Further changes are being made to ways of working, and there is likely to be further structural change. The Board has initiated a new strategy process, which will result in the creation of a Strategic Plan.

In short, the AER’s transformation process is evolving and renewing itself in the face of new challenges.

Note

← 1.  AER Stakeholder Survey 2018, https://www.aer.gov.au/publications/corporate-documents/aer-stakeholder-survey-2018.