Embedded networks draft report released – major changes foreshadowed

As we noted last year, the Australian Energy Markets Commission (AEMC) had initiated a review of the regulatory framework for embedded networks after previously indicating that it did not regard the current regulatory regime as being fit for purpose.

On 31 January, the AEMC released its draft report, proposing a “comprehensive reform package”.  At this stage, the AEMC is recommending that the new regime only apply, for the most part, to networks that are established after the reforms take effect.  However, even if that were to be the case, there will likely be some direct and indirect implications for owners and operators of established embedded networks, such as assigning NMIs to all off-market connection points.  The AEMC is still nevertheless canvassing in the report whether legacy networks should be transitioned to the new regime.  If the proposals canvassed by this report come to fruition, some may question the ongoing viability of their model.

For many, but a small subset of networks servicing customers of particular classes, operators and retailers would no longer be able to seek an exemption but instead would have to be registered with the AER.  In addition, it is proposed that nearly all of the consumer protection mechanisms that apply to on-market customers would also be made available to customers in embedded networks.  While they are unlikely to be particularly controversial in principle, there will likely be additional costs associated with compliance and greater risks for non-compliance, even where the owner of a network is relying on a contracted registered operator.

There is also a clear focus of the AEMC on facilitating customers’ choice of retailer.  To date, the view has been that there are practical impediments to customers being able to exercise choice.  The proposed reforms will include the requirement to use market-compliant meters, registering those meters with the Australian Energy Market Operator, and new data transfer processes.

An implication from these proposals is that, if customers can more easily take a retail offer from outside the embedded network, those retailers whose electricity charges are at the higher end of the market may face significant pressure to reduce prices or risk losing critical mass.  The “catch 22” for them in reducing prices may be the loss of an income source.

Further, for those with a legacy network, their competitors who are subject to the new regime may promote the additional consumer protections, and enhanced capacity for customers to choose their retailer, as a feature of their network, which may drive operators and retailers of legacy networks to adhere to the new regime in a de facto fashion.

As a final observation, the AEMC has also noted the lack of a national exemptions regime in the area of embedded gas networks.  It will be exploring further the regulatory framework for embedded gas networks, including the supply of unmetered gas for cooktops.

The AEMC is inviting stakeholder submissions on its report, which are due on 14 March 2019, with a final report scheduled for May 2019.  Any implementation will not occur until 2020.  We will continue to monitor progress in this space.

The regulatory environment for embedded networks is a complex one and can be difficult to navigate.  For property owners with, or considering installing, an embedded network, or customers or suppliers of an embedded network, they should consider reviewing current arrangements to ensure compliance and also start considering the implications of the regime that is likely to be implemented.

Authored by: 
Adam Walker, Partner