Government position on regulation of Victorian embedded networks set – draft General Exemption Order now available for comment

The next milestone in the review of the regulation of Victorian embedded networks was reached last month when the Department of Environment, Land Water and Planning (DELWP) released its final position paper on the Victorian electricity licence exemptions framework (the Position Paper) including a draft revised General Exemption Order (GEO). Following on from changes made to the regulation of embedded networks at the federal level, the draft GEO seeks to improve the effectiveness of the regulatory framework applying to embedded networks, attempting to balance improved consumer protections while minimising burdens on embedded network operators.

For owners and operators of embedded networks, the combination of the federal and state reforms will lead to additional compliance obligations, possibly from as early as 1 December 2017 and otherwise from 1 April 2018.

Regulation of embedded networks in Victoria

Embedded networks, typically seen in shopping centres, apartment buildings, retirement villages and caravan parks, generally involve the distribution and sale of electricity by an owner of land to tenants or residents of the premises. Embedded networks in Victoria are regulated by both state and federal legislation.

Victorian regulation

Embedded networks are exempt from the need for a licence under section 17 of the Electricity Industry Act 2000, which provides an exemption for the generation, distribution and retail sale of electricity where the embedded network complies with the General Exemption Order, issued by the Government in 2002 (and subsequently varied). Currently, it is up to the embedded network operator to ensure that it complies with the GEO, as there is no requirement for networks to be registered with any regulatory body.

Federal regulation

Distribution of electricity in Victoria must also comply with the federal requirements under the National Electricity Law and National Energy Rules which ordinarily requires registration with the Australian Energy Market Operator (AEMO) as a Distribution Network Service Provider (DNSP) and compliance with the applicable obligations. Distribution of electricity in an embedded network can be exempt from these requirements under the Australian Energy Regulator’s (AER) Network Service Provider Registration Exemption Guideline (Network Guideline). The Network Guideline sets out various conditions to the exemption. Of particular note, embedded networks qualifying for exemption must register with the AER as an exempt network.

As Victoria has not signed up to the National Energy Retail Law, the national regulatory framework for retailing electricity does not apply to embedded networks in Victoria. Only the GEO applies.

Changes arising from the AER’s Network Guideline

AER’s Network Guideline was updated last year, as reported on in our earlier publication, with a number of changes including a new requirement for an Embedded Network Manager to be in place from 1 December 2017 for many embedded networks. The AER has recently released a tool to help networks navigate the new Embedded Network Manager requirements).

Changes under the draft GEO

Following a review of the current regulatory framework, including two rounds of public submissions, DELWP is proposing to revise the state based regulation of embedded networks through an update to the GEO, notably:

• Classifying exemptions

  – Registrable and deemed exemption categories are to be introduced with tailored exemption classes to specific activities based on the AER’s Network Guidelines. Registration will be with the Victorian Essential Services Commission (ESC), meaning that applicable embedded networks in Victoria will be required to be registered with both the ESC and the AER in most cases.

• Embedded networks servicing multiple strata lots

  – Embedded networks servicing multiple strata lots will likely eventually require a licence. More work is still to be done by DELWP and the ESC on this proposal, however the policy position is clear: embedded networks for multiple strata lots should be treated like a public utility.

• This is influenced by the view that such embedded networks are operated by entities as their primary business, rather than being a network incidental to the strata development’s functions.

• Consumer protections

  – The main consumer protections provided for embedded network customers will still be found in the Energy Retail Code (ERC) and Electricity Distribution Code (EDC). In relation to the application of the ERC, embedded networks are currently required to comply with “all applicable provisions of the [ERC]” which is generally accepted by submitters and DELWP as being too vague and subject to interpretation. To address this, DELWP has referred to the ESC the task of specifying exactly which provisions of the ERC are to apply to embedded networks (as is already the case for the EDC), with a view to producing a “Retail Exemptions Guideline” to introduce certainty to the level of protections to be afforded to customers.

• Choice of retailer

  – Information disclosure requirements under the GEO are to increase, with embedded networks required to make customers aware of their right to choose to purchase electricity from their choice of licensed retailer. This is in line with the amendments to the AER’s Network Guideline, which aims to facilitate customer access to network competition through the function of the Embedded Network Manager.

• Pricing Rule

  – A price cap on what sellers of electricity in embedded networks can charge customers will be revised from the “standing offer” price to one based on commercial market data formulated by the ESC. This is a result of DEWLP concluding that the standing offer price is no longer appropriate.

• Enforcement

  – DELWP intends to enhance the compliance and enforcement regime once more information is obtained about the number of embedded networks in Victoria and the ESC completes its review of the licence framework.

• Dispute resolution

  – All embedded networks are nevertheless to be brought under the dispute resolution jurisdiction of the Energy and Water Ombudsman Victoria (EWOV).

What should embedded network operators do?

The comment period for the draft GEO will close on 22 September 2017.

DELWP is anticipating implementing the new GEO by 1 April 2018, establishing EWOV’s jurisdiction by 1 July 2018, and implementing the new Pricing Rule by 1 July 2019. This is additional to the AER’s own requirements for Embedded Network Managers (as required) to be in place by 1 December 2017. Strata lot networks will also need to observe these new arrangements until there are further announcements by the Victorian Government on the transition to a licensing framework for those networks.

Assuming the new GEO is put in place as anticipated, embedded network operators should:

• Ensure they are currently complying with the AER’s Network Guideline, including whether they are registered and complying with the conditions of exemptions.
• Determine whether they will need an Embedded Network Manager in place from 1 December 2017.
• Review how customers are being charged, in terms of both network and usage charges to ensure customers are not being improperly charged in contravention of the current GEO and Network Guideline.
• Prepare for the implementation of the new GEO.

Gadens is able to assist in reviewing current and future compliance.

Authored by:
Adam Walker, Partner
Zina Teoh, Lawyer