More regulatory changes on the way for embedded networks

In recent action by the Australian Energy Regulator, several shopping centres and retirement villages were issued with infringement notices for not selling electricity in a manner required by the National Energy Retail Law.

This is a timely reminder for operators of embedded networks to familiarise themselves with their regulatory obligations and also to be aware of proposed changes to that regulatory framework.

Regulation of embedded networks

In Victoria, typical embedded networks are regulated on two levels:

Retailing

Sellers of electricity within embedded networks can do so without the need for a Victorian retail licence if they comply with the conditions of the General Exemption Order issued by the Government in 2002 (and subsequently varied) under section 17 of the Electricity Industry Act 2000.

Distribution

In the context of the embedded network as a distribution network, there is dual regulation.

At the State level, an embedded network provider may also be exempt from the requirement to hold a distribution licence by virtue of the General Exemption Order, provided that the conditions of the exemption are met.

In addition, the operation on an electricity network ordinarily requires registration with the Australian Energy Market Operator (AEMO) as a Distribution Network Service Provider (DNSP) and compliance with the applicable obligations. However, a person who owns, controls or operates an embedded network may apply for an exemption from the Australian Energy Regulator (AER) as canvassed by the AER’s Network Service Provider Registration Exemption Guideline (Network Guideline). Notably, most embedded networks qualifying for exemption must register with the AER as an exempt network.

Potential changes to the regulatory framework

General Exemption Order

As noted in our earlier update (see here), the Department of Environment, Land, Water and Planning (DELWP) released a Draft Position Paper proposing changes to the General Exemption Order due to concerns regarding consumer protection issues and a customer’s right to choose its retailer, with the review aiming to ensure that customers in embedded networks are not unreasonably disadvantaged when compared to customers of licensed retailers or distributors.

For facilities that use embedded networks, this could lead to new obligations to be registered with the Essential Services Commission, increased disclosure obligations to potential purchasers and tenants, tightened consumer protection compliance, and empowering the Energy and Water Ombudsman Victoria to hear complaints. For strata lot developments, there is also the prospect of losing access to the exemption altogether, and instead being required to hold a licence.

With the period for making submissions having already closed, the Final Position Paper is expected to be released late in 2016.

Network Service Provider Registration Exemption Guideline

As noted above, embedded networks are generally regulated as an exempt entity by reference to the Network Guideline. Primarily to remove the barriers that customers of embedded networks face in accessing retail competition, the AER proposes to vary the Network Guideline, which flows from rule changes made by the Australian Energy Market Commission (AEMC), so as to include the following features:

• A new function known as an “embedded network manager” (ENM) who will be required for most classes of exempted networks. The ENM must be accredited by the AER, and will be responsible for:
  • market interface services for on-market embedded network customers;
  • ensuring that child meters in an embedded network are an approved market meter; and
  • recording details of network customers’ metering installations in the market settlement system, MSATS, so that they are accessible to market retailers.
• An ENM must not pay an advance fee or a rebate to a property owner, developer of exempt embedded network service provider or any other person connection with the provision of the ENM services or to secure a right to provide services to an embedded network regulated by the AER.
• Networks with 30 or more customers will be required to have the ENM in place by 1 December 2017. Smaller networks could delay that appointment until, in essence, a customer elects to take a market retail contract from another retailer.
• Revisions to billing practices whereby, among other things:
  • there will be increased disclosure obligations regarding tariffs;
  • an exempt embedded network service provider must not impose any network charge that would not be charged by the local area distributor if there were a direct connection; and
  • meter reading charges will be more strictly prescribed and possibly prohibited.
• In respect of metering:
  • an embedded network operator must not prevent meters in a network being used by a market retailer on reasonable commercial terms;
  • if a customer elects to replace a meter for that purpose, the customer may do so;
  • an embedded network operator may not obtain compensation for the unrecovered cost of redundant meters arising from customers replacing meters for competition purposes; and
  • meters must comply with the standards prescribed under the National Energy Rules.
• Exempt embedded network service providers must have dispute resolution processes that comply with AS/NZS 10002:2014 and must also apply to join an ombudsman scheme.

Submissions on the AER’s draft Guideline are due by 10 October 2016.

The proposed changes being canvassed by the AER could have a marked impact on the cost base of an embedded network. Even if the embedded network operator were to be accredited itself as the ENM, cost and compliance obligations could make the embedded network less competitive with more traditional arrangements, particularly if a customer’s opportunity to obtain a competitive retail offer is more accessible.

What to do next

For owners and operators of embedded networks, it is timely to review practices to ensure current compliance. Providers of embedded networks supplying 10 or more customers should ensure that they are registered with the AER.

For the future, it is clear that regulators are looking to improve end users’ access to the benefits of electricity competition, and that there is a level playing field for retailers to compete for customers. Those making current investment decisions about embedded networks should be mindful of likely regulatory changes that could affect the cost and attractiveness of conducting an embedded network.