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By Anne Wardell, Compliance Quarter.

In a recent article, Embedded Networks under the spotlight, Connor James outlined the Australian Energy Market Commission (AEMC) review of the regulatory arrangements for embedded networks.

The AEMC released a consultation paper and sought submissions. The Australian Energy Regulator (AER) lodged a submission on 17 May 2017. In this article I consider the Australian Energy Regulator (AER) submission.

Paula Conboy, Chair of the AER, has provided a covering letter which usefully summarises the recommendations made in the submission. Attachment A provides detailed answers to the questions asked in the Consultation paper.

The AER is of the view that the review ‘provides an opportunity to consider whether the benefits of embedded networks outweigh the detriment’[1]

The submission identifies both areas for improvement in the regulatory framework and the detriments arising from the structural limitations placed on competition in embedded networks. The following four main areas are highlighted:

  • limitations of the current regulatory framework;
  • the need for competition in embedded networks;
  • the need for appropriate (and tailored) consumer protections for customers within embedded networks; and
  • the need for more appropriate compliance and enforcement options.

I will consider the propositions contained in the submission under each of these headings. I have also developed a table, AER RESPONSE TO QUESTIONS RAISED IN AEMC CONSULTATION PAPER ON EMBEDDED NETWORKS, which as the name suggests sets out the AER responses to questions asked. The page references in the table are to the pages of the AER submission, please contact us for a copy of the table.

Limitations of the current regulatory framework

The existing system of regulation was designed on the basis that embedded networks would be an incidental aspect of the relationship between a landlord and their tenant. Based on this an exempt selling framework was established.

The reality however, is that more and more embedded networks are being developed with the energy produced being sold for profit. Installation of embedded networks has increased with many occupants of large developments seeking to convert to an embedded network (retrofitting).

The AER recommends that:

‘the distinction between authorisation and exemption under the current regulatory framework is no longer fit for purpose as it is unable to deal with the diversity and complexity of exempt selling arrangements, including selling in embedded networks’[2]

The need for competition in embedded networks

The AER notes that there is an inherently monopolistic design in embedded networks which prevents customers from having access to competition. The introduction in December 2017 of the AEMC rule change allowing customers to choose their embedded network supplier will assist to some degree but will not solve the problem.

The AER recommends that:

‘In the short term, enhanced competition in embedded networks could be achieved by greater availability of competitively priced energy only offers to provide customers greater choice of retailers and contracts. In the longer term, improving access to competition may involve solutions outside the Retail Law framework, for example alterations to planning legislation to facilitate direct access for embedded network customers to the national grid. This review provides a forum in which to recognise and highlight such changes for future consideration’[3].

The need for appropriate (and tailored) consumer protections for customers within embedded networks

The AER notes that embedded network operators (ENO’s) are a diverse collection of individuals or businesses with very different resources and drivers. Add to this the complexity of a relationship which often includes the role of landlord which has its own regulation, the ability to provide consumer protections can vary. Overall, the AER is of the view that:

‘the exemptions framework is failing customers in that it seeks to regulate embedded networks as if ENOs were authorised retailers operating in a competitive environment, rather than a diverse group of individuals and businesses with different levels of ‘retail’ capabilities and drivers operating in monopolistic environments’[4]

The need for more appropriate compliance and enforcement options

The AER notes that the current Retail Law provides limited enforcement options for breaches of selling requirements in the embedded network. Added to this is the fact that many ENO’s use an agent to manage their embedded network. These agents are not the authorised or exempted party for the purposes of the Retail Law framework. Although action can be taken against them it is more complex to do so. Further the customers usually view the agent as the seller of the energy.

Given this background the AER suggests that it may be appropriate for the Retail Law to specify a monitoring role for the AER to examine exempt seller behaviour[5]. Given the diversity of ENO’s, the AER suggests that such a role would need to be flexible.

Interestingly, the AER, recently published an issues paper seeking stakeholders’ views on the current access to dispute resolution services provided for small customers of exempt sellers and providers[6]. It is likely there will be several reforms delivered in this space.

Conclusion

In conclusion, Ms Conboy states that the best way to achieve improvement in the embedded network space is to introduce effective competition which would allow customers to have greater choice in choosing a supplier and put competitive pressure on the ENO’s. As well, the AER requests more flexible enforcement options and penalties for breaches of network exemption conditions.

The AEMC has indicated that a draft report will be published by 15 September 2017 with a final report by December 2017. The issue of embedded networks will also be discussed in the AEMC’s 2017 Retail Energy Competition Review which is due to be published by 30 June 2017.

We will continue to monitor developments in the embedded network space.

If you would like a copy of the table we have developed outlining the issues and AER responses, please email [email protected]

 

[1] Submission on regulatory arrangements for embedded networks, AER, 17 May 2017 at p 1.

[2] Ibid p 2.

[3] Ibid p 3

[4] Above n 3.

[5] Ibid p 4

[6] See Complaints Resolution for Exempt Customers, Anne Wardell, Compliance Quarter.

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