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AEMC rule and law changes for embedded networks

AEMC rule and law changes for embedded networks

AU Energy Compliance

As noted in previous posts the Australian Energy Markets Commission (AEMC) is working on rule and law changes for the regulation of embedded networks.

We now have a new draft timeline- as provided by the AEMC today and set out below:

On the draft report, submissions were received from the Australian Energy Regulator (AER), the Public Interest Advocacy Centre (PIAC), and retailers among others. The AER requested that the AEMC consider retaining individual exemptions as part of the retail framework to ensure that there remains flexibility in the regulation of embedded networks. Retailers were, unsurprisingly, supportive of measures to ensure that customers within embedded networks had power of choice.

Individual exemptions

In retaining individual exemptions, the AEMC proposes to restrict the power of the AER to specify varying conditions on off-market retailers- ensuring that the flexibility is within the individual exemption category and not within the retail authorisation category.

The AEMC is proposing that there be a public consultation process for individual exemption applications whereby anyone can lodge a submission and the AER can make an assessment on the basis of the consumer impact and cost of the proposed selling activity.

Timeline

Above you will see that there is a new timeline for the implementation of the rule and law changes. This process includes rule and law changes passing the SA parliament and AEMO system changes.

In terms of transition, the AEMC proposes to review the size and establishment date (the meaning of which is unclear) in determining when an embedded network needs to transition to the new framework.

The proposed timelines are set out below and you will note that the 2013 date relates to the implementation of new metering requirements- on the assumption that meters installed since are compliant.

 

If you have any questions on the above please get in touch.

What will happen to ‘legacy embedded networks’ under the AEMC’s proposed rule and law changes

What will happen to ‘legacy embedded networks’ under the AEMC’s proposed rule and law changes

AU Energy Compliance

Tomorrow the Australian Energy Market Commission (AEMC) will hold a stakeholder forum to examine the question of what will happen to ‘legacy embedded networks’ under the AEMC’s proposed rule and law changes. Below we discuss this question.

By Connor James, Compliance Quarter.

In January the AEMC released its draft report Updating the regulatory frameworks for embedded networks. The report set out proposed amendments to the national energy laws and rules to establish a new regulatory regime to improve consumer protections and access to retail market competition for embedded network customers. We have discussed the report in previous posts.

The headline items included the establishment of a new ‘type’ or retailer holding an off-market retail authorisation and the abolition of the majority of exemptions meaning that all ‘new’ embedded networks would need to be supplied by an off or on market authorisation holder. A new Embedded Network Service Provider (ENSP) role will be established and that party must register with AEMO and be subject to many of the existing regulatory requirements placed on DNSPs.

The remaining question was what is to happen with ‘legacy’ embedded networks.

Options for Transition

The language of the AEMC has gradually changed from being open to the possibility of allowing existing exemptions to a focus on transition. Transition means that a number of existing embedded networks will need to be supplied by an authorised retailer at some point. There are estimated to be between 700,000 -900,000 customers within these embedded networks, so the transition is important not only for suppliers but also for consumers.

The AEMC is now considering retaining ‘individual exemptions’ for those selling arrangements which meet a set of consumer interest and competition based principles and factors. This makes sense from the point of view of ensuring that the regulatory framework retains flexibility; particularly as we see more and more innovation in the space.

Deemed exemptions will not be transitioned to the new arrangement. These allow, for example, the sale of energy between related entities.

Transition Triggers

The AEMC recognises that ‘Existing EN are quite diverse and will have their own unique situation and characteristics. The transition framework needs to recognise this while keeping the arrangements simple and practical.

It is proposed to use two types of triggers for transition:

• Time based; and
• Size based (number of customers).

This means the size of an embedded network and the dates specified by the AEMC will determine when embedded networks need to transition to the new framework. From an operator point of view, this simply means that they will have time to come into compliance by either obtaining an off-market retail authorisation or by divesting of their embedded network operations- which creates its own issues.

We will provide updates to our clients tomorrow on the proposed transition timelines and new implementation timeline.

If you have any questions on the above, please contact me via email to [email protected]

The new rule proposal for exempt gas sellers

AU Energy Compliance, Consumer

The new rule proposal for exempt gas sellers

A consultation paper was released last week by the Australian Energy Market Commission (AEMC) on a proposal that exempt gas sellers in east and south-east coast states be allowed to purchase gas directly from the Australian Energy Market Operator’s ‘Gas Retail Markets’. These markets are the equivalent of the National Electricity Market for gas retailers.
We describe the proposal below and offer our take on it.

Photo by Fancycrave on Unsplash

By Dr Andrew Donnelly, Compliance Quarter.

1. Two Frameworks for Gas
As with electricity, there are two distinct regulatory frameworks for gas sellers in the eastern and south-eastern states:

• The National Energy Customer Framework (NECF) administered by the Australian Energy Regulator (AER). It is focused on customer protections and captured primarily in the National Energy Retail Law and the National Energy Retail Rules. Note, this does not apply in Victoria;
• The Gas Retail Market Participant Framework administered by the Australian Energy Market Operator (AEMO). It is focused on the physical operation and co-ordination of the Gas Retail Markets and captured primarily in the National Gas Law and National Gas Rules.

2. The Problem and Proposed Solution
Under NECF, sellers of gas need to hold a retail authorisation or be exempted from the requirement to do so by. Exemptions may be available for gas sellers who supply gas:
• ‘incidentally’ to their main business
• as a community service or at cost, or
• to a defined group of customers at one site.

Some exempt gas sellers wish to purchase gas from the Gas Retail Markets but are prohibited from doing so as they do not fit into any of the registrable categories currently permitted under the National Gas Rules.

It is proposed that exempt sellers would be able to register as either a:
• ‘self-contracting user’, if they sell only to a related business; or,
• ‘retailer’, where they sell gas to unrelated entities.

3. How does this affect you?
Many exempt gas sellers are ‘on-sellers’. This means they purchase gas from a gas retailer and on-sell that, often within an embedded network. If this applies to your business – nothing changes. The new change is only for an exempt seller that wishes to purchase gas directly from producers through the Gas Retail Markets.

However, this does create a strange regulatory situation. Businesses that are ‘exempt sellers’ for the purposes of the AER-administered regime would also be capable of being ‘retailers’ for the AEMO-administered regime. This could prove confusing for some end -customers who may mistakenly believe that their gas supplier is subject to the retailer obligations set out in the NECF.

Note also that the AEMC is currently separately considering how gas embedded networks may be brought within NECF. This raises the question whether the proposal to let some ‘exempt sellers’ also be ‘retailers’ is pre-empting a decision to bring exempt gas sellers into NECF.

Submissions on this consultation paper close on 4 April 2019.

If you are interested in the Compliance HUB, contact us using the contact form.

Embedded Networks Framework Update – Further Questions

Embedded Networks Framework Update – Further Questions

AU Energy Compliance

Following our webinar on the topic last week (which you can watch at https://zoom.us/recording/share/jBd95cUmW_4wZ9fGoZMqnXaJEe-kDAaVBhehvD2pp7uwIumekTziMw?startTime=1551409241000)), we had a range of questions. As those questions will be of interest to a wide range of people, we offer our responses here.

By Dr Drew Donnelly, Compliance Quarter. 

All references are to AEMC’s draft report ‘Updating the regulatory frameworks for embedded networks’ available at https://www.aemc.gov.au/market-reviews-advice/updating-regulatory-frameworks-embedded-networks. We encourage you to make submissions on this report soon as they close on 14 March.

  1. Can the embedded network owner or operator pass on the costs of appointing the Embedded Network Service Provider (ENSP) and the Off-Market Retailer?

The proposed new framework will require the entities which own and operate new embedded networks to register with the Australian Energy Market Operator (AEMO) as an ENSP and as an authorised Off-Market Retailer.  In certain circumstances an intermediary or third party will be able to provide these services in place of the owner or operator of the embedded network. There is no proposed regulation as to how these costs may be passed on and to whom (p57).

  1. Will all ‘new’ embedded networks have to be built with market facing meters, in all sites, already installed for customers to go ‘on market’ if they so desire?

Yes. New embedded networks, that are requited to appoint an ENSP, will be required to have National Electricity Market (NEM) compliant metering as well as comply with Chapter 7 of the National Electricity Rules (p60).

The off-market retailer for that embedded network will be required to appoint a Metering Coordinator who in turn appoints a Metering Provider who will be responsible for the actual installation of NEM-complaint metering.

  1. Can the cost of a new metering installation be passed on to the customer?

For new embedded networks, who will be required to install NEM-compliant metering (i.e. smart meters), the existing rules in relation to updating a metering installation will apply. The retailer will be able to pass on the cost of a new meter to the customer in a variety of ways including a lump sum, a monthly fee or incorporating the cost of providing new meters to customers as part of the electricity usage charges. For more information see https://www.aer.gov.au/consumers/my-energy-service/smart-meters.

For legacy embedded networks, if they are transitioned to the new framework (which is yet to be determined), the metering will need to be NEM-compliant, if it is not already. There is no mention yet of whether there will be any restriction in passing on the cost of upgrade to customers.

  1. Is the creation of a child NMI the job of the newly created ENSP?

In embedded networks that are required to appoint an ENSP, then it will be the responsibility of the ENSP to create the child National Metering Identifier (NMI) through an ‘MSATs Change Request’ – the name for the AEMO’s market interface system.

  1. Who decides who will be the ‘local embedded network retailer’? 

Under the new framework, for a new embedded network, in its registration as an ENSP, the ENSP will be required to nominate an off-market retailer as the ‘local embedded network retailer’. The consent of that retailer will be required before doing so (p40).

  1. What about small to medium-sized businesses versus large enterprises? Will the rules be the same?

The proposed new requirements for registration as an ENSP and as an off-market retailer would apply equally to a small business or medium-sized business as to a larger businesses. However, the AEMC does point out that its proposal:

“grants the AER discretion in relieving an applicant from some conditions, which substitutes for the current individual exemption regime. The Commission considers that the AER may, for example, determine to exempt some NEM retailers or off-market retailers from a sub-set of obligations based on their customer type or size.” (p54).

  1. Under the new embedded network regulatory environment where there would be a requirement for a ‘legacy’ exempt retailer to become registered as on Off Market retailer, will there be a requirement for legacy customers to provide explicit informed consent (EIC) to transition to the new entity?

The AEMC have not yet come to a recommendation on this. While there is a proposal in the new framework that EIC will be required before transfer from an exempt seller to an authorised retailer (p57), at the time of the commencement of the new framework it is likely that legacy embedded networks that require authorisation, will already be authorised

The NZ Electricity Price Review – Options Paper released

AU Energy Compliance

The New Zealand Government’s Electricity Pricing Review has just released an options paper looking at changes in a range of areas(https://www.mbie.govt.nz/have-your-say/electricity-price-review-options-paper/). It explores 41 options across the following broad themes:

  • strengthening the consumer voice;
  • reducing energy hardship;
  • increasing retail competition;
  • reinforcing wholesale market competition;
  • improving transmission and distribution;
  • improving the regulatory system;
  • preparing for a low-carbon future;

In this update I focus on those changes that have the potential to directly affect consumers.

Photo by Bethany Legg on Unsplash

By: Dr Drew, Compliance Quarter.
  1. Energy Hardship

It is proposed that mandatory minimum standards be introduced for retailers dealing with customers in payment difficulty/financial hardship. Currently, the standards are voluntary and there is significant inconsistency between retailers. While hardship policies have been prescribed in the Australian National Energy Retail Law (NERL) for a long time, similar concerns have prompted recent changes to hardship programs in Australia.[1]

In addition, to strengthen support for customers in hardship it is proposed that the following be established:

  • a network of community-level support services for vulnerable customers. This would support responsible energy use and be funded by an industry levy;
  • a fund to help households in energy hardship become more energy efficient;
  • extra financial support for customers in hardship;
  • a prohibition on prompt payment discounts.[2]
  1. Retail competition

Options proposed to support a more competitive retail environment include:

  • the requirement to provide information to customers on dispute resolution, usage and comparison websites;
  • a prohibition on win-backs;
  • mandatory market-making obligations for vertically integrated retailers to ensure the availability of sufficient hedge contracts for smaller retailers to manage their wholesale price risk.

Interestingly, the Review considered, but ultimately did not recommend price caps as an option. For the latest on the policy to introduce a default market offer in Australia see https://www.compliancequarter.com.au/aer-draft-determination-of-default-market-offer-prices/.

To read more about the Electricity Pricing Review go to https://www.mbie.govt.nz/building-and-energy/energy-and-natural-resources/energy-consultations-and-reviews/electricity-price/. Submissions should be received by 12pm, Friday 22 March 2019.

[1] See https://www.aer.gov.au/communication/aer-publishes-draft-hardship-guideline.

[2] See https://www.aemc.gov.au/sites/default/files/2019-02/Rule%20change%20request_0.pdf for a recent proposal for the Commonwealth Government to prohibit a similar practice in Australia.

If you are interested in the Compliance HUB, contact us using the contact form.

The new Consumer Data Right extended to the energy sector

The new Consumer Data Right extended to the energy sector

AU Energy Compliance

The Australian Competition and Consumer Commission (ACCC) recently released a Consultation paper on data access models for energy data.[1]

The Consumer Data Right (CDR) regime, provides individuals and business with a right to conveniently access specified data in relation to them that is held by businesses. It is intended to  improve consumers’ ability to compare and switch between products and services and thereby increase competition. It is currently being rolled out in the banking sector but has been scheduled to roll out in the telecommunications and energy sectors for a while now.

By Dr Drew Donnelly, Compliance Quarter

A key difference between roll-out in the banking and energy sectors is the diverse range of entities that hold relevant information in the latter sector, including retailers, distributors, embedded network operators and the market operator (AEMO). In some respects, this makes the choice of data access model in the energy sector more complex.

  1. Types of data

There is a range of data that is proposed to be subject to the CDR in the energy sector. This includes:

  • National Metering Identifier (NMI) Standing Data. This substantial dataset logged in the market operator’s MSATS system contains a range of identifying information and information relating specifically to the connection including NMI, network tariffs, transmission node identities, average daily load and the presence of controlled loads;
  • Customer Provided Data. This is any data submitted by the customer themselves;
  • Metering Data. This data, collected by Metering Data Providers (MDPs) records the actual energy use at the premises;
  • Billing Data. This data is held mainly by the retailer;
  • Product Data. This is general information relating to energy products/plans;
  • Distributed Energy Resources Register. This relates to equipment like solar energy resources or batteries that are connected to the grid.
  1. The three models

The dispersion of energy information across different entities means that there are several broad models being considered for implementation.

  • Model 1: the AEMO centralised model – AEMO would be the sole data holder of a centralised data set and would provide CDR data directly to accredited data recipients.

Figure 1: https://www.accc.gov.au/system/files/ACCC%20consultation%20paper%20-%20data%20access%20models%20for%20energy%20data.pdf., p26.

  • Model 2, the AEMO gateway model – AEMO would provide a gateway function to facilitate the transfer of data from data holders such as retailers, distributors and AEMO itself to accredited data recipients.

Figure 2: https://www.accc.gov.au/system/files/ACCC%20consultation%20paper%20-%20data%20access%20models%20for%20energy%20data.pdf, p29.

  • Model 3, the economy-wide CDR model – existing data holders (for example, retailers) would be responsible for providing CDR data directly to accredited data recipients.

Figure 3: https://www.accc.gov.au/system/files/ACCC%20consultation%20paper%20-%20data%20access%20models%20for%20energy%20data.pdf, p31.

  1. Comment

There is a range of advantages and disadvantages to each model that are canvassed in the paper itself. Some important general points to note include:

  • The first or second options would require significant changes to the National Electricity Law, National Energy Retail Law, associated rules and regulations and jurisdictional legislation to alter the role of AEMO and its access to information;
  • It is an open question how and when customers sold energy in an embedded network by an exempt on-seller/authorised on-seller would get access to their data as their data is not held by AEMO or market participants. Current plans to further regulate embedded networks do not include a proposal for retailers/embedded network service providers to collect the same data on embedded network customers as traditional retail customers;
  • The CDR will not initially apply to gas data-sets but it is intended that the regime will extend in this direction in the future.

Submissions on the paper are due 22 March at https://www.accc.gov.au/focus-areas/consumer-data-right-cdr/energy-cdr/consultation-on-energy-data-access-models.

[1] See https://www.accc.gov.au/system/files/ACCC%20consultation%20paper%20-%20data%20access%20models%20for%20energy%20data.pdf.

AER Draft Determination of default market offer prices

AER Draft Determination of default market offer prices

AU Energy Compliance

The Australian Energy Regulator (AER) has published its draft determination of default market offer prices. Below we look at the methodology used and the implication for energy sellers.

By Connor James, Compliance Quarter. 

The default market offer (DMO) came about as a result of recommendations from the Australian Competition and Consumer Commission (ACCC) in its retail electricity price inquiry (REPI). On 23 February 2019, the AER published draft default market offer prices, which are to apply from 1 July 2019 for standing offer customers on relevant tariffs, in network distribution regions not subject to state-based price regulation.

Price Reductions

As has been widely reported, in a number of regions the DMO will result in a decrease in the rate being paid by consumers on standing offers. The DMO is said to result in “reductions in median standing offer prices in all distribution zones” of up to $218 for residential customers on flat-rate tariffs. The DMO will apply in those states that have adopted the National Energy Customer Framework (NECF) which are NSW, QLD, SA, TAS and the ACT (subject to jurisdictional regulations). Victoria, despite a recommendation from the ACCC, continues to refuse to adopt NECF and have developed their own default pricing regime.

As you will see from the above, the determination relates to flat rate and flat rate with controlled load but not directly to time of use tariffs. On this, the AER notes:

While the draft Code does not require us to develop DMO prices for Time of Use offers, retailers will need to be able to calculate annual bills for TOU offers for comparison to the reference bill. For consistency, these calculations will need to be made using a common set of assumptions about usage at different times.

The AER’s calculation for its draft determination position is that “the DMO price for each distribution zone will be set at the mid-point (50th percentile) of the range between the median market offer and median standing offer, based on generally available offers in October 2018.”

Impact on energy sellers

The DMO is effectively price regulation. Under the draft Code retailers must structure prices to not exceed the DMO annual price for the stated benchmark consumption level. From a retailer’s perspective, this will involve system and process changes and, for many with legacy systems, significant implementation and ongoing compliance costs.

The changes may also have impacts on exempt energy sellers who are generally prohibited from charging more than a local area retailer’s standing offer.

Changes to the rules and law will be required to give effect to the DMO.

The AEMC draft rule and law package- the regulation of embedded networks.

The AEMC draft rule and law package- the regulation of embedded networks.

AU Energy Compliance

With up to 1 million energy consumers in the embedded networks, the AEMC has proposed sweeping changes to the existing regulatory framework.

 

By Dr Drew Donnelly and Connor James, Compliance Quarter.

The headlines:

  • There will be a very limited number of new embedded networks (post implementation of the rule changes) that qualify for exempt selling: the majority will require an authorised retailer (off-market retailer) to supply electricity within them.
  • All off-market customers will have a National Metering Identifier (NMI) and be ‘discoverable’ in MSATs (the market system).
  • The embedded network service provider (ENSPs) will need to register with the Australian Energy Market Operator (AEMO). It is likely that they will need to comply with higher safety and reliability obligations including those under jurisdictional obligations.
  • The transition question i.e. what will happen to existing embedded networks is likely to be determined with reference to the need to ensure that all customers enjoy the same protections regardless of their place of residence.

Below we discuss the proposed new regulatory regime for embedded networks. Work has been underway for some time on a new regulatory regime for embedded networks under the National Energy Customer Framework.

One of the key objectives is to give effect to the principles of Power of Choice by allowing embedded network customers access to retail competition.  The Australian Energy Market Commission (AEMC) is also looking to improve the consumer protections available for off-market customers, the AEMC is not concerned so much with the nature of the embedded network or the embedded network operator i.e. a customer should enjoy the same protections as an energy consumer regardless of where they live.

These are a complex set of proposal and there are a large number of stakeholders with different interests. Below we look at the discussion from the AEMC workshop held on 22 February 2019. As well as summarising the proposals made so far, the workshop gave an indication of AEMC’s views on future directions for its policy proposals and the areas where it needs feedback from stakeholders.

In summary, the proposal is to increase the regulation of embedded networks by requiring most on-sellers to be authorised retailers and most network operators to register with the Australian Energy Market Operator. The new regime will continue to exempt some network operators and on-sellers i.e. short-term accommodation. However, deemed exemptions will no longer be available with all exemptions requiring registration with the AER. The AEMC notes that developers and body corporates will still have the option to arrange direct connections i.e. to not establish an embedded network.

New Roles

Under the proposal, there will be two new roles established: the ENSP- the network service provider who will need to be registered with AEMO and the ‘off -market’ retailer.’

The ENSP will be an entity that engages in the activity of owning, controlling or operating an electricity embedded network. The ENSP will be required to register with AEMO. The ENSP may also be the ‘off market retailer’ i.e. one party may fill the two roles.

Interestingly, the AEMC proposes that very similar conditions for authorisation will apply to both off and on market retailers. This will be a barrier to entry that many existing ENOs cannot meet. A metering coordinator will be appointed for all embedded networks- with the aim of ensuring that metering within embedded networks is consistent with that in the NEM and that ‘off-market’ customers are discoverable in MSATs.

Standardised network billing arrangements will be introduced in an attempt to overcome the existing barrier to customer choice which is the difficulty for retailers in entering into agreements with ENSPs for network billing of on-market customers in embedded networks.

Off-Market Retailer authorisation

The off-market retailer will be a retailer authorised by the AER. Essentially the only difference between an off-market and on-market retailer will be that an on-market retailer is a registered market participant.  The off-market retailer will be obliged to make an offer to all off-market and new customers in the embedded network that it operates in.

Off market retailers will be subject to almost the same compliance obligations as an on-market retailer. They will also be subject to the same entry test. For the majority of the existing embedded network operators, this will simply not be possible assuming the AER applies the same tests it applies today to an applicant for a retail authorisation.

To obtain a retail authorisation, an applicant must demonstrate that it has the capacity to comply and financially support its operations. The AER has a guideline and we have published various guidance on this process.

Changes for existing authorised on-sellers

Existing authorised on-sellers will need to review the changes and consider the impact of the report on their operations.

The most significant changes for authorised on-sellers will be:

  • obligations to supply customers within an ‘embedded network area’;
  • meeting the same metering standards as market retailers;
  • the obligation to appoint a metering coordinator;
  • liaising with the new ENSP role.

Points of emphasis/questions from the workshop

In addition to summarising matters contained in the draft report released in January, AEMC emphasised certain points in the workshop and requested specific areas for stakeholder feedback. Stakeholders also asked some questions that are worth further reflection and submission from interested parties.

  • Transition arrangements. Which existing embedded networks, if any, should be transitioned to the new framework? This could substantially affect authorised on-sellers who operate in embedded networks that operate under network exemptions as registration as an ENSP would be required.
  • The definition of a ‘network activity’ is changing. This may mean that some activities that currently require a network exemption, will no longer require an exemption of any form.
  • Compliance costs. AEMC considers that the cost of complying with the new framework will be minor and seeks your feedback on potential costs. Our view is that full compliance with the new off-market retailer obligations and registration as an ENSP will be very costly for some organisations.

Embedded Network Managers (ENM): This role is being largely phased out for new embedded networks but with an increase scope of responsibility for legacy embedded networks. The new ENSP will take on most of the responsibilities of an ENM in new embedded networks. In existing embedded networks, the ENM will have new responsibilities for network billing and appointing National Metering Identifiers (NMIs) for all embedded network connection points. There will still be a role for ENMs in the remaining exempt embedded networks.

What is next

The AEMC draft is open for submission until 14 March 2018.  AEMC is aiming to give the package to COAG by the middle of this year.

Feel free to get in touch if you have any questions.

The Updated Framework for Embedded Networks

The Updated Framework for Embedded Networks

AU Energy Compliance

On 31 January 2019, the Australian Energy Market Commission (‘AEMC’) released its draft report on its project labelled ‘Updating the regulatory frameworks for embedded networks’ (‘Report’). In total, the Report exceeded 1000 pages and included specific suggestions for amendments to the National Electricity Law (‘NEL’) and National Energy Retail Law (‘NERL’), as well as draft changes to the National Electricity Rules (‘NER’) and National Energy Retail Rules (‘NERR’) to complement the proposed legislative amendments.

By Alex Silcock, Compliance Quarter. 

The Report is the first practical step taken by the AEMC to update the regulatory framework for embedded networks since the review undertaken for COAG in 2017. The report confirms details of previously discussed legislative changes, gives an estimated timeframe for their implementation and provides opportunities for submissions by stakeholders. These details should be carefully considered by businesses involved in embedded networks, not only in relation to regulatory compliance, but also in a strategic context.

Timeframe

The AEMC helpfully released an infographic with the anticipated timeframe for the implementation of the changes which can be accessed here: https://www.aemc.gov.au/sites/default/files/2019-01/Updating%20regulatory%20frameworks%20for%20embedded%20networks%20draft%20report.pdf

The consultation, rule-making and recommendation process will take place in the first half of 2019, with a view to submitting the draft legislation to the South Australian Parliament later in the year. It is likely that the updated framework will come into effect during 2020.

The updated framework will have legal and compliance ramifications for all stakeholders, but will impact businesses differently according to how they currently conduct their operations. All embedded network operators have been put on notice and have sufficient lead-in period to make strategic and operational decisions as well as updates to their compliance programs.

Proposed Legislative Changes

The recommended changes are driven by the AEMC’s finding that ‘customers in embedded networks should … be provided the same protections, access to retail market competition and regulatory oversight as standard supply customers’. The tenor of the Report is that most of the recommendations in the 2017 report will be implemented. The changes will centre on:

  • the registration and exemption framework;
  • market and system integration;
  • network billing;
  • connection and network charging;
  • consumer protections; and
  • monitoring and compliance.

While the central themes remain, the suggested changes to the text of the regulatory instruments are different than initially conceived. The broad rule change recommendations at the review stage contained less changes to the NERL and the NEL, and focused on amendments to the Rules that sit underneath them. The Report suggests numerous changes to the legislation itself and fewer rule changes than first contemplated. The draft package set out in the Report is preferable to the previous suggestions. While the rules allow for flexibility and swift adaptation which is important in an innovative sector, embedded networks have become so fundamental to our supply system that it seems absurd not to address the mere concept of an embedded network in the NERL.

Finally, the amendments will predominately only apply to new embedded networks. However, some changes will apply to legacy embedded networks as well and the AEMC flagged that there is a possibility of legacy networks being gradually transitioned over to the new framework overtime.

Summary of Impact on Authorised Retailers

The draft report is welcome for most authorised retailers who on-sell in embedded networks. Currently, many of these retailers’ obligations are unclear, or highly impractical or impossible to follow. The changes include the addition of a definition for ‘off-market’ retailer, extending the definition of designated retailer to apply to authorised on-sellers and permitted alterations to the model terms. This will provide much needed clarity for these retailers and places them in an advantageous position as compared to their on-selling counterparts that currently operate under exemptions. Nevertheless, authorised on-sellers will still need to make certain adjustments to their compliance programs, particularly in relation to the network component of their businesses.

We will be sending a detailed update on the effect of the Report for our retainer clients who are authorised retailers. We will also provide the more detailed update for a fee on request.

Summary of Impact on Legacy Embedded Networks

The Report focused primarily on the framework for new embedded network. Nevertheless, it provided some suggested changes to the framework for existing embedded networks and also presented some questions for consideration by stakeholders and invited submissions on this issue.

The primary changes for existing embedded networks include greater compliance and enforcement powers by the AER, an expansion of the Embedded Network Manager role to encompass billing functions, the registration of child connection points and making it easier for exemption holders to surrender their exemptions.

Before the framework for legacy embedded networks is properly developed the AEMC has asked for feedback from stakeholders on the following issues:

  • the costs and benefits of transitioning legacy embedded networks to the new framework;
  • appropriate criteria for determining which legacy embedded networks should transition to the new framework;
  • potential impediments to legacy embedded networks transitioning to the new framework;
  • the appropriate timeframes for transitioning legacy embedded networks.

We will be sending a detailed update on the effect of the Report for our retainer clients who are exempt sellers and network service providers. We will also provide the more detailed update for a fee on request.

Conclusion

The updated framework will impact exempt and authorised on-sellers, exempt embedded network service providers and Embedded Network Managers. Business involved in any of the above activities should consider making submissions to the AEMC on the proposed changes and start to prepare for the updated framework from a strategic, operational and compliance standpoint. Please contact us if you would like a detailed outline of how the changes will impact your business, or would like assistance in drafting a submission to the AEMC.

The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018: Weaknesses in the Energy Sector’s ‘Big Stick’

The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018: Weaknesses in the Energy Sector’s ‘Big Stick’

AU Energy Compliance

In December 2018 the federal government introduced the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018 (‘Bill’) to Parliament. Presumably drafted under the ‘corporations power’ in s 51(xx) of the Constitution, if passed the Bill would amend the Competition and Consumer Act to prevent corporations from engaging in certain ‘prohibited conduct’.  We look at the proposed prohibitions are set out below.

By Alex Silcock, Compliance Quarter. 

The prohibitions do not affect transmission and distribution businesses, but relate to retail pricing, financial contract market liquidity and wholesale market conduct. The Bill confers several enforcement powers on the Australian Competition and Consumer Commission (‘ACCC’), the Treasurer and the courts to ensure compliance with the prohibitions.

Financial contract market liquidity

This prohibition is aimed at ‘gentailers’ – retailers that own significant generation assets – and is designed to ensure that these vertically integrated retailers ‘do not unreasonably refuse to offer financial contracts for anti-competitive purposes’. In its June 2018 report, the ACCC found that the ‘level of liquidity and the advantages enjoyed by vertically integrated retailers make it difficult for new entrants and smaller retailers to compete effectively in the retail market’. This prohibition is an attempt to temper that disadvantage.

Under this section, a corporation that generates electricity will be in contravention if it limits, restricts or fails to offer electricity financial contracts and does so for the purpose of substantially lessening competition in any electricity market.

It may prove difficult to show that a gentailer is restricting its electricity financial contracts, let alone that it is doing so to substantially lessen market competition. It will likely be even harder to prove when a generator ‘offers to enter into electricity financial contracts in a way that has, or on terms that have, the effect or likely effect of preventing, limiting or restricting acceptance of those offers’.

While the hedging contract market is a recognisable barrier for small retailers, this section appears a rushed and imperfect solution. It is worth noting that a rule change request has been initiated with the Australian Electricity Market Commission (‘AEMC’) directed at the same mischief and proposes a tender for voluntary market making services overseen by the Australian Energy Regulator. The AEMC’s consultation paper on the request was published on 20 December 2018.

Wholesale market conduct

In July 2018, the Grattan Institute published a report with findings that generators ‘game’ the market. The ACCC and AEMC have been more circumspect on this, noting that the effect on prices passed on to consumers is unclear. Nevertheless, ‘gaming’ is at least perceived to be a problem by some small retailers.

The Bill purports to address ‘gaming’ by creating an extremely broad prohibition which disallows spot market bids by a corporation where it has acted fraudulently, dishonestly, or in bad faith to manipulate or distort the spot market.

The Explanatory Memorandum (‘EM’) states that ‘[g]iven the complexity of the market, it is not possible to exhaustively prescribe the conduct which will and will not have the purpose of distorting manipulating prices. This depends on the specific facts of the case.’ While the EM goes into more detail about what will be considered prohibited conduct, the proposed legislative text remains too unclear.

Retail Pricing

While smaller retailers would likely welcome the objectives behind the other prohibitions, they are unlikely to be happy with the prohibition on retail pricing. The relevant section states that it prohibited for a retailer to fail to make reasonable adjustments to the pricing of their offers to supply electricity, ‘to reflect sustained and substantial reductions in its underlying cost of procuring electricity’.

Similar concerns about the uncertainty of the text are present here, as in the other prohibitions. For instance, what are ‘reasonable adjustments’? What is classified as a ‘sustained and substantial’ reduction in the cost of procurement? The plain text of the Bill should be clearer, particularly where penalties for non-compliance are substantial and would be difficult to challenge.

From a policy perspective, even if implemented correctly, it is unlikely that the prohibition will result in long-term benefits for consumers. It is desirable for retailers to invest in cost reduction strategies and strive for greater efficiency, but one questions whether they will do so if they are likely to receive little or no benefit. In such an innovative industry, there will be numerous opportunities to improve efficiency, but engaging in such strategies always carries a level of risk. The Bill removes some of the motivation for retailers to substantially reduce their costs and this could result in higher prices.

It is worth noting the Bill being drafted using the power in s 51(xx) of the Constitution may result in it having a broader than intended application. This prohibition is on corporations generally, regardless of whether or not they are licensed energy retailers under the applicable jurisdictional authorisation scheme. It applies when a ‘corporation offers to supply electricity, or supplies electricity, to small customers’. This appears to capture any corporation that sells electricity to customers, including for example, energy sellers holding an exemption under the Australian Energy Regulator (‘AER’) exempt selling guidelines. Making these ‘reasonable adjustments’ to price seems an unreasonable burden to place on caravan park operators or other exemption holders, who are often family-run businesses already struggling to contend with applicable Residential Parks legislation and various utility industry codes and guidelines. There has traditionally been a lack of consideration for embedded networks in regulation and law making, causing inconsistency, confusion and sometimes resulting in litigation. It is hoped that the sometimes unique situations of exempt-sellers and embedded networks generally are properly addressed by law and policy makers moving forward.

AER Amendments

The Bill also confers new compulsory information gathering powers on the AER and allows the AER to share information with other agencies and facilitates the conferral on the AER of functions related to the regulation of retail electricity prices.

These changes, particularly in relation to power to regulated pricing are in response to the ACCC’s recommendation of the introduction of a ‘Default Market Offer’ (‘DMO’) to replace the current standing offer regime. The AER has conducted only initial consultations up until now, primarily aimed at how the default price will be calculated, not how it will operate. The Bill contemplates the facilitation of DMO through a retail electricity industry code, which would include a provision that a retailer’s standing offer prices cannot exceed the amount determined by the AER.

The initiation of a new industry code would only add to the compliance burden of retailers who must already contend with the National Energy Retail Law, National Energy Retail Rules, jurisdictional derogations to those instruments, state and territory electricity supply acts and various other guidelines and codes implemented by the AER and state and territory regulators.

Conclusion

While some of the Bill’s objectives are admirable, the core issues have not been properly considered and this has resulted in poor drafting. The Bill is currently under consideration by the Senate Economics Committee which is due to report in March. At this stage, it appears unlikely that it will be passed before the election, but pending the findings of the committee and given the AER’s work on the DMO to date, it is likely that some elements of the Bill will be introduced in 2019.

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