In the just released final report of the Australian Competition & Consumer Commission (ACCC) retail electricity pricing inquiry, energy retailers identified the rising cost of regulatory compliance as a major concern. Furthermore, rising compliance costs are not just a challenge for the energy sector.
In 2014 Deloitte estimated that the total cost of compliance for Australian businesses was $250 billion every year. This raises the question; what kinds of things must I consider when calculating my compliance spend as an energy business in Australia?
By Dr Drew Donnelly, Compliance Quarter.
Compliance Costs in General
Unfortunately, there are no publicised benchmarks for compliance spend for individual energy businesses. This is likely because, in part, compliance spend is often not captured by a distinct line in the budget. Even when a business does set aside distinct funds for compliance, due to the integration of compliance activities within a business, this will often not capture the total spend.
While there are no benchmarks per se, there is some interesting international survey data available which aggregates the amounts that organisations claim to spend. The Deloitte/Compliance Week 2016 Compliance Trends Survey was a worldwide survey with over 700 respondents across a range of industries (around 8 per cent from the energy sector). 59% of respondents reported having a total annual compliance budget of less than $5 million, while a third of respondents got by on less than $500,000. 60 per cent of respondents expected their compliance budget to increase over the next year.
The Society of Corporate Compliance and Ethics Benchmarking Guidance Survey: June 2016 analysed responses of 647 compliance professionals, that survey found:
For organisations with revenues up to $15 million, 50 % spent less than 100,000 on their compliance budgets;
For organisation with revenues of a billion or more, around 12 per cent spent 100,000 or less, with 42% spending a million or more. 
One problem with this general survey data is that, as some sectors, including energy and financial services, are much more heavily regulated than others, their compliance costs are likely to be higher than aggregated figures.
Determining Compliance Spend for Energy Businesses
While there is no benchmarking data available for energy businesses in Australia, what we can identify are some of the matters that you should take into account when calculating compliance spend for yourself. Some key considerations are:
Integration of compliance. Under the Australian Standard AS ISO 19600: 2015, compliance should be embedded into the operations of the business. In practical terms, this means that the organisation needs to put compliance on the agenda at all levels of the business, including at executive management and governance levels. It is not possible to ‘hive off’ compliance completely to a distinct compliance unit. Insuring integrated compliance could end up being cheaper for the business in the long-run;
Use of RegTech, LegalTech, ComplianceTech. Automating aspects of your compliance program can significantly reduce the time and money spent on compliance and can focus your efforts on those areas where you can add value;
Prohibitions on passing on costs to customers. Some compliance costs such as the cost of appointing an Embedded Network Manager in an embedded network, cannot be passed onto customers. Energy businesses will need to consider which costs they can pass on before determining their compliance spend.
If you would like some advice on your compliance program, including how you can utilise our compliance technology offerings for a more efficient compliance spend, please get in touch.
A recent judgment handed down by the High Court of New Zealand highlights the need for exercising extreme care when drafting and reviewing lease agreements. Volumex Nominees Limited V The Attorney-General  NZHC 647 concerned an agreement between landlord and tenant in a seven-story building in New Plymouth. The dispute was about the amount of electricity charges to be paid by the tenant. We take a look at electricity charges in lease agreements.
Electricity charges in lease agreements – Background:
The case was brought before the court in an application for summary dismissal. Associate Judge Johnston, at the beginning of his reasons, noted that ‘at the heart of this case is a humble comma’. The particular clause that provided for the payment of electricity charges was not in dispute. Rather, each party sought to rely on a competing interpretation of the relevant clause.
The landlord and the tenant agreed that the latter would pay “… all charges payable in respect of the Premises for telephone, gas, electricity, and any other Tenant consumables … supplied to and actually consumed on the Premises”.
The landlord submitted that this clause provided that the tenant was to pay for all electricity charges ‘in respect of the Premises’. While the tenant contended that payment was only required for charges that were both ‘in respect of the Premises’ and ‘supplied to and actually consumed on the Premises’.
This distinction was material, as the tenant’s bill included charges for consumption by the building’s heating, ventilation and air-conditioning plant (HVAC plant). The primary HVAC plant is on the roof of the building and therefore excluded from the ‘Premises’ as defined in the lease.
Electricity charges in lease agreements – Competing interpretations:
Landlord’s interpretation: There are two distinct parts to the above clause, separated by an Oxford comma. In the first part, the tenant is required to pay for telephone, gas and electricity in respect of the premises (including the costs of running the HVAC plant on the roof). The second part begins after the comma following ‘electricity’. This part relates only to ‘other Tenant consumables’, not telephone, gas and electricity. Therefore, the landlord contends that the tenant agreed to be charged for ‘other Tenant consumables … actually consumed on the Premises’, but for all electricity charges, in respect of the premises, whether consumed on the premises or not.
Tenant’s interpretation: The entirety of the clause must be read as a whole, and when read as a whole, there is a clear and unambiguous construction of the clause. There is no distinction made between electricity, telephone and gas on one hand, and ‘other Tenant consumables’ on the other. Therefore, for the tenant to be responsible for any of the above charges, they must be both ‘in respect of the Premises’ and ‘supplied to and actually consumed on the premises’.
Electricity charges in lease agreements – Conclusion:
The court preferred the construction as argued by the tenant and found that the plaintiff had not discharged the onus of establishing that the defendant had no defence. Therefore, the application for summary judgment was dismissed and it is likely that the matter will go to trial.
This matter should be a lesson to lawyers, landlords and tenants alike, to ensure that lease agreements are drafted clearly and accurately reflect the intention of the parties. If you are involved in an energy dispute or would like your contracts reviewed, please contact one of the experienced lawyers at Compliance Quarter or Law Quarter.
Here at Compliance Quarter, a key focus of ours is supporting Australian energy retailers with licensing, authorisation and general compliance processes. However, we also offer compliance support for energy retailers in other countries and jurisdictions such as California and New Zealand. For any Australian retailers who are considering expanding into another state or into New Zealand, it is essential to understand the similarities and differences in retail regulation across jurisdictions. In today’s article, we look at the different retail regulatory regimes and application processes across Victoria, the other southern and eastern states and New Zealand.
By Dr Drew Donnnelly, Compliance Quarter
Electricity Retailers in the Eastern and Southern States (sans Victoria)
A unified electricity retail authorisation process applies across New South Wales (NSW), South Australia (SA), Queensland, Tasmania and the Australian Capital Territory (ACT). This process is administered by the Australian Energy Regulator (AER). The requirements of this authorisation process are summarised in the AER Retail Authorisation Guideline.
This Guideline prescribes that applicant retailers must:
have the necessary organisational and technical capacity to operate as a retailer;
have the financial resources, or access to resources, to operate as a retailer;
be a suitable person to hold a retailer authorisation.
This Guideline also emphasises that an applicant retailer must be familiar with, and adhere to a host of legislation, regulations and rules including:
National Energy Retail Law;
National Energy Retail Regulations;
National Energy Retail Rules;
relevant provisions of the National Electricity Law;
relevant Provisions of the National Electricity Rules.
While there are differences between the applicable regulatory provisions in NSW, SA, Queensland, Tasmania and the ACT (‘jurisdictional derogations’), in collectively committing to the provisions noted above, these jurisdictions adhere to the ‘National Energy Customer Framework’.
This framework also includes an exemption regime for some suppliers of electricity (common for operators of embedded networks), with such suppliers being subject to the Retail Exempt Selling Guideline. In addition, retailers must be members of their state or territory Ombudsman service for dealing with customer complaints.
Once an aspiring retailer has applied to the AER for authorisation, the AER aims to process completed applications within 12 weeks of receipt. All such applications are subject to public consultation.
Any aspiring retailer that wishes to purchase energy from the wholesale market must also go through a separate registration process with the Australia Energy Market Operator (AEMO).
Electricity Retailers in Victoria
Victoria has a separate retail regulatory regime from the other eastern and southern states. Many aspects of the application process are similar to what is set out for the other states above. Aspiring retailers must provide key information in relation to their organisational, technical and financial capacity in their application. Applications (made to the Victorian Essential Services Commission rather than the AER) are subject to a public consultation period. Furthermore, Victorian customers have access to an Ombudsman service and retailers have access to an exemption framework.
The reason that Victoria operates its own framework is because it has not yet fully implemented the National Energy Consumer Framework. The purpose of this separate regime is to preserve the enhanced consumer protections that exist for Victorian retail customers. In light of this, aspiring retailers in Victoria have extra obligations that they must be familiar with and commit themselves to. These obligations, set out primarily in the Energy Retail Code include:
A prohibition on retailers imposing fees and charges for merchant service fees (e.g. credit card fees) to customers on standing offer contracts (clause 35B);
A requirement that retailers offer home energy audits and flexible options for the purchase of appliances in their hardship policies (see clause 71B(2)(g));
Special billing requirements with respect to smart metering (multiple clauses);
Extra protections prior to customer disconnection (multiple clauses);
Compensation for wrongful disconnection (see clause 113).
Perhaps as a result of the extra obligations retailers have to consumers in Victoria, aspiring retailers are also subject to increased information requirements when making their application, including information relating to:
The organisation’s capacity to operate a business;
Managing supplier contracts;
Managing customer contracts;
Customer account establishment and management;
Customer service provision;
Billing and collection;
Appropriate management systems.
Electricity Retailers in New Zealand
We mentioned previously that New Zealand has taken a different approach to electricity retail regulation compared to Victoria or the other eastern and southern states. Overall, the framework is far less prescriptive than Australia’s and has been described as ‘light touch’. Retailers have regulatory obligations which are primarily set out in the:
As in Australia, retailers are subject to a dispute resolution scheme in the form of ‘Utilities Disputes’ (formerly The Office of the Electricity and Gas Complaints Commissioner).
Perhaps the biggest difference between New Zealand and the eastern and southern states is that New Zealand does not have a formal retail licensing or authorisation regime. However, all aspiring retailers are required to register as a participant with the Electricity Authority under section 9 of the Electricity Industry Act 2010. Furthermore, in virtue of that Act and the Electricity Distribution Code, retailers are subject to the monitoring, compliance and enforcement powers of the Electricity Authority.
If you think that you have a good business case for retailing in another jurisdiction, and you would like our help with compliance or application processes, please get in contact with us.
The obligation to ensure adherence to general and specific laws applying to your company’s operations is at the heart of your responsibilities as a company director – both under the Corporations Act 2001 (Cth) and at common law. The most recent set of hearings before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) are a sage reminder of the need for organisations (of all sizes) to reflect on how they are managing issues of governance and compliance within their business. You can follow some of our previous coverage of the Royal Commission here (https://www.compliancequarter.com.au/three-financial-services-compliance-lessons-from-the-royal-commission/#_ftn1).
By Sarah Le Breton, Compliance Quarter.
The consequences of failing to meet your obligations as a director can potentially expose the organisation to actions by shareholders, along with civil penalty enforcement action by the Australian Securities and Investments Commission (ASIC). The enforcement outcomes which can be sought by ASIC do not end with civil action but can also extend to criminal prosecution (depending on the facts) along with administrative disqualifications orders. Directors should also remember that their obligations are personal ones, which in some circumstances may also give rise to personal liability for debts and other losses incurred by the company.
Let’s now consider what it is that you should be asking as a director about compliance within your organisation in wake of recent events.
1. How do we manage our compliance obligations?
It may seem like a base line question to ask but it remains an important one for a director to ask no matter the size of the organisation and you shouldn’t feel uncomfortable asking it. Your obligations as a director are personal and do encompass you understanding how the organisation is managing legal and regulatory risk (inter alia) as part of the overall management of its operations. As such, it is important that you are familiar with the location and contents of the organisation’s compliance framework along with the policies and other controls that form part of that program — as an absolute minimum.
2. How are we embedding our compliance framework into everyday decision making?
It’s all good and well to have an elaborate set of compliance documentation and be able to point to that as your compliance framework, but if members of your organisation are not adhering to those mechanisms or understand how they apply to the work they are doing each day, then how effective is that compliance system in practice? As a director, you should be asking do we (as an organisation) need to better incorporate those controls into our work practices – of course, how you do so is a matter that should be approached based on the size and nature of your organisation.
3. How do we ensure that our compliance framework is current?
Compliance is not a set and forget suite of documentation you put in place and archive. How is your organisation managing its compliance obligations on an ongoing basis? Who within your organisation is monitoring changes in the law or keeping abreast of regulatory guidance by your relevant regulators so that your organisation remains on top of its compliance obligations on an ongoing basis. The directors of all companies should consider compliance as an evolving process and should ensure that the organisation has in place a mechanism that enables the compliance framework and controls to be updated as changes take place.
4. How are we testing adherence to our compliance obligations?
It is critical to have a compliance framework in place but if adherence to that framework is not being tested on a regular basis through monitoring and audits, how can you have confidence that the organisation is meeting its obligations? The process of periodic monitoring and auditing is just as key to managing compliance successfully as having a framework to start with. The governance around how that process takes place is also worth focusing on – are those charged with responsibility for monitoring and auditing sufficiently independent from the work processes to ensure that audits are transparent and robust?
5. What is our breach reporting process?
If a breach does take place, how does your organisation manage that process – both in relation to assessing the facts that give rise to the concern but also in how that is then escalated within the organisation. A common compliant by regulators is that organisations can have cumbersome and slow assessment processes that can result in breach reporting delays and an overly legalistic approach being applied to the process. Are your breach reporting systems operating so that you can meet any reporting deadlines prescribed by legislation? If not, how are you managing any delays in meeting those obligations when it comes to communication with the regulator and is that considered satisfactory?
6. What kind of relationship do we have with our regulators?
As a director, you should be familiar with the regulatory history of the company that you are a director of. Is there a regulatory history? If so, what is that history and how has the organisation managed the failings that gave rise to those concerns. What kind of relationship does the company now have with its regulators and how can we best manage that, so the company is considered as demonstrating a compliance mentality and posing minimal regulatory risk. It is important that your regulators have confidence in your ability to meet your regulatory obligations and act with candour in dealing with them.
It may be considered by some as a soft compliance skill but the art of maintaining sound regulatory relations is important in managing the reputation of the company and should be considered a part of the overall compliance framework.
If you would like us to run a free webinar for Company Directors, please leave a comment below or contact the Compliance Quarter by clicking here.
We have spent a lot of time recently discussing embedded networks and, in particular, the ‘power of choice’ and embedded network manager reforms. We also recently discussed the permissive regulatory environment in New Zealand for electricity retail. Assessing the regulatory environment in New Zealand for ‘Secondary Networks’ (the New Zealand equivalent of Australian embedded networks) is more complex.
By Dr Drew Donnelly, Compliance Quarter.
Today we look at the key rules for owning or operating an embedded network in New Zealand with an emphasis on the differences between the Australian and New Zealand contexts.
The definition of secondary networks.
A Secondary Network is defined as any network that is connected to a local distribution network rather than directly to the transmission network and is owned by someone other than the local network provider. This is similar to the definition of an ‘Embedded Network’ in Australia. A secondary network could be a shopping mall, an apartment building, a retirement home, a caravan park, or take some other form. There are three types of Secondary Network in New Zealand:
Customer Network. A Customer Network is a secondary network with only one Installation Control Point (ICP) connecting it to the Local Network. The consumer associated with that ICP (i.e. the embedded network operator) is responsible for billing all other individual consumers connected to the Customer Network.
Embedded Network (NZ). An Embedded Network (NZ) is a Secondary Network where individual consumers have ICPs allocated and managed by the Embedded Network (NZ) owner. The Embedded Network (NZ) owner is responsible for reconciling energy traded and must be certified as a reconciliation participant.
Network Extension. A Network Extension is a Secondary Network where individual consumers have ICPs managed by the parent network owner and the electricity traded is reconciled at the by the parent network owner.
Below we consider the key differences between the way in which embedded networks in Australia and Secondary Networks in New Zealand are regulated.
There is no ‘power of choice’ right in New Zealand
In almost all cases Australian embedded network consumers have a right to choose whether to be supplied energy by the embedded network operator or by a market retailer. In New Zealand, consumers in Embedded Networks (NZ) and Network Extensions have the right to switch retailer. Consumers in a Customer Network do not have this right. Their only option is to request their Customer Network owner to take on reconciliation obligations and switch to an Embedded Network (NZ), or, to ask a local network provider to do so and switch to a Network Extension (with the Customer Network owner’s consent). There will often be little incentive or the owner of a Customer Network or a Local Network to do so.
Secondary Networks do not have a distinct regulatory framework in New Zealand
In Australia, embedded networks are regulated separately from other forms of electricity distribution and supply. Rather than being subject to the Distribution Network Service Provider requirements of the National Electricity Rules (NER), embedded networks are subject to the Network Service Provider Registration Exemption Guideline. Furthermore, embedded network operators are often exempt from the National Energy Retail Rules and instead adhere to Retail Exempt Selling Guideline.
The owners of Secondary Networks in New Zealand, by contrast, are not exempt from obligations in governing legislation the Electricity Industry Act 2010 (the Act), or New Zealand’s version of the NER, The Electricity Industry Participation Code (the Code). This means that, depending on the configuration of the Secondary Network, it has the same regulatory obligations as a Distributor (equivalent to a Distribution Network Service Provider in Australia) or a Retailer.
The different types of obligations a Secondary Network owner might have under the Act and the Code are set out below.
Obligations as industry participants
Owners of a Secondary Network in New Zealand are classed as ‘industry participants’ under the Act. This means that secondary networks must:
register with the Electricity Authority as an industry participant;
comply with the ownership separation requirements in Part 3 of the Act;
make available a low fixed charge tariff option for domestic consumers;
Obligations as Embedded Network (NZ) owners
Further obligations under the Act and the Code depend on which type of Secondary Network is involved. Embedded Network (NZ) owners have specific obligations under the Code. These include obligations relating to metering (Part 10), registry management and switching customer processes (Part 11), trading arrangements (Part 13) and reconciliation (Part 15). Customer Networks and Network Extensions do not have similarly specific obligations under the Code.
Obligations as Distributors
A recent law change has clarified that all ‘Secondary Network providers’ are subject to the Code, as if they are Distributors. Distributor obligations under the Code are extensive and include the obligation to ensure connection points have metering installations (clause 10.25(1)), and that there is a metering equipment provider for each connection point (clause 10.25(2)). All Distributors must be members of the dispute resolution scheme that is administered by ‘Utilities Disputes’ (section 96 of the Act). It is possible that some Customer Networks may be exempt from Distributor obligations on the basis that they do not “provide services that are substantially similar to the services provided by a distributor”, as required in section 131A of the Act.
Whether or not a Customer Network owner is subject to Distributor obligations, as they are suppliers of energy, they will be subject to retailer obligations under the Code. 
In addition to regulatory obligations under the Act and the Code, all Secondary Networks are expected to comply with the Guidelines for Metering, Reconciliation and Registry Arrangements for Secondary Networks.
If you think we could be of any assistance in moving into the New Zealand market as a Secondary Network owner, please let us know or contact us by clicking here.
 See Guidelines for Metering, Reconciliation, and Registry Arrangements for Secondary Networks
Version 8.2., p2.
 Defined in the National Electricity Rules as “A distribution system, connected at a parent connection point to either a distribution system or transmission system that forms part of the national grid, and which is owned, controlled or operated by a person who is not a Network Service Provider.” (Chapter 10). It is noteworthy here that an Australian embedded network can be connected directly to the transmission network, though this is not the usual type of embedded network.
 An ICP is the New Zealand equivalent of an Australian National Metering Identifier.
 See Guidelines for Metering, Reconciliation, and Registry Arrangements for Secondary Networks
 Under sections 7 and 5 of the Act, all retailers, distributors or owners of lines count as industry participants. Some owners of Customer Networks may fall outside this definition if they simply own electricity installations, rather than ‘lines’. For example, a retirement home where tenant-occupiers are supplied electricity but have no property rights in their unit. See Retail Review of secondary networks -Issues and options paper 12 February 2015, p11.