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.