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 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.