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.

EWON Consultation Review

EWON Consultation Review

AU Energy Compliance

EWON Consultation Review – Under the new Retail Exemption Guidelines and Network Exemption Guidelines – from July 2018 – All AER exemption holders operating in NSW will be required to hold an EWON membership. Previously, membership was only a requirement for authorised retailers or networks. The anticipated changes will increase EWON membership from 56 to approximately 400. This will affect EWON’s own governance and operations as well as having a significant impact on exemption holders. On 15 March 2018, EWON – in association with KPMG – held a forum outlining the proposed changes to EWON’s structure to facilitate the transition. The significant changes will have an impact on four spheres of EWON’s operations.

By Alex Silcock, Compliance Quarter.
EWON Consultation Review
Photo by Thomas Kelley on Unsplash

Membership model:

EWON will be retaining its current membership model. That is one membership per legal entity, NOT one membership per licence. Therefore, from July 2018, every legal entity holding an authorisation or an exemption must become a member. If that legal entity holds multiple licences or exemptions, it cannot register for multiple memberships. However, corporate groups that consist of multiple companies, must obtain a membership for each legal entity that holds an exemption and/ or licence.

While each exempt entity must become a member, EWON has indicated that it will not be necessary for each individual member to engage directly with the Ombudsman. Rather, exemption holders may enter into formal arrangements with third party intermediaries which will allow the third party to liaise with EWON and undertake training and compliance activities on their behalf.

Funding model:

EWON’s funding is drawn primarily from fees paid by its members and is made up of three elements. A one-off joining fee, an annual fixed fee and casework fees. The joining fee and annual fixed fee will both be scaled according to customer numbers in response to the proposed exemption guidelines. However, in what will come as a concern for exemption holders – traditionally smaller operators – EWON intends to retain the current casework fees model. Under the casework model, fees will vary for each member. A member’s casework fee will be determined by how many customer complaints the Ombudsman receives in relation to that member and the extent to which these complaints are escalated. A more detailed breakdown of the EWON casework fees was made available to those who attended our recent Embedded Networks Regulatory Update Webinar.

Voting Rights:

EWON is also reviewing the voting rights provisions in its constitution. The current model is simply ‘one member one vote’. This is no longer seen as appropriate, given that it is anticipated that the current membership base will increase from 56 to approximately 400 with the addition of exemption holders. Due to perceived concern surrounding exemption holders holding too great of an influence under the current system, EWON is seeking submissions on proposed changes to voting rights. The proposed alternatives to the current model are: 1) one vote per dollar of fixed annual fees; or 2) one vote per customer. Both of these proposed methods will favour larger EWON members and exemption holders are encouraged to make submissions on this issue if they have an alternative suggestion regarding voting rights.

Board Composition:    

One of the foremost issues on which members vote, is the composition of the EWON board. Currently, all directors are chosen by EWON members through a nomination and voting process. EWON appears to be favouring a shift to a more structured, industry orientated board, made up of two directors from the energy retail industry, one director from the energy network sector and one director from the water industry. However, the details of the actual selection process have not been determined at this stage. There is no suggestion that EWON is contemplating reserving a board position for a representative of exemption holders or Embedded Networks.

Conclusion:

The proposed changes in the four major areas outlined above, will impact existing and new EWON members. Smaller exempt entities in particular, will need to be cognisant of the component of their membership fee which will be determined on a variable basis. The potential to be liable for significant membership fees as a result of customer complaints, should be an incentive for all networks, retailers and exemption holders to ensure that they have effective complaints and disputes resolution mechanisms in place.

To help exempt entities to deal with the transition to membership, EWON intends to establish an Operational Exempt Entities Advisory Group to act as a conduit to the board and ensure that the concerns of EWON’s newest and smallest members are understood. Concerned parties should seek to join.

Misconceptions in Embedded Networks: Beware Common Errors

AU Energy Compliance

Last Friday we ran a free webinar on the common misconceptions in embedded networks for exempt and authorised retailers.

You can view our webinar for free by submitting the form below.

For further reading and recent analysis on embedded networks click here.

Misconceptions in Embedded Networks
Photo by Jez Timms on Unsplash
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New Metering Coordinator requirements and Exempt Selling Guideline are in force

New Metering Coordinator requirements and Exempt Selling Guideline are in force

AU Energy Compliance

This is a quick update on the Australian Energy Regulator’s recent announcements regarding Metering Coordinator requirements and the revised Exempt Selling Guideline.

By Dr Drew Donnelly, Compliance Quarter.
Metering Coordinator requirements
Photo by Aaron Burden on Unsplash

Metering Coordinator Rule Change

In line with the ‘Power of Choice’ rule changes, metering contestability was introduced to the Australian Capital Territory, New South Wales, Queensland, Tasmania and South Australia on 1 December 2017.As part of this rule change, Financially Responsible Market Participants (usually market retailers) were required to appoint a Metering Coordinator for all of their connection points by 1 December 2017. Large customers have the option of appointing their own Metering Coordinator.

Why the change?

Before this rule change, it was generally only the Local Network Service Provider that had the responsibility for metering services for small customers. This restricted competition and reduced incentives for innovation and investment in metering services.[1] Such innovation is particularly important in light of the way smart meter functions can be used to increase usage and cost transparency for customers.

What’s happening now?

The Australian Energy Regulator (AER) will be requesting compliance reports from the Australian Energy Market Operator(AEMO) checking that there has been full compliance by 30 March 2018 (see https://www.aer.gov.au/communication/compliance-with-new-metering-rules-requirement-to-appoint-a-metering-coordinator). AER will consider action against any market retailer that has not complied by that date.

Exempt Selling Guideline

On 16 March the AER released its revised Retail Exempt Selling Guideline which came in to effect on the date of publication (see https://www.aer.gov.au/communication/aer-releases-revised-retail-exempt-selling-guideline-version-5-and-notice-of-final-instrument).

While the latest Guideline contains several changes, the most significant is the new requirement that those who sell or supply energy under an exemption to residential customers must be members of, or subject to, an ombudsman scheme, where the scheme allows them to do so.

For more information about this requirement see https://www.compliancequarter.com.au/proposed-new-dispute-resolution-obligations-exempt-sellers/.

Ask us a question or book some time to speak with us by clicking here.

 

[1] For more information see Final Rule Determination National Electricity Amendment (Expanding competition in metering and related services) Rule 2015, pii.

Webinar Recording Energy Updates: AEMC taking the axe to Embedded Network Exemptions

AU Energy Compliance

If implemented, the AEMC recommendations will effectively take an axe to the existing regulation of embedded networks – embedded network exemptions – redefining a sector of the energy market that is growing in importance. The changes discussed in this webinar are focused on NECF jurisdictions (NSW, QLD, SA, ACT and TAS). In a webinar to follow we will consider similarly significant changes to be implemented in Victoria following the gazettal of a new section 17 order.

embedded network exemptions

View our webinar here.

Hosted by Connor James and Anne Wardell

Welcome

The presentation will run for 25 minutes then we will have a Q & A for 10 minutes after.

What is an Embedded Network?

• Embedded networks are private electricity networks connected to the distribution and transmission system of the national electricity market through a parent connection point (gate meter).
• They are typically found in apartment blocks, retirement villages, caravan parks and shopping centres.
• They are on the increase with a range of business models being introduced on to the retail market.

AEMC Final Report on the regulation of embedded networks

Consistent with the AER’s submission to the AEMC review, the AEMC found the existing regulatory framework is not fit for purpose.

“However, the current regulatory arrangements for embedded networks are resulting in some customers not being able to access competitive prices or important consumer protections. There are also insufficient monitoring and enforcement powers for the Australian Energy Regulator (AER), leading to a lack of clarity that embedded network operators are meeting their obligations as suppliers of an essential service. While some embedded networks are providing benefits to energy consumers they may not receive in a standard supply arrangement, often they do not.,,

Recommendations

• If implemented, the AEMC recommendations will effectively take an axe to the existing regulation of embedded networks, redefining a sector of the energy market that is growing in importance and prevalence.
• The changes discussed are focused on NECF jurisdictions (NSW, QLD, SA, ACT and Tas).
• When considering the recommendations it is important to distinguish between those that apply to retail exemptions and those that apply to network exemptions.
• The recommendations are discussed under three main headings.

The electricity network service provider exemption guideline (Draft) (AER)

On 17 November 2017, the AER published Version 6 of the Electricity Network Service Provider Exemption Guideline (draft). The AER is seeking submissions on the draft. This new draft guideline should be read by all existing exempt operators.

The new draft guideline goes into further detail about microgrids and local energy sales:

“The AER is supportive of the concepts of microgrids and private trading but we caution there are significant regulatory hurdles which must be overcome before a microgrid or private selling of excess electricity can be implemented. We will work with proponents to develop models that respect and enhance the rights of customers to access new energy options but our ability to facilitate microgrids is limited by the constraints of the current regulatory framework”

embedded network exemptions

5 Key Questions

1. What is the headline for existing embedded network operators?
2. Why are changes being made?
3. Will we need to obtain a retail authorisation?
4. How do I obtain a retail authorisation?
5. Will existing embedded networks, and embedded network operators, be grandfathered?

What is the headline for existing embedded network operators?

Under the proposed regime new Embedded Network Operators (ENO) will need to obtain an authorisation rather than rely on an exemption.
The authorisation will not be the same as for an authorised retailer but it will include additional requirements that are not currently imposed on the holder of an exemption.

Why are changes being made?

The AEMC is dissatisfied with the existing regulatory framework:

“The Commission does not see retaining the current framework as an option…”.
The AEMC wants to increase the customer protections available to customers of an embedded network.

At the same time, the AER is introducing new dispute resolution obligations which apply to exempt sellers.

Will we need to obtain a retail authorisation?

Once the recommendations are implemented there will be a very narrow range of activities that can be conducted under an exemption.

Existing operators, such as managers of residential parks will not be included as an exemption category in either the network service provider exemption framework or exempt seller framework. Even community energy projects will be excluded from the exempt seller framework.

Activities which continue to be covered by an exemption

“However, the Commission considers that an energy selling exemption framework remains necessary to address circumstances where:
• the costs of retail authorisation and facilitating retail competition would outweigh the benefits to customers, and
• the need for regulatory oversight is low.

The Commission recommends amending the exemption framework by removing the detailed seller factors and customer factors from the NERL and providing the AER the power to exempt persons, or classes of persons, from holding a retailer authorisation in accordance with the NERR. The Commission also recommends narrowing the exemption framework by including a set of factors the AER must take into account in exempting persons, or classes of persons, from holding a retailer authorisation.

How do I obtain a retail authorisation?

It is proposed that the Australian Energy Regulator be given broader power to reduce the regulatory burden on authorised retailers who only supply electricity within embedded networks by the establishment of a new ‘category’ of retailer authorisation. However, it is unlikely that the AER would exempt (for need of a better word) new authorised retailers from any of the consumer protection provisions within the rules and retail law.

The AER requires that applicants for a retailer authorization meet a number of requirements as set out under the Retail Law. The AER must be satisfied that an applicant has the capacity to meet their obligations as an Energy Retailer under the Retail Law and Rules.

The AER must be satisfied that an applicant;

• has the necessary organisational and technical capacity to operate as a retailer;
• has the financial resources, or access to resources, to operate as a retailer; and
• Is a suitable person to hold a retailer authorisation.
• Your application will need to demonstrate the above.

The assessment by the AER is conducted at the point in time that an application is made. The application itself consists of a range of documents including a hardship policy, complaints management procedure, and compliance plan.

Point of difference

Authorised retailers who operate solely within embedded networks will not need to be a market participant and register with AEMO (providing they are sourcing electricity at the gate meter from a market participant retailer). This means that the prudential requirements will be less onerous. Nonetheless, the operational and compliance costs of running an authorised retailer are significant. Systems used for customer management, billing and operations will need to be fully compliant with the application provisions of the rules and retail law.

Will existing embedded networks, and embedded network operators, be grandfathered?

The separation of ‘new’ from ‘legacy’ embedded networks raises the obvious concern that the existing two-tier regulatory regime is evolving into a four-tier regime. This, in turn, raises the question about whether ‘legacy’ embedded networks can continue forever or will need to convert to the regime applicable to ‘new’ embedded networks.

Of course, when a property is sold, the exemption which applies cannot be transferred so the new ENO would need to apply under the new system.

As part of the review, the AEMC engaged Minter Ellison to “Review and advise in connection with the implementation of the recommendations in its Draft Report ‘Review of regulatory arrangements for embedded networks’ dated 12 September 2017.”

Minter Ellison identified that the draft report did not:

“show an intention that there should be any element of retrospectivity in relation to existing exemptions.”

Minter Ellison identified six options for either grandfathering existing embedded networks and embedded network operators or move them to the new regulatory regime.

In our view, the options open to the AEMC include recommendations to:

i. preserve all existing exemptions indefinitely, on their current terms and conditions;
ii. provide that existing exemptions only apply until such time as there are substantial changes to the network;
iii. Preserve each existing exemption until such time as the premises to which they relate are sold. We note that under the NERL. while authorisations are transferable, exemptions are not;
iv. Deem pre-existing individual and registrable exemptions to be authorisations for the premises to which they relate on the conditions on which they have been granted. Such mechanism could either:
A. require the previously exempt retailer to comply with the conditions attaching to the exemption as if they were contained in an authority; or
B. require the previously exempt retailer to comply with exemption conditions and the obligations of an Off-market retailer under the NERL and NERR;
v. give the holders of exemptions a certain time in which to elect to convert their exemptions to authorisations; and
vi. require the holders of deemed exemptions to notify the AER of the existence of their deemed exemptions within a certain time frame, in order to maintain them.

Preferred options

“In our view, given that one of the dominant themes of the Draft Report is the lack of information available to the AER about the extent and number of deemed exemptions, we are attracted to option (vi). We also consider there is some merit in further exploring options (iii) and (iv)”.

Conclusion

Whatever framework the AER decides to implement, the one certain thing is that Embedded Network Operators will be subject to more regulation. This means that if you are currently an ENO operating under an exemption you will need to be vigilant about keeping up to date with the proposed changes.

We are here to help with embedded network advice

• Compliance Quarter provides regular updates on what is happening in the energy regulation space. Check out our news stories on our website here.
• Alternatively, give Connor James a call to discuss your questions or issues or email us here.

 

Consultation on draft exempt embedded network guidelines (part two): what is a ‘dedicated connection asset’?

Consultation on draft exempt embedded network guidelines (part two): what is a ‘dedicated connection asset’?

AU Energy Compliance

Last week we looked at some of the proposals contained in the draft electricity network service provider registration exemption guideline (draft guideline) (see https://compliancequarter.com.au/consultation-draft-exempt-embedded-network-guidelines-part-one-embedded-network-managers-take-note/). Today we continue that discussion, looking at the changes in that draft guideline that relate to the National Electricity Amendment (Transmission Connection and Planning Arrangements) Final Rule Determination (the rule change).

In today’s article, we address the new concept of a ‘dedicated connection asset’ and the exemptions that have been proposed for any business that owns or controls those assets.

embedded network guideline
Photo by Oliver Wendel on Unsplash
By Dr Drew Donnelly, Compliance Quarter.

What is a dedicated connection asset?

When we think about an embedded network, we often think of private wiring systems connecting a group of customers to the local electricity network at a single point. These are the sorts of embedded networks we find in apartment complexes, retirement homes, caravan parks and shopping malls. But the regulatory definition is broader than that. Chapter 10 of the National Electricity Rules defines an embedded network as a:

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.

This broad definition means, for example, that power lines owned by a generator which connect a generator to a transmission network through a substation are an ‘embedded network’. Likewise, for power lines connecting large energy users (‘loads’) directly to the transmission network, through a substation.

This raises the question as to whether these assets should be dealt with in the same way as traditional embedded networks, through the network exemption regime. Through the rule change and the subsequent draft embedded network guideline, it has been proposed that new exemption classes for ‘dedicated connection assets’ (DCAs) be created to address this issue. These are defined as:

the collection of components that are used to connect a connecting party to the shared transmission network and which, once commissioned, can be isolated from electricity flows on the transmission network.

Draft Embedded Network Guideline

Although a DCA facilitates a connection to the transmission network, it was considered unnecessary to require DCA service providers to register as a Transmission Network Service Provider. Instead, it was left to Australian Energy Regulator (AER) to deal with DCAs in its network exemption regime. It is for this reason that two new categories of exemption have been proposed in the draft guideline.

Under the draft embedded network guideline, there are two new classes of exemption depending on whether the business operates a ‘large’ DCA or a ‘small’ DCA. A large DCA includes a component that is longer than 30km, and a small LDCA is one where no component is that long.

Any business that supplies energy to a small DCA is eligible for a deemed exemption (exemption class ND08). That is, an exemption that applies automatically to certain classes of people or businesses. A business that supplies energy to a large DCA is eligible for a registrable exemption (exemption class NR06). That is, an exemption that must be registered with the AER.

As part of their exemption, both small and large DCAs are subject to a range of exemption conditions (just as is the case with traditional embedded networks). Important new conditions for an NRO6 exemption (large DCA) is the obligation to create an access policy, and the obligation to comply with commercial arbitration obligations in the event of an access dispute.

To read the draft guideline go to https://www.aer.gov.au/networks-pipelines/guidelines-schemes-models-reviews/review-of-network-service-provider-registration-exemption-guideline-2017-18.

Any feedback is due by 15 January 2018.

For more of our recent articles and analysis within the Australian energy sector click here.

Embedded Network Operators take note: A new General Exemption Order in Victoria

Embedded Network Operators take note: A new General Exemption Order in Victoria

AU Energy Compliance

The sale of electricity in Victoria is regulated by the Electricity Industry Act 2000 (VIC).  Sellers must either operate under a licence or an exemption. Most embedded network operators (ENOs) in Victoria operate under a General Exemption Order (‘GEO’) that exempts them from the requirement to hold a licence.

On 15 November 2017, a GEO under section 17 of the Electricity Industry Act 2000 (VIC) was published in the Victorian Government Gazette. The new GEO implements recommendations from the Department of Environment, Land, Water and Planning, whose final report was published in August 2017.

The new GEO will come into effect from 1 April 2018 (clause 11 will come into effect on 11 July 2018).

general exemption order
Photo by Samuel Zeller on Unsplash
By Connor James, Compliance Quarter. 

The new General Exemption Order:

  1. sets out exemption categories;
  2. includes an obligation to obtain explicit informed consent; and
  3. includes mechanisms to restrict the pricing charged by ENOs in Victoria.

The new GEO represents a significant challenge for Victorian ENOs and a departure from the recommendations by the AEMC.

Why are embedded networks important?

Embedded networks allow for ‘behind the (gate) meter’ innovation that can result in embedded generation, greater network stability, and lower pricing. Electricity is purchased in bulk at the gate meter and can then be on-sold to individual occupants within an embedded network at a rate that is lower than those end users would have been able to purchase directly from the ‘grid.’

The various benefits of embedded networks were recognised by the AEMC in its review of the regulation of embedded networks.  The AEMC found that the existing regulation of embedded networks was not ‘fit for purpose.’

Exemption Categories

The new GEO introduces exemption categories. Generally, these reflect the framework in place in NECF jurisdictions, soon to be overhauled.

Relevant retail exemption categories are extracted below (note that there are additional conditions that apply to each):

general exemption order

general exemption order

Similar categories apply in the exemption from the requirement to obtain a distribution licence.

The extensive amendments coming into effect in NECF jurisdictions will ensure the challenge of continued compliance with multiple, ambiguous, and inconsistent Victorian obligations continue.

Explicit Informed Consent

A condition of an exemption under the GEO will be that ENOs obtain the explicit informed consent of customers to an arrangement for the sale of electricity.

Explicit informed consent means consent is given by a customer where:

(a) the ENO, or a person acting on behalf of the ENO, has clearly, fully and adequately disclosed, in plain English, all matters relevant to the consent of the customer, including each specific purpose or use of the consent; and

(b) the customer gives the consent to the arrangement or transaction,

(i) in writing, signed by the customer; or

(ii) verbally, if the verbal consent is evidenced in a way that it can be verified and recorded; or

(iii) by electronic communication generated by the customer.

There are practical difficulties in complying with this obligation. It is very common for electricity to continue to be connected to a site after a known customer moves out and an unknown customer moves in. If electricity continues to be supplied, and payment required, an agreement (deemed) is in effect.  Without the explicit informed consent of the new occupant, it is unclear how an ENO could possibly comply with the above obligation for deemed supply agreements.

Pricing Regulation

Under the new GEO, pricing for embedded networks supplied by an exempt operator will be regulated.  This was anticipated in the Department’s draft and final position papers:

The Department will task with ESC with formulating a new price cap benchmark based on commercial market data.

This would better approximate a fair price for electricity and restrict the potential for exempt sellers to earn monopoly profits on electricity sales. Currently, the ESC publishes an annual schedule which prescribes the maximum charges that an embedded network operator may charge its customers. The ESC will continue to annually publish the applicable rates on its website.

The mechanism by which the ESC will determine the price cap is unclear. The new GEO simply requires that the ESC “must have regard to commercial market data in formulating a maximum price.”

If you would like to read other recent articles on the subject of embedded networks please click here.

If you would like to discuss embedded networks, including the impact of the new GEO, please contact us by email to [email protected]

Taking the Axe to Embedded Network Exemptions

AU Energy Compliance

Yesterday we spoke about the final Australian Energy Market Commission (AEMC) report on the regulation of embedded networks. Recommendations from the report will be considered by COAG and are likely to be implemented mid-to-late next year.

Today, we answer Five Key Questions for existing embedded network operators.

embedded network operators
Photo by Malte Wingen on Unsplash
By Anne Wardell and Connor James, Compliance Quarter. 

If implemented, the AEMC recommendations will effectively take an axe to the existing regulation of embedded networks, redefining a sector of the energy market that is growing in importance and prevalence.

The changes discussed in this article are focused on NECF jurisdictions (NSW, QLD, SA, ACT and Tas). In an article to follow we will consider similarly significant changes to be implemented in Victoria following the gazettal of a new section 17 order.

The existing regulatory regime distinguishes between authorisation holders and exempt operators. To be able to provide network and/or retail services, embedded network operators must be operating under an exemption from the requirement for registration as a network service provider and/or hold a retailer authorisation.

Currently, exempt operators are regulated, but not to the same extent as authorisation holders. Exempt operators are not required to publish standing offer pricing, nor to report to the regulator, nor to comply with other requirements in the rules.

Question One: What is the headline for existing embedded network operators?

From the date of implementation, customers within the majority of ‘new’ embedded networks are going to need to be supplied by an authorised retailer rather than an exemption holder.  This means that a business that relies on exemptions to supply electricity within embedded networks will need to obtain a retail authorisation if it wishes to supply electricity within any ‘new’ embedded networks.

The implementation of the AEMC recommendations will redefine existing successful business models. Existing embedded network operators and exemption holders need to take note of the changes.

Question Two: Why are changes being made?

The AEMC is dissatisfied with the existing regulatory framework: [i]

“The Commission does not see retaining the current framework as an option…

We have also found significant practical barriers to customers in embedded networks accessing retail market competition, which means that embedded network customers have limited ability to change supplier if they are unhappy with the price they are paying or level of service that they are receiving. In addition, there are a number of provisions of the NERL and NERR that do not operate effectively for embedded networks.”

The AEMC is essentially concerned that the range of activities covered by exemptions is too broad. This flows back to wide-ranging concerns in the sector about pricing and consumer choice. Electricity pricing is newsworthy and pricing increases have real-life consequences, particularly for vulnerable consumers. The AEMC does recognise the benefits of embedded networks:

“Provided that they are appropriately regulated, the Commission considers that embedded networks can provide benefits to consumers by way of discounted prices and non-price benefits such as multi-service offerings, more environmentally sustainable housing and improved access to embedded generation. However, due to a lack of competitive pressure and appropriate consumer protections, the Commission considers that many embedded network consumers are not currently receiving benefits from these arrangements.”

Another major factor in seeking change is to increase the customer protections available to customers of embedded networks. The current view is that a number of customers of embedded networks have no recourse to dispute resolution or assistance in dealing with a complaint about the services received. We have discussed changes in this area in previous articles.

Question Three: Will we need to obtain a retail authorisation?

If you propose to supply electricity within ‘new’ (in reference to the implementation of the recommendations not to greenfield/ retrofit) embedded networks, then the answer is probably yes.

“The Commission considers the most effective way of implementing these measures is through elevating the regulation of embedded networks into the national framework. The Commission recommends requiring embedded network service providers that supply small customers to register with AEMO and on-sellers to hold a retailer authorisation except in a narrow set of circumstances.”

Once the recommendations are implemented there will be a very narrow range of activities that can be conducted under an exemption.

Existing operators, such as managers of residential parks will not be included as an exemption category in either the network service provider exemption framework or exempt seller framework. Even community energy projects will be excluded from the exempt seller framework:

“The Commission considers that it would be in the long-term interests of consumers if community energy projects are implemented within the proposed framework which requires the supply and sale of energy to small customers in embedded networks to be provided by a registered embedded network service provider and authorised on-selling retailer.”

There will continue to be activities that are appropriate for a retail exemption:

“However, the Commission considers that an energy selling exemption framework remains necessary to address circumstances where:

  • the costs of retail authorisation and facilitating retail competition would outweigh the benefits to customers, and
  • the need for regulatory oversight is low.

The Commission recommends amending the exemption framework by removing the detailed seller factors and customer factors from the NERL and providing the AER the power to exempt persons, or classes of persons, from holding a retailer authorisation in accordance with the NERR. The Commission also recommends narrowing the exemption framework by including a set of factors the AER must take into account in exempting persons, or classes of persons, from holding a retailer authorisation.

The Commission agrees with the AER that a principles-based approach in the NERL would avoid precluding as yet unforeseen energy selling activities from being eligible for an exemption, where exemption may be more appropriate than authorisation. The Commission considers further prescription in the NERR would be appropriate for providing direction to the AER and certainty to industry on the eligibility criteria for exemptions. Placing these in the NERR balances this prescription with flexibility by providing any person the opportunity to request a rule change to amend these factors if they consider it meets the NERO.”

Question Four: How do I obtain a retail authorisation?

It is proposed that the Australian Energy Regulator be given broader power to reduce the regulatory burden on authorised retailers who only supply electricity within embedded networks by the establishment of a new ‘category’ of retailer authorisation. However, it is unlikely that the AER would exempt (for need of a better word) new authorised retailers from any of the consumer protection provisions within the rules and retail law.

“The Commission acknowledges that elevating the regulation of embedded networks into the national framework will involve some costs for participants and market bodies. As we note above, providing consumer protections and providing access to the retail market is not costless. However, the Commission considers these costs will be minimised and proportionate to the benefits or the proposed changes.”

A point of difference for authorised retailers who operate solely within embedded networks will be that they need not be a market participant and register with AEMO (providing they are sourcing electricity at the gate meter from a market participant retailer). This means that the prudential requirements will be less onerous. Nonetheless, the operational and compliance costs of running an authorised retailer are significant. Systems used for customer management, billing and operations will need to be fully compliant with the application provisions of the rules and retail law.

We previously published an article on ‘how to become an authorised retailer’ which can be read here.

Question Five: Will existing embedded networks, and embedded network operators, be grandfathered?

The separation of ‘new’ from ‘legacy’ embedded networks raises the obvious concern that the existing two-tier regulatory regime is evolving into a four-tier regime. This, in turn, raises the question about whether ‘legacy’ embedded networks can continue forever or will need to convert to the regime applicable to ‘new’ embedded networks.

As part of the review, the AEMC engaged Minter Ellison to “Review and advise in connection with the implementation of the recommendations in its Draft Report ‘Review of regulatory arrangements for embedded networks’ dated 12 September 2017.

Minter Ellison identified that the draft report did not “show an intention that there should be any element of retrospectivity in relation to existing exemptions.” Minter Ellison identified the following six options for either grandfathering existing embedded networks and embedded network operators (or move them to the new regulatory regime), noting that option (iv) is the most attractive:[ii]

  • preserve all existing exemptions indefinitely, on their current terms and conditions;
  • provide that existing exemptions only apply until such time as there are substantial changes to the network;
  • preserve each existing exemption until such time as the premises to which they relate are sold. We note that under the NERL, while authorisations are transferable, exemptions are not;
  • deem pre-existing individual and registrable exemptions to be authorisations for the premises to which they relate on the conditions on which they have been granted. Such mechanism could either:
    1. require the previously exempt retailer to comply with the conditions attaching to the exemption as if they were contained in an authority; or
    2. require the previously exempt retailer to comply with exemption conditions and the obligations of an Off-market retailer under the NERL and NERR;
  • give the holders of exemptions a certain time in which to elect to convert their exemptions to authorisations; and
  • require the holders of deemed exemptions to notify the AER of the existence of their deemed exemptions within a certain time frame, in order to maintain them.”

We are currently working with the Majority of retail authorisation applicants and have successfully assisted a number of retailers. If you would like to understand how the above impact your business, contact us by phone (02) 8001 6664 or email [email protected]

 

 

[i] See Review of regulatory arrangements for embedded networks, AEMC 2017, accessible at http://www.aemc.gov.au/Markets-Reviews-Advice/Review-of-regulatory-arrangements-for-embedded-net

[ii] See Review of regulatory arrangements for Embedded networks, Implementation of

recommendations in Draft Report

, Minter Ellison 2017, accessible at http://www.aemc.gov.au/getattachment/e7a91675-0277-4757-9221-a59bf832a5e2/MinterEllison-Review-of-regulatory-arrangements-fo.aspx

Consultation on draft exempt embedded network guidelines (part one): embedded network managers take note

Consultation on draft exempt embedded network guidelines (part one): embedded network managers take note

AU Energy Compliance

On 17 November, the Australian Energy Regulator (AER) released the latest Draft Guideline – Exemption from Registration as a Network Service Provider (the Draft Guideline) and an accompanying Issues Paper[1]. AER is consulting on all aspects of the proposed amendments, and encourages submissions from stakeholders by 15 January 2018.

embedded network
Photo by ål nik on Unsplash
By Dr Drew Donnelly, Compliance Quarter.

Of the changes in the Draft Guideline, three relate to the Transmission Connection and Planning Arrangements final rule determination, and four relate to other matters necessary to update and clarify aspects of the guideline.

As the Embedded Network Manager (ENM) regulatory changes have just come into effect (1 December 2017), this article looks at two small changes in the draft Guideline that could have a direct impact on the ENM. In our next piece, part two on the Draft Guideline, we will look at the changes resulting from the Transmission Connection and Planning Arrangements final rule determination.

It is worth remembering that it is a regulatory requirement that ENMs be familiar with the Guideline- Exemption from Registration as a Network Service Provider[2].

First Change: Providing Embedded Network Information

A successful embedded network, both from a commercial and a compliance perspective, requires that a range of functions are performed in a co-ordinated manner. These functions include providing network services (‘Exempt Embedded Network Service Providers’[3]), selling electricity (‘Exempt Sellers’), and facilitating customers going on or off-market (ENMs). These functions could all be performed by distinct business entities or different parts of the one business. A crucial aspect of this co-operation is sharing information.

A change to the Draft Guideline (see 4.8.1.3) provides that the Exempt Embedded Network Service Provider (EENSP) must now specify in an embedded network customer’s bill:

  • ENM contact details
  • the parent NMI for the embedded network[4]

In addition, the parent NMI must be made available on request to:

  • the customer
  • the customer’s retailer
  • the ENM appointed to the embedded network.

This is aimed at ensuring that customers, ENMs and retailers have the information necessary to support the customer’s right of retail choice.

Second Change: Dispute Resolution

The Draft Guideline propose to amend part 4.1.6 of the Draft Guideline and add a condition (4.1.13) to harmonise the dispute resolution requirements with the requirements in the Draft Retail Exempt Selling Guideline.[5] This means that an EENSP needs to be a member, or subject to, an energy ombudsman scheme, where permitted to do so and notify residential customers of their right of access to such a scheme.

So how does this change impact on ENMs specifically? First, this means that businesses which provide several different embedded network functions can further align their dispute resolution policies and procedures as they will be subject to almost identical requirements for their exempt seller and EENSP functions. Second, a customer with a complaint or dispute may not always know who provides which embedded network functions, so it is important that ENMs knows the dispute resolution rules for all embedded network functions.

Remember, that these are simply proposed changes and AER welcomes your feedback by 15 January 2018.

AER also invites stakeholders to attend a forum on Thursday 14 December 2017 to discuss the proposed amendments. The forum is at 9.10am AEST and will be held via VCU in their Canberra, Sydney, Melbourne, Adelaide, Brisbane, Hobart and Townsville offices.

 

 

 

 

 

 

[1] See https://www.aer.gov.au/networks-pipelines/guidelines-schemes-models-reviews/review-of-network-service-provider-registration-exemption-guideline-2017-18.

[2] See http://www.aemo.com.au/-/media/Files/Electricity/NEM/Retail_and_Metering/Metering-Procedures/2017/Qualification-Procedure-MP-MDP-ENM.pdf, appendix A.

[3] Sometimes called ‘Embedded Network Operators’.

[4] The ‘Parent NMI’ is the National Metering Identifier at the parent connection point of the embedded network. This unique identifier is used in the Market Settlement and Transfer Solutions (MSATS) system to specify the ‘gate meter’ to the embedded network and accurately determine energy use in the embedded network.

[5] We discussed these proposed changes here https://compliancequarter.com.au/proposed-new-dispute-resolution-obligations-exempt-sellers/.

Greater Regulation of Embedded Networks in 2018

Greater Regulation of Embedded Networks in 2018

AU Energy Compliance

Today we look at two new publications that will impact the regulation of embedded networks in 2018.

This month saw the release of the Australian Energy Market Commission’s (AEMC) final report on the Regulation of Embedded Networks along with the publication of Version 6 of the Electricity Network Service Provider Exemption Guideline (draft) by the Australian Energy Regulator (AER).

regulation of embedded networks
Photo by Seb Zurcher on Unsplash
By Connor James, Compliance Quarter.

Electricity Network Service Provider Guideline

As readers will be aware, in the Eastern States, anyone who engages in an electricity distribution activity must either be registered with the Australian Energy Market Operator as an electricity network service provider or must gain an exemption from that requirement. Exemptions are granted by the AER.

On 17 November 2017, the AER published a new exemption guideline, version 6. This new draft guideline should be read by all existing exempt operators.

The new draft guideline goes into further detail about microgrids and local energy sales:

“The AER is supportive of the concepts of microgrids and private trading but we caution there are significant regulatory hurdles which must be overcome before a microgrid or private selling of excess electricity can be implemented. We will work with proponents to develop models that respect and enhance the rights of customers to access new energy options but our ability to facilitate microgrids is limited by the constraints of the current regulatory framework.”

Other changes within version 6 include clarification about the requirement of exempt sellers with respect to life-support customers (which goes without saying as being important), clarification about who pays for a metering upgrade or installation, and clarification about embedded networks that include embedded generation.

With respect to embedded generation, version 6 notes that additional requirements will apply to a generator, battery or inverter type installation where there is an aggregate capacity measured at the connection point of greater than 5MW output. All such systems require review by the Australian Energy Market Operator (AEMO).

Submissions can be made on the draft guideline prior to COB Monday 15 January 2018.

The AEMC Final Report

The AEMC notes that there are now over 200,000 embedded network customers and a growing number of exempt energy sellers.

These energy sellers are bringing innovation that has not been seen previously. Energy sellers within embedded networks often include embedded generation and energy storage as part of their product. Overall, this has resulted in increased complexity and difficulty for the regulator in determining the appropriate regulatory setting.

The AEMC examined the existing regulatory framework against issues faced by consumers and the benefits of embedded networks:

“These benefits can include the promotion of innovation in products and services that can help manage energy costs in embedded networks such as embedded generation and demand management services.”

Consistent with the AER’s submission to the AEMC review, the AEMC found the existing regulatory framework is not fit for purpose.

“However, the current regulatory arrangements for embedded networks are resulting in some customers not being able to access competitive prices or important consumer protections. There are also insufficient monitoring and enforcement powers for the Australian Energy Regulator (AER), leading to a lack of clarity that embedded network operators are meeting their obligations as suppliers of an essential service. While some embedded networks are providing benefits to energy consumers they may not receive in a standard supply arrangement, often they do not.”

The recommendations in the final report are wide-ranging. Recommendations are focused on three areas: a. Improving access to competition, b. Elevating embedded networks into the national framework, and c. Better regulation of new and legacy embedded networks.

regulation of embedded networks

The implementation of these recommendations will be significant from the perspective of embedded network operators. Embedded network operators should be considering the changes coming in 2018 and acting now to ensure that they can continue to run their business.

We will publish a separate article in the coming days, going to further detail on the AEMC report, in the meantime please feel free to contact us if you wish to discuss the regulation of embedded networks.