Embedded networks: Same same, but different

At the request of the Council of Australian Governments (COAG) Energy Council the Australian Energy Market Commission (AEMC) is reviewing the regulatory arrangements for embedded networks under the National Energy Retail Law (NERL) and National Energy Retail Rules (NERR)[i].

Embedded networks are private electricity networks which supply the likes of shopping centres, retirement villages, apartment blocks and complexes and caravan parks.

Their numbers have grown significantly in recent years. A range of business models have emerged incorporating both distributed generation and new technologies, such as energy storage. The arrangements within embedded networks are increasingly difficult for consumers to comprehend.

Energy supply and sales agreements are subject to a high level of regulation and oversight, which is consistent with the view that it is an essential service. When an embedded network owner or operator wishes to sell electricity within the embedded network they must obtain either a retailer authorisation, such as those held by the major electricity retailers from the Australian Energy Regulator (AER), or be exempted from holding a retailer authorisation. This exemption means that their customers are not subject to the same high level of regulation and oversight, and as a result the same rights and protections as those of an authorised retailer. Basic rights such as access to an energy ombudsman scheme are not upheld.

This approach is clearly contentious. The supplier of the electricity is subject to differing authorisation and regulation, and the enforcement regime points to more severe penalties on authorised retailers than for exempt sellers for a comparable breach of regulatory obligations around retailing the same good – electricity. Where regulations can be ‘peeled off’ by the exemptions framework we might assume they are superfluous to the minimum rights and protections afforded to all other electricity consumers.

Two-tiered regime

The exemption framework has been compared to other two tiered regulatory regimes, such as those for therapeutic goods or financial services. But they are not analogous. The subject of the differing regulation in those multiple tiered regimes is the product itself, not the supplier. This product based approach means that compliance obligations are uniform across suppliers of the product. In the energy exemptions framework, it is the supplier that is subject to differing authorisation and regulation, even though the product of retailed energy is the same.

Multiple tiered regulatory frameworks that can be applied differently according to the provider’s business model are often popularised as lowering barriers to entry and improving competitive outcomes. At least that’s the theory. In practice, exemptions that lower the cost of compliance for certain business models, when compared to those of say an authorised retailer, create regulatory arbitrage leading to distorted incentives and price signals.

Improved access to competition may improve opportunities for customers of exempt networks in Victoria, South Australia and New South Wales, but embedded network customers in the ACT, Tasmania and Queensland continue to have costly regulatory impediments in place that require them to connect directly to the network should they wish to access retail market offers. The practical effect of this requirement is to deny the customer access to competition.

Change versus status quo

Submissions to the AEMC consultation to date are divided along fairly predictable lines, with consumer representatives and authorised retailers making the case for an alignment of all electricity consumer rights and obligations, and those benefitting from the current arrangements appealing for the status quo. The AEMC will publish its Draft Report in September this year, and make its Final Report and recommendations to COAG by December.

[i] http://www.aemc.gov.au/News-Center/What-s-New/Announcements/Review-of-embedded-networks-regulatory-arrangement