An embedded network is a network for transport of low-voltage electricity along distribution lines owned and operated by an entity other than an electricity distributor.

An embedded network enables the network owner/operator (ENO) to aggregate demand for electricity among consumers connected to the embedded network and to purchase it in bulk to meet the aggregated demand. Electricity that is purchased from the National Electricity Market (NEM) is reconciled at the point of connection between the embedded network and the distribution network. The ENO then on-sells the electricity to customers connected to the embedded network.

Embedded networks provide customers within the network with the opportunity to purchase cheaper electricity. They could also minimise the impact of future electricity price increases. Examples of customers who may benefit from the establishment of an embedded network include retirement villages, shopping centres, educational facilities, apartment buildings, housing estates and industrial and commercial estates and complexes.

Despite the benefits that embedded networks may offer, they pose special challenges for customers. Recent regulatory developments that seek to protect customers are discussed below.

Challenges faced by customers in embedded networks

In a report prepared in 2012 by a Victorian advocacy group for utility customers, the Customer Utility Advocacy Centre (CUAC), the following issues were identified as arising for customers in the context of embedded networks:

• prices, fees and charges
• billing problem or error
• metering issue
• payment methods
• concession/ rebates
• is connection from electricity supply.¹

Some of the most important consumer protection issues detected by CUAC for customers were:

• Practical barriers to exercising choice of retailer (e.g. the prohibitive cost of having a meter replaced and a reluctance by retailers to accept approaches by customers for market offers).² Many customers were simply told by the re-seller or a third-party that they could not switch, while others were told that they would need to arrange or pay for meter replacement.³
• High fees and charges, including for connection.⁴
• Limited access to information about prices and charges. It was found that, although re-sellers typically claim to offer 'discounted rates', it may be difficult for customers to access the information that would enable them to assess this claim.⁵

Recent changes to regulatory mechanisms to protect customers connected to an embedded network

Core exemption conditions applicable to 'exempt sellers'

Under the National Energy Retail Law (NERL), anyone who sells energy to people for use at premises must have a retailer authorisation, unless a retail exemption has been obtained. The requirement to be authorised or exempted applies equally to ENOs where electricity is purchased from a registered retailer and then on-sold to customers connected to the embedded network (such as in the context of retirement villages or caravan parks).

The Australian Energy Regulator (AER) may exempt a person from obtaining retailer authorisation under the Exempt Selling Guidelines, when the burden associated with obtaining retailer authorisation would be unwarranted given the nature and scale of the electricity on-selling involved – which is particularly relevant in the context of embedded networks. The latest version of the Exempt Selling Guidelines was issued by the AER in April 2015.

There are three categories of exemption under the Exempt Selling Guidelines, which are described below.

• Deemed exemption: deemed exemptions apply automatically, so no application to the AER is required. Such an exemption is usually applicable for small-scale networks (e.g. retirement villages or caravan parks).
• Registrable exemptions: registrable exemptions only apply if the entity seeking to rely on the exemption registers their embedded network activities for particular sites with the AER. Generally, the scale of activity is larger than in the context of networks that would be covered by the deemed exemption.
• Individual exemptions: individual exemptions require an application to be made to the AER, and are granted on a case-by-case basis for entities that do not meet the criteria for a deemed or registrable exemption. In these cases, the exemption must be tailored to the requirements of the particular embedded network.

All exempt embedded networks are subject to core exemption conditions, which cover a broad range of issues that help to address typical customer complaints in the context of embedded networks, including (but not limited to):

• Provision of information: obligation to provide customers information in writing on a range of matters, including the applicable energy tariffs, all associated fees and charges applicable to the sale of energy and the right to elect a retailer of choice.
• Billing and payment arrangements: obligations regarding timing and contents of bills, as well as making flexible payment options available to customers in financial difficulty.
• Pricing: obligations regarding the setting and amendment of customer tariffs, including limitations on the maximum customer tariffs that can be charged and fees for late payment.
• Overcharging: obligations regarding the repayment of amounts that have been overcharged.
• Disconnection and re-connection: limitations on the circumstances when disconnection or cessation of supply can occur and obligations to re-connect when the matter that led to the disconnection has been rectified.
• Concessions and rebates: obligation to use best endeavours to make a claim for an energy rebate, concession or assistance under a relief scheme on behalf of an eligible customer.
• Choice of retailer: prohibition on doing anything to discourage or prevent customers from purchasing energy from a retailer of choice.
• Dispute resolution: obligation to make reasonable endeavours to resolve a dispute with a customer and to advise the customer of any right to access the relevant energy Ombudsman scheme.

The AER is empowered to take action against exempt sellers for failure to comply with exemption conditions. In particular, civil penalties apply to a failure to comply with exemption conditions. In addition, the AER may revoke an exempt seller's exemption if there has been a material failure to meet the conditions imposed on the exempt seller. Nevertheless, customers do not have a direct mechanism through which to ensure that the exemption conditions are complied with.

Accessing retail market offers

Notably, the Exempt Selling Guidelines stress the importance of providing customers in embedded networks with access to their 'retailer of choice', a principle which is reflected in the NERL.

Arrangements where customers choose a retailer that is not the ENO are referred to as 'on-market activity' because customers who are connected to a NEM registered retailer, are accounted for in NEM market systems and are visible to the operator of the NEM - the Australian Energy Market Operator (AEMO) – as well as other market participants. In these cases, customers must still pay the ENO for network services (i.e. for the distribution of electricity on the embedded network). In contrast, 'off-market' arrangements refer to cases where electricity is metered and sold to customers by the ENO.

In October 2014, AEMO submitted a rule change request to the Australian Energy Market Commission (AEMC) to address perceived regulatory gaps in the arrangements to support off-market customers who are seeking to become on-market customers, including lack of certainty regarding responsibility for NEM activities, including responsibility for physical transfer of customers between retailers and metering of electricity consumption.

Under the rule change request, AEMO has proposed a new category of service provider – an 'embedded network manager' (ENM) – to manage customers in the NEM. AEMO considers that, if implemented, the proposed rule will provide clarity regarding the roles and responsibilities of managing embedded networks and provide a framework for embedded network customers to access retailer market offers.

As part of its assessment of the rule change proposal, the AEMC issued a consultation paper in May 2015 identifying specific issues in respect of which it has sought stakeholder comment, including (but not limited to):

• Role of the ENM: should a new accredited service provider (ENM) be created to manage on-market customers? If not, who should perform this role?
• Determining when an ENM is required: should all deemed, registrable and individual embedded networks be required to appoint an ENM? What threshold should be applied to determine when an ENM is appropriate?
• Accreditation and governance of an ENM: what are the appropriate accreditation and governance requirements for an ENM? What should be the consequence if services are not supplied by an accredited ENM?
• Who can be an ENM?: should any party be prevented from becoming an ENM?

Submissions on the rule change proposal are due by 2 July 2015.

What does this mean?

Clearly, regulatory mechanisms exist to help protect customers within embedded networks. These mechanisms are designed to address at least some of the types of complaints that customers have expressed about embedded networks. Recent changes and proposed changes to these regulatory mechanisms will help to enhance the degree of protection afforded to customers. Nevertheless, it will be necessary to see whether these mechanisms are practically effective, especially as the number of embedded networks proliferates.

¹Consumer Utilities Advocacy Centre (CUAC), 'Growing Gaps: Consumer Protections and Energy Re-sellers, A CUAC Research Report', December 2012, p. 30.

²Letter from the Consumer Utilities Advocacy Centre (CUAC) to the Australian Energy Regulator regarding the 'Draft AER (Retail) Exempt Selling Guideline – version 3 – December 2014', dated 10 February 2015.

³Consumer Utilities Advocacy Centre (CUAC), 'Growing Gaps: Consumer Protections and Energy Re-sellers, A CUAC Research Report', December 2012, p. 6.

⁴Letter from the Consumer Utilities Advocacy Centre (CUAC) to the Australian Energy Regulator regarding the 'Draft AER (Retail) Exempt Selling Guideline – version 3 – December 2014', dated 10 February 2015.

⁵Consumer Utilities Advocacy Centre (CUAC), 'Growing Gaps: Consumer Protections and Energy Re-sellers, A CUAC Research Report', December 2012, p. 6.

⁶The NERL commenced in the ACT and Tasmania on 1 July 2012, 1 February 2013 in South Australia and 1 July 2013 in NSW. Victoria and Queensland are yet to announce commencement dates for the NERL. In these jurisdictions, State legislation continues to govern authorisation and exemption of electricity re-sellers.