Embedded networks - it's time for change

June 2021

In 2018, the National Energy Customer Framework (NECF) was amended to include the requirement for exempt sellers and networks, selling and supplying to residential customers, to join an Ombudsman scheme. 

Since then, EWON has worked with the Australian Energy Regulator (AER) to bring existing NSW energy exempt networks and sellers into our membership. Combined with our customer complaints data, this has provided us with a unique perspective on how the current framework has failed to respond to the growth of embedded networks, resulting in significant customer detriment.

This Spotlight On outlines EWON’s insights over the past three years, particularly how the existing framework can be improved to ensure clarity, transparency, accountability and ultimately, consumer protection aligned with that of mass market energy residential and small business customers.

Rapid growth overtakes exemption framework

At the time the NECF was introduced, the exemption framework aimed to capture situations other than where AER authorised mass market energy retailers were selling energy for profit to residential and small business customers. Policy makers frequently noted that the exemption framework typically applied to situations including where residential park operators and lodging / rooming / boarding house landlords onsold electricity ¹ to their residents as an incidental part of their business. 

Calling it an ‘exemption’ framework clearly implies this is outside the norm. The system was set up to ensure that most energy sellers were captured in the AER authorised and licensed area where customers would be afforded the high standard of consumer protections warranted for essential services.

But as the embedded network industry has grown, the regulatory system has become unwieldy. It can no longer be said that the exemption framework is for entities who are not selling energy as their ‘core business’. 

Since the introduction of the exemption framework, we have witnessed the rapid growth of the embedded network industry. Authorised energy retailers have now moved into this section of the energy market, proof that the embedded network industry is now driven by the core business of selling energy to customers for profit. This situation creates an imbalance between the National Energy Retail Law (NERL) policy principles and the application of the current exemption framework.

Regulation no longer fit for purpose

In the face of the growth of the embedded network industry, the Australian Energy Market Commission (AEMC) found that the regulatory framework for embedded networks is no longer ‘fit for purpose’ ². 

We recognise the motivation for the development of some embedded networks has been to deliver improved customer and environmental outcomes, for example, prioritising sustainability of utility supply. However, the overall growth of the industry is not being driven by consumer demand. The benefits of embedded networks are geared towards offsetting building costs for developers and locking in long-term revenue streams for service providers that continue long after the developer has left the scene. This developer/operator supply driven business model is only successful due to the sustained growth in Australian property prices and the increasing demand for more affordable housing i.e. apartments rather than stand-alone houses – it is not consumer demand driven, the benefits to residents/owners are unlikely to emerge.

Further, the application of the exemption framework guidelines for retail and network exemptions and the historical lack of administration of the AER’s register of exemptions has played a role in the development of a for-profit industry selling energy, with minimal regulatory consumer protection or price protection to embedded network residential customers.

This report provides a detailed overview of what’s not working in the exempt energy sector and suggests how the exempt guidelines can be tightened. We encourage all relevant stakeholders to read this report and take action by responding to the AER’s call for submissions as part of its review of the exemption framework.

Embedded network issues and suggested solutions

 

Act now to	Recommendations
Improve consistency and transparency	the AER be more proactive in collecting the numbers of customers covered by network and retail exemptions and ensuring that these numbers are reported publicly on a regular basis – or change the public register so that customer numbers are included in the details on a registered exemption. the network and retail exemption guidelines are updated so that all residential customers are included in a registered class exemption. the AER create a registered exemption class for entities selling unmetered gas combined with hot water.
Proactively engage with exempt entities and maintain the exemption register	the AER take a more active role in engaging with exempt entities, and in reviewing existing registered and individual exemptions. the guideline contain stronger requirements for exempt entities to keep the information on registered exemptions up-to-date.
Increase accountability for unregulated billing agents	the published information contained on the register of exemptions be expanded to include the details of any billing agent providing retail services to the embedded network.

 

Exemption framework review – how to be part of it

In light of the current AER review into the exemption framework, actions need to be taken now to address these inconsistencies and start to bridge the gap that has seen customers of embedded networks receive lower levels of consumer protection.

EWON’s unique vantage point allows us to see firsthand the gaps in consumer protections outlined in this report, but it is not in our remit to address them. We have welcomed the open engagement of the AER over the past eighteen months which has culminated in the current review of the exemption guidelines.  

We look forward to contributing to the actions required to address the consumer protection gaps, which will help build the confidence of embedded network residents in the energy sector.

EWON’s experience with exempt entities

It has now been three years since the introduction of mandatory membership of EWON for exempt entities. In 2015, EWON drove to change the exemption framework, effective from 1 July 2018, which we considered a huge step forward in bridging consumer protection gaps. What we didn't expect was that this experience would shine a brighter spotlight on what is not working – from a regulatory perspective. 

1. Regulatory confusion

Through our engagement with exempt entities and their customers, we know the current framework’s operation is inconsistent and leads to significant confusion, including about:

• protections for small business customers within embedded networks
• registered and deemed exemptions are providing inconsistent outcomes for residential and small business customers 
• the lack of billing agent regulation in embedded networks. 

Protections for small business customers within embedded networks 

Many of the conditions in the guidelines apply to both small business and residential customers, however the dispute resolution requirements, including the requirement to join EWON, do not. 

This has led to inconsistencies in the options available for small businesses. The NSW Electricity Supply Act gives all residential and small business customers the right to complain to EWON, but because operators are not required to be EWON members, our dispute resolution powers are limited to at best, negotiating an outcome if the operator is open to engaging with EWON.

We cannot compel the operator to work with us, provide information or comply with our decisions. We engage with them to assist customers, but for many complaints, we are unable to achieve a fair and reasonable outcome, as we do for small business customers of EWON members. 

There is an additional complication in embedded networks, where not all customers in the same building will be extended the same consumer protections. Many embedded networks are built with a mix of residential and commercial properties, usually an apartment complex with shops on the ground floor. In these networks, residential customers enjoy higher standards of consumer protection than the small businesses they frequent. 

Registered and deemed exemptions are providing inconsistent outcomes for residential and small business customers 

Our engagement with exempt entities and customers who reside in embedded networks has allowed us to see that the current framework is providing customers with inconsistent experiences and outcomes. This relates to two main areas:

• While some residential embedded networks with less than 10 residential customers fall into a deemed class exemption i.e. retail exemption class D2 or network exemption class ND2, retirement villages and residential parks must obtain a registerable exemption regardless of their customer numbers. We consider that the framework should deal with all residential customers equally. We recommend that all onsellers and networks servicing residential customers should be required to obtain registerable exemptions.
   
• Companies onselling unmetered gas to residential customers also fall into a deemed exemption class. The issue of fragmented energy services, (e.g. receiving separate bills for chilled or hot water, air conditioning, and unmetered gas within embedded networks) is a rapidly growing consumer detriment which needs to be addressed i.e. through the expansion of the consumer protection framework. In NSW, the sale of unmetered gas is frequently paired with the sale of hot water, which is also based on the supply of gas. The cost of which is recovered by the ‘hot water provider’ through billing of litres of hot water consumed. The number of customers living in apartments which are part of these type of hot water embedded networks has increased from 13,000 in 2019 to over 49,000 in 2021. Understandably, customers in residential buildings see these services as equally essential as their electricity and gas connection. We believe that continuing to allow these networks and onsellers to fall into a deemed exemption class is failing to deliver the appropriate oversight of this rapidly expanding industry. Our Spotlight On: Hot water embedded networks provides more detailed analysis of this issue.

The lack of billing agent regulation in embedded networks

EWON recognises the dilemma the AER faces in regulating entities that have structured their businesses so they are not purchasing energy at the parent connection point for an embedded network. Perhaps some strata corporations choose to structure their energy services in this way (this has not become evident to EWON to date). However, there must be increased public visibility of the number of billing agents operating in embedded networks, the number of networks each operates in and the number of customers they service – by network and collectively. The AER could ensure this as part of its review of the exemption guidelines.

The initial version of the Exempt Selling Guideline, published in 2011, recognised that specialist external providers played an important role within embedded networks. The guideline noted that a specialist external provider onsells energy as a core business and was required to obtain a retail exemption. The guideline also made it clear that specialist external providers differed from billing agents who simply issue and receive payment of customer accounts on behalf of the exemption holder ³.

Table: Role of embedded networks billing agents (Exempt Selling Guideline, December 2011)

Entity	Specialist external provider (registered exempt entity)	Embedded network billing agent (unregulated contractor)
Role	contracting for the supply of energy at the parent connection point issuing bills processing payments  managing disconnections and reconnections customer service handling complaints	issuing bills processing payments

The rapid growth of embedded networks from 2012 coincided with an equally rapid growth in the number of companies whose core business was providing retail services to customers living in them.

The current exempt selling guideline explains that entities must only obtain an authorisation or exemption if they purchase the energy at the parent connection point for the embedded network. However, EWON has seen multiple examples of energy businesses that have structured their contractual agreements with strata corporations so they can operate as a billing agent under the AER guideline, while maintaining full control over the energy retail services provided to their customers. This means entities controlling the energy services in a building have avoided the requirement to obtain an authorisation or exemption for their activities. This business structure also places the regulatory burden of being the registered exempt seller and network onto the strata corporation which generally comprises volunteer committee members whose understanding of energy is limited – while also being the customers.

The growth in this business model has led to increased confusion about who is meant to be the regulated entity, and who is responsible for embedded network customers. Greater regulatory scrutiny of the business models of entities operating in the market is required.  
 

2. Multiple party network registrations

The complexity of embedded network business models has been one of the major sources of confusion and detriment for customers who contact EWON. It is also a barrier to welcoming exempt entities into EWON’s membership. 

This is best illustrated by the difficulties caused by multiple parties registering for a single network exemption. This occurs because the National Electricity Law (NEL) requires a person owning, controlling or operating an embedded network to be subject to an AER network exemption. The AER exempt network guideline notes that where multiple parties perform the roles of ‘owner’, ‘operator’, or ‘controller’ of the network, each party must register or be exempt. 

The contractual arrangements within embedded networks are frequently complex and vary widely between different locations. In some cases, long-term commercial agreements between a strata corporation and the embedded network operator are set in place by the developer before the owner/occupiers of the building (the residents) take over the running of the strata committee. These agreements will often also provide the network operator with the role of billing agent and control over retail services, such as pricing, billing and customer service. There is also a trend where authorised retailers, and one large billing agent, have taken to registering network exemptions in their own name rather than in the name of the owner’s corporation.

These varying business models underpinned by differing contractual relationships offer no transparency regarding which parties have sufficient control over the network to take action when things go wrong. This has created uncertainty about which party is responsible for internal and external dispute resolution. If multiple parties register an exemption for a single embedded network, then they are all technically required to comply with the requirement to join the relevant Ombudsman scheme. While most customer complaints are dealt with by discussion and agreement, the Ombudsman can make binding decisions, directing members to undertake certain action to resolve a customer complaint.

It is essential that the network party which joins EWON can take the action required to address problems that arise. At the moment it can be very unclear which entity that is. Again, increased scrutiny would assist in providing greater clarity.

3. Compliance with the exempt selling guideline

Retailers applying for an AER authorisation generally understand they can only commence operating in NSW once they have met the AER’s requirements – including their compliance obligations, such as complaint handling policies and membership of EWON.

In contrast, exempt entities have limited awareness that there are conditions and obligations that come with registered or deemed exemptions. In some cases, contractual arrangements with a billing agent mean prospective exempt members don’t control aspects of the retail services / information required by their customers, like the complaint handling policy, or the information contained on the agent’s website. This information would be best provided by the AER as part of the exemption approval process.

A significantly higher level of engagement by EWON staff is required for these new members. Many are resistant to join EWON and feel intimidated by the conditions that come with EWON membership despite the requirements of the AER exemption. 

EWON provides membership packs with critical information and complaint handling policy templates for new members, and we have seen many exempt entities develop an internal complaints policy for the first time - using these templates. EWON has responded to the needs of these businesses by educating them on the rights and responsibilities of energy consumers, complaint handling and compliance with the AER exemption framework.

We have also developed a second complaint policy template, consistent with the guidance for small organisations within the Australian Standard ⁴. This template is designed to help small embedded network operators who only manage a single site and lack the resources of a large organisation. Members can adopt either of our templates in full or support the development of their own policy or approach in terms of presentation, style and language. Most of our new exempt members have adopted the EWON complaint policy template in full, especially residential parks. We have also found new authorised members adopt the template or use it as a basis to develop their own.

We have also worked with billing agents, who are contracted to new members, to adopt our complaints handling policy. Where the opportunity arises, we have engaged with them to ensure other core conditions of the AER’s exempt selling guideline are met – such as the requirement to identify the legal and trading name of the registered exempt entity on the customer’s bill.

This is beneficial to both the exemption holder and the embedded network residents – and, as planned, reduces complaints to EWON. But it’s only applicable for the exemption holders who have agreed to join EWON – and many exemption holders are yet to do that.

We consider our engagement to date with many embedded network businesses in NSW has been successful, however the EWON membership process should not be the driver of broader compliance with the guidelines. More work is required by the AER to ensure exemption holders are fully aware of their obligations, including to join EWON when the exemption is granted, and that compliance action is taken.

4. Exemption Register accuracy and currency

The NERL and the NERR require the AER to keep a public register of authorisations and exemptions. The Register must include the names and business addresses of exempt sellers and networks who have registered with the AER as belonging to a class of persons subject to a registrable exemption. The Register may also include other particulars and information relating to exempt sellers and other matters that the AER considers relevant.

Registered retail and network exemptions are important for maintaining oversight of energy companies and embedded network operators that service residential customers. An accurate and current public register of exemption holders underpins the consumer protections contained in the exemption framework. The Register provides critical information for energy consumers about who is selling them energy, and it holds exempt entities accountable for providing their customers with a suite of consumer protections.

EWON began accessing the public Exemption Register in 2017 in preparation for expansion of jurisdiction for exemption holder membership. It quickly became obvious that from the time the Register was established, accuracy, completeness and currency of exemption registrations received little attention.  

Critically, the exemption framework is largely reliant on self-regulation. Compliance of exempt entities and embedded networks with the existing framework has not been a past enforcement priority of the AER. When the requirement to join Ombudsman schemes was extended to exempt entities in 2018, EWON worked with the AER to help update and maintain the information in the register.

5. Enforcement of the framework and ongoing engagement

EWON’s engagement with potential new members has come with a wide range of responses from exempt entities. Some embedded network operators have responded to the requirement to join an Ombudsman scheme by delaying their application indefinitely, disengaging from the discussion, or simply refusing to join.

We recommend that exempt entity compliance and enforcement be a FY22 priority for the AER. This will perhaps require change to the current enforcement framework as it does not appear to be adequately designed for responding to non-compliance by very small energy providers.

We support providing the AER with more flexible enforcement options which enable it to respond proportionately to small operators who are unable or unwilling to comply with the current exemption framework and allow penalties to escalate if these small operators continually fail to comply.

It’s time to take action – be part of the exemption guideline review 

The AEMC proposed a regulatory reform package in June 2019 aimed at fixing the regulatory gaps created by the growth of embedded networks. These reforms are still being considered by the Energy National Cabinet Reform Committee (ENCRC). Even if the AEMC reforms are agreed to by the ENCRC, the time taken for effective change to be implemented will be lengthy and consumer detriment will continue. It is also uncertain whether the reforms will apply to both new and legacy embedded networks. 

The progress on regulatory reform of the embedded network industry is uncertain, but action can be taken now to improve the current exemption framework. 

In May 2021, the AER released a consultation paper to update the exemption guidelines (PDF). The consultation paper outlines the issues it considers can be addressed now, including some of the problems that EWON has encountered as we have expanded our membership to exempt entities. For example, the AER is consulting on multiple party network registrations and what it means to own, control or operate an embedded network. The AER is also proposing to take a more proactive role in exempt entity compliance within the current framework. The AER is asking stakeholders for further ideas on how to facilitate exemption holders taking up membership with Ombudsman schemes. We strongly support the AER’s steps to address these critical issues. 

In addition to the changes proposed by the AER in its consultation paper, EWON recommends the following improvements are considered.

 Act now: Improve consistency and transparency 

When introducing its 2019 reform package, the AEMC noted that the lack of comprehensive and reliable data on embedded network customer numbers highlights some of the challenges associated with the current exemptions’ regime ⁵. EWON considers there is still limited publicly available information on the number of customers living in embedded networks. 

 We recommend that the AER be more proactive in collecting the numbers of customers covered by network and retail exemptions and ensure that these numbers are reported publicly on a regular basis – or change the public register so that customer numbers are included in the details on a registered exemption.

The AEMC also recommended a more consistent approach to regulating the energy services provided to residential customers. This means doing away with a two-tiered system of consumer protections for different classes of residential customer. We are calling for the existing framework to be amended now to reflect this recommended change in policy. This means that no residential customer should be covered by a deemed exemption, even where there are fewer than 10 customers. 

 We recommend that the network and retail exemption guidelines are updated so that all residential customers are included in a registered class exemption.

We also consider this change should include any sale of energy to residential customers. For example, the supply of unmetered gas and chilled or hot water to residential customers should be raised up into a registerable exemption class. Our Spotlight On: Hot water embedded networks highlights how these new energy products are still essential services for the residential customers living in these networks. The growth in fragmented energy services within residential buildings is a fast-emerging issue that must be given an appropriate level of oversight. 

 We recommend that the AER create a registered exemption class for entities selling unmetered gas combined with hot water.

EWON recognises that currently sellers of hot water mostly charge customers for $/litres of hot water. This means that the hot water seller is not considered to be selling energy. However, it is critical to note that the Australian Energy Market Operator has long standing Gas Retail Market Procedures that incorporate hot water meters into the gas supply for residential customers. 

We urge the AER to create a registered exemption class for unmetered gas and combined with chilled or hot water. This would achieve three main outcomes:

• introduce public transparency on the growing number of gas embedded networks in Australia. EWON notes that the number of NSW residential customers in unmetered gas and hot water networks has increased from 13,000 in 2019 to over 49,000 in 2021.
• any hot water embedded network operator that wanted to charge customers for the gas used to heat the hot water would have the ability to register an exemption.
• State government jurisdictions would then be free to create legislation or regulations that require hot water sellers to bill customers for the gas used to heat the water (see our Spotlight On: Hot water embedded networks).

 Act now: Proactively engage with exempt entities and maintain the exemption register

When the framework was first initiated, exemptions were intended to apply to small energy sellers who covered limited numbers of customers. The framework was developed at a time when rapid growth in an embedded network industry was not anticipated. It is understandable that the approach taken to the exemption framework was one largely of self-regulation and proportional obligations for consumer protections.

The exemption framework now covers several hundred thousand customers across the NEM. The embedded network industry is made up or large numbers of small and large specialist embedded network providers whose business model is based on selling energy to residential customers for profit.

The exemption framework has become a critical consumer protection mechanism, albeit not as expansive as NECF, for a large and growing number of residential customers. It is no longer appropriate to rely on self-regulation for the embedded network industry. 

 We recommend the AER take a more active role in engaging with exempt entities, and in reviewing existing registered and individual exemptions.

 We recommend the guideline contain stronger requirements for exempt entities to keep the information on registered exemptions up-to-date. 

Act now: Increase accountability for unregulated billing agents

The published information contained on the register of exemptions should be expanded to include the details of any billing agent providing retail services to the embedded network.

Many embedded network customers are unaware how energy services are structured in their residential building. Providing accessible information could help them navigate poor customer service and complaints. It would also provide Ombudsman schemes with more resources to identify and manage systemic issues arising from complaints and ensure more accountability from energy companies who have structured their business to avoid regulation.

We recommend that the published information contained on the register of exemptions be expanded to include the details of any billing agent providing retail services to the embedded network. 

For queries about policy issues raised in Spotlight On, contact Rory Campbell. For media queries contact Fran Strachan. Don't want to miss future editions? Subscribe to Spotlight On.

Footnotes

1. The Hon. John Ajaka, Second Reading Speech, National Energy Retail Law (Adoption) Bill 2012, p12629; The Hon. J.D. HILL, House of Assembly, National Energy Retail Law (South Australia) Bill, Wednesday 27 October 2010, 1753
2. Australian Energy Market Commission, Final Report, Review of regulatory arrangements for embedded networks, 28 November 2017, p58
3. AER, Exempt selling guideline, Version 1, December 2011, p7
4. AS/NZS 10002:2014, Guidelines for complaint management in organizations, Australian/New Zealand Standard
5. Australian Energy Market Commission, Final report, Updating the regulatory frameworks for embedded networks, 20 June 2019, 18