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Posted 27 November 2017
Embedded electricity networks are becoming more and more common in strata buildings. They have also become common in other situations, such as commercial buildings, retirement villages and caravan parks, but this article will focus on strata buildings. Similar arrangements for other services, such as gas, hot water, air conditioning, internet access and storm water have also become common, but this article will focus on electricity.
It is becoming very common for developers to have strata buildings constructed so that there is a “parent” or “gate” meter between the infrastructure forming the national electricity grid and the meters of individual lot owners. This creates a private network, known as an “embedded network”, through which an “embedded network service provider”, acquires energy supplied by an authorised retailer and on supplies electricity to “embedded network customers”. The most common scenarios we see are:
This can have many advantages for developers, including lower infrastructure costs, those relating to the embedded network typically being borne by the energy company and the marketing advantage deriving from the ability to claim that an embedded network facilitates efficient and cost effective electricity supply.
However, this has proven problematic for many embedded network customers, the common perception being that lot owners have become captive customers paying the maximum permitted charges. This has been compounded by the rapid growth in the number of such networks, in the context of a growing realisation that customers of such networks are being disadvantaged in terms of price competition and consumer protections, as compared with normal retail customers.
This has led to a number of reviews and in turn to a number of reforms. Important reforms commence on 1 December 2017 and further reforms are expected in the future. The purpose of this article is to consider, for NSW strata schemes, how this works, what changes are coming and what you can do if you are having problems in your building.
Key features of the regulatory framework are:
Another important issue in this area concerns common law and equitable principles relating to secret profits and secret commissions, as considered by the NSW Supreme Court in Community Association DP 270180 v Arrow Asset Management Pty Ltd  NSWSC 527. In that case, the Supreme Court found that a developer owed fiduciary duties to a community association and prospective lot owners, analogous to those owed by the promoter of a company and had breached those duties by committing the association to a management agreement which was not on commercial terms and in relation to which the developer received a large secret fee, which was not disclosed to community association and prospective lot owners. The developer was ordered to account to the association for the secret fee.
It is not a long leap to argue that a developer who receives a benefit from a prospective embedded network operator, whether a payment or assumption of part of the infrastructure construction costs associated with the development, must disclose that benefit to the owners corporation and prospective purchasers of lots, failing which the owners corporation may be able to recover, from the developer, an account of profits (the benefit), equitable compensation for the amount by which embedded network costs exceed market rates and compensation for unfunded debts incurred during the initial period.
It does not follow that an owners corporation will be able to terminate the embedded network arrangements, i.e. any contractual arrangements between the owners corporation and the energy company and the lease of common property under which energy company owned embedded network infrastructure is situated on common property, which can survive registration of the strata plan pursuant to Section 24(2)(c) of the Strata Schemes Development Act 2015. It may be possible in some cases, e.g. where there has been fraud or misleading conduct by the energy company, but the specific statutory protections available in relation to management and caretaker agreements will not apply.
If you are having difficulties with an embedded network in your scheme, you have options and we can help you with those. In particular:
***The information contained in this article is general information only and not legal advice. The currency, accuracy and completeness of this article (and its contents) should be checked by obtaining independent legal advice before you take any action or otherwise rely upon its contents in any way.