Jimmy 00:00
Hello, I was going to start this week's podcast by saying that I'm on my own, sitting here in our little office. But what I actually meant to say was that Sue is enroute back from Kenya; I think she's somewhere in the Middle East at the moment. Hopefully, she'll get home tomorrow, without experiencing too much turbulence on the way. But I'm not alone, because today I have a special guest. His name is Joseph Arena, his company is Embedded Networks Arena, and they advise owners corporations on what to do if they have embedded networks, and how to get more bang from their bucks from their energy and hot water contracts, if they have them in place, and how to avoid signing up for embedded network contracts that aren't in anybody's favour, except for the people who are providing the service. That's going to take up most of our podcast today. There's a couple of things at the end, that might interest and even amuse you. I'm Jimmy Thomson, I write the Flat Chat column for the Australian Financial Review. And this is the Flat Chat Wrap. As promised, we are with Joseph Arena of Embedded Networks Arena. Welcome Joseph, to the Flat Chat podcast.
Joseph 01:40
Thanks very much, Jimmy. I appreciate the opportunity to be here today.
Jimmy 01:43
Now I am constantly writing about embedded networks (and not in a very positive way.), but I know that there are some that are good. So could you just take us through what are embedded networks?
Joseph 01:56
A great question. People often think it's a black box, but it's really not. A really simple explanation here... There can be residential commercial buildings or industrial parks, shopping centres; they all can be embedded networks, but basically it's a building that has multiple tenancies, or multiple lots or apartments or shops. There is one metre, which is called the parent meter or the gate metre, that metre measures the energy utility for the whole site, the sub-metres. Every apartment or lot has their own individual metre; that energy is then bought in bulk and then on-sold to the individual residents or the retail shops etc. So basically, it's an aggregation of energy into a private energy network.
Jimmy 02:01
Now, what's the difference between a good embedded network and a bad one?
Joseph 02:46
There's good and bad. Like lots of things in life, service and price, that's what it all comes down to. I mean, you have some embedded network operators that are, let's call them ethical, where the objective is really to pass on the benefits of the bulk-buying of the energy, and share that benefit with the residents; the tenants, the occupants there. They lower tariffs, and in a shop, like a residential building scenario, where there's an owners corporation or a body corporate, to actually share some of that benefit with the owners corporation or body corporate as well, because technically, the people that own the building... In a residential sense, it's the body corporate or the owners corporation; they actually physically own the infrastructure in the embedded network, so it's great if they can get some value out of it as well. So sharing the benefits; the good one's are sharing the benefits.
Jimmy 03:44
And there are other sides to this, too, aren't there? There are some companies that exploit the opportunity to get into a building. I mean, how does that pan out?
Joseph 03:54
Exploitation; that's a strong word, but it's probably pretty accurate in a lot of cases. It is very difficult for tenants to transfer out of an embedded network. And while the rules allow it, there's state-based jurisdictional rules and there's the regulator and something called the National Energy customer framework. All the various rules and regulations technically allow electricity customers to transfer, but it's very difficult in your residential sense, in particular, because they're very small energy users compared to large corporates, of course. So because of the difficulty for individuals to transfer out, there's an opportunity then for an embedded network operator, that's not really, let's call it operating ethically, to provide reasonable value and good discounts, etc. So there is a bit of gouging that occurs, and certainly with centralised hot water, and the cooktop gas is associated often with decentralised hot water, or centralised air conditioning services. There's no opportunity for individual residents to transfer out, so as a result of that, they're basically a 100% captured market.
Jimmy 05:05
Now, before we go much further, what does your company, Embedded Network Arena do?
05:12
Joseph
We're independent consultants and I use the word "independence" specifically, because we spend probably 80% of our time working with residential strata buildings, and certainly in the strata sector, there's a lot of angst around secret commissions or benefits that are being shared with service providers, that provide services to these various buildings. So I didn't want to be potentially classified under that cap. I operate independently; we don't receive commissions, we just do everything on a fee service basis. So what do we actually do? In the residential sense, we provide advice to residential buildings and the committees in particular, and then sometimes broadly to all the owners . We might present at a owners meeting; we help them to lift up the bonnet and understand what embedded networks are all about. Sometimes it's prior to a first annual general meeting, when still, an agreement hasn't been executed between the operator and the owners corporation. Sometimes it's post that, where there might be an option to review the contract. So we do commercial audits, a regulatory compliance audit, health checks on the actual tariffs that are being provided, just to know whether they are in the best situation or not. Based off that, we often end up running tenders. Maybe we'll talk about tendering in a minute, but basically, we provide independent consulting services to residential people, who generally have no idea what an embedded network is.
Jimmy 06:44
Certainly at the first annual general meeting of a lot of new buildings, very few people would understand what an embedded network is.
Joseph 06:54
You're so right, Jimmy. I mean, it's agenda item 23, or 24. or later. It's 9:30 or 9:45 at night... The item comes up for the embedded network, "can everybody please vote on this?" And everyone's got glazed eyes; no idea what's happening. Unless you've been exposed to it before, you just don't know.
Jimmy 07:14
I recently (foolishly), bought into an off-the-plan development and at our first AGM, the agenda turned up with reference to the embedded networks there. I think it was three contracts, the details of which were behind QR codes. So you had to scan the QR code to read the contract and the contracts turned out (well, in my opinion, and the opinion of a couple of other owners), to be very much favoured in the direction of the energy provider. And I might talk to my specific, not that I'm looking for free advice, you understand, but I might talk about my specific scenario later. How hard is it to change energy providers to an embedded network? What about that scenario we just discussed where it's late at night, people haven't scanned the QR codes on the agenda. They have no idea what the embedded network is. The strata manager is standing there, saying "this is just standard stuff; just say yes." What happens if they find out that this so-called standard contract is actually very unfavourable to them?
Joseph 08:04
Okay, that's a great question. I'm going to break that up into two components. For individual residents, it's very difficult. While the rules allow it, it's very difficult to find a counter party and what I mean by a counter party is an energy retailer that's not your embedded network operator that's prepared to provide an offer to residential customers. And the fundamental is, because they're so small, there's not much margin in it and so it's very difficult to transfer it. From the owners corporation or the body corporates' perspective, it's very easy. We've run dozens and dozens of tenders, where we have sometimes invited the incumbent, sometimes we don't. I take instructions from the committee, depending on what relationship they've had with that operator, and then we run a tender, and then a new operator gets appointed. It's sort of an eight-to-twelve week transfer process. No one's power gets cut off. Sometimes when the meters are changed, there's a short metre change-over, like a 20 -minute sort of thing, but the whole building doesn't get disconnected; the world doesn't end. There's a transfer process over a few weeks, and then you have a new operator, and then benefits start flowing where they're supposed to flow. So to be blunt, it's a very easy process.
Joseph 09:48
That's a great question. Look, I always tell people that unless you actually understand it completely, don't sign the agreement at the first AGM. There's often covert commentary "if this doesn't get signed tonight, you're going to get power disconnected by tomorrow morning." It doesn't happen. There is a building up on the north coast of New South Wales that I was dealing with. They didn't sign on the first AGM. One year later, there was some threats for starting for disconnection and that's because they didn't pay for their common area energy account for the whole year. It wasn't because the agreement didn't get signed; they just weren't paying their bills, so you don't get disconnected overnight. It's a stop-gap opportunity. You stop, you catch your breath: you either review it and understand it yourself or if you don't, you get some independent advice; either a strata lawyer or someone like Embedded Network Arena. You get independent advice and I often then negotiate sometimes just the incumbent, to get a better outcome. You don't have to sign at 9:00 at night; that's ridiculous.
Jimmy 10:59
I mean, my advice to all new owners these days is, don't sign anything at the first AGM, just say "thank you very much for the information. We've now elected our committee; they're going to look at all the contracts, and go away and leave us alone for four weeks, and we'll come back and sign the contracts that we want and we'll find other contracts to replace the ones we don't want." That's my radical view of this. Is there anything people can do if they have been cajoled into signing a contract, or agreeing to a contract at the first AGM?
Joseph 11:36
Some contracts you can, some contracts, you can't. So from a commercial point of view (and I'm not a lawyer, but we've dealt with enough of these), if an agreement is executed at the first AGM, and both parties can't assign it, then it's a formal agreement, and both parties are locked in for a period of time. But when you lift up the bonnet of the contract terms as well, there may be opportunity to terminate that with a notice period. And some of the agreements might be 10-year terms, for example, but there may be a clause in there to say you can give x months notice to terminate the agreement, and then pay out some sort of liability. And in every case, where I've changed an owners corporation to a new operator, when there's been a liability for payment of some infrastructure that the operator installed, the incoming operator always pays for us. So I've never had a scenario where the committees have been out of pocket, or the owners have been out of pocket for that. To answer your question, it really depends on the agreements and to understand that, one needs to just review the terms and then see what their options might be.
Jimmy 12:53
I'm constantly (like, I guess most people in Australia), getting barraged with phone calls saying "hey, we've got a great electricity deal for you. We can save you..." Can individual residents in apartment blocks where there's an embedded network actually change the provider?
Joseph 13:11
Firstly, for centralised hot water and air conditioning, the answer's no. You must buy it from the incumbent; you have no choice. But when it's electricity, the answer is yes, you can. So what will happen for individuals that transfer out, your energy bill gets cut into two, for example. So one component of your energy bill is for the energy commodity itself, the actual electricity that you're consuming, it's a commodity effectively. And the other part of the cost, is there might be some metering costs and some physical distribution costs. For the network providers like Energex, or Oz Grid or City Power, depending on what state you're in, there are the physical distribution costs. The embedded network operator, under the rules, has a right to charge the individual customers for the physical distribution costs. They can't make a margin on that; it has to shadow whatever the regulated costs are for where you live. So say for example, the customer signs up with AGL or Red Energy or Momentum Energy, or whoever their energy supplier may be. I don't have a preference for any of those; they are just the first ones that came up the top of my head. The embedded network operators would then send them that monthly bill for the physical charges, so it's a bit clunky. There's been lots of discussions with the regulators to try to make that process a bit easier, so customers have single bills, so that it's much easier to do benchmarking for your tarrif, compared to what it was, so it's a little bit messy, and as a result of that, most of the embedded network operators will put their proud cap on and say "no one's transferred out of our embedded networks." I mean, I've dealt with so many buildings and thousands of people, and there's been less than a handful, that have actually transferred out in residential buildings. It happens much more frequently in shopping centres, because, again, bigger customers, bigger loads, more money, more attractive propositions for retailers. It's just really difficult. It's like threading the needle in the eye of a storm.
Jimmy 15:33
Is the ownership of the electricity metres a permanent impediment to changing suppliers?
Joseph 15:39
No, absolutely not. Let's talk about that for a second... There's some discussion with the regulators about removing the private metering requirement. Most metres are private metres, they're not owned by an accredited market operator. With private meters installed, there are minimum requirements for billing, agency, certification; that sort of stuff. The embedded operator will fund the metering, they'll instal it. Periodically, they need to get replaced anyway; between five and ten years, the lifespan might reach the end of its life, to get replaced.
But again, if the owners corporation or body corporate chooses to engage a new operator, if there's metering there, there's a liability that the owners corporation has to pay for that. The incoming operator will assess that when they're providing a tender response. "Okay, there's a liability of $30,000 to buy out their current electricity metering infrastructure, we will fund that liability for you." They then take ownership of those metres. There's no benefit or value for the owners of the building, i.e the owners corporation, to own the electricity metres, unless they're running their own embedded network; they want to do it themselves. There's zero benefit.
Jimmy 17:06
I'm going to run a scenario past you, if I may? The building I bought into, our embedded network energy contracts were divided into two sections, basically. And what had happened was to get the development approval for the building, the developer put on the minimum solar panels on the roof, that would meet the local council standards. This solar panel was provided by the energy provider nominally to provide electricity for common areas, like the garage, or whatever. And then we discovered that, well, two things... One was that in the contract with the energy provider, it set the rate at a certain level, but they promised verbally that there would be a discount, which was admittedly later offered verbally. But we discovered that if we were using electricity from the solar panels, which are owned by the energy provider, then they would charge us the going rate for the electricity that we were generating on our roof, to drive the electricity needs of the common property. Does that sound dodgy to you?
Joseph 18:24
It's a very complex situation. There's a couple of scenarios with solar, or there's multiple scenarios. I mentioned before about the parent meter or the gate meter that measures the whole site? Sometimes the solar gets connected to that and so the person who gets the direct benefit is the operator, not the owners corporation. If it's physically connected to, or feeding into the common area, as you said, the owners corporation should get 100% of the benefit for that. So if you're being charged for the energy that's being generated; it all sounds very complicated. Again, it's one of those things that you need to lift up the bonnet to understand the contract. Who's getting what benefit where? We own the building; why aren't we getting any benefit for this? It's really about understanding the agreement. I don't know if I've answered your question completely, Jimmy, but it sounds a bit complex.
Jimmy 19:21
It's interesting, because our active members of the committee, who have have picked up on this, we're in a position now where we haven't signed a contract on the solar panels, and that's holding up the agreement (to our benefit), for the whole energy provision. But now the provider is saying well, okay, if you're not going to sign the contract, we're going to come and remove the solar panels.
Joseph 19:45
It's all getting very messy.
Jimmy 19:47
And that would put us in breach of our development approval, so, it's getting messy.
Joseph 19:53
It is messy. Sometimes those solar agreements are longer than the embedded network management agreements as well. So you need to be really careful. You need to be careful what you're signing You're dealing with a business and an owners corporation body corporates are not treated as residential; they're treated as a commercial customer. The individuals are residential, but the body corporate is not treated as a residential, so they have less small consumer protection. So you need to be careful what you sign.
Jimmy 20:23
The message is folks, don't sign anything at the first AGM. Talking about consumer protection; there has been some discussion from the Strata Commissioner and Property Services Commissioner (who is the same person), that they're looking to bring strata law into line with consumer protection laws, specifically with regard to unfair contracts. Do you think this will change anything?
Joseph 20:48
Any transparency and more regulation for an essential utility is good. I don't mean to make it clunky and hard work and add cost to it, but just for consumer protections. Until 2018, I think, real change has happened then. Residential customers didn't even have access to the ombudsman in embedded networks. I think from my perspective, more transparency is better. And then people need to have the same consumer protection. So I mean, IPART for example, in New South Wales, is currently reviewing embedded networks. In the middle of May, they released their report and it's all about raising the bar for many more protections for customers. Victoria is doing very similar things; in Western Australia, they're not linked to the rest of Australia from an event network rule perspective, but they're doing their own thing. Across the country, there's like 1 million-plus people that live inside embedded networks. It's not a boutique market segments anymore, so we need more rules, and we need more regulations; we need to raise the bar. We need more transparency, we need more support. I think you're pretty clear what my position is on that!
Jimmy 22:04
Absolutely. I'm going to put some links on the show notes that go with this to your website, which has material in it, including a really impressive list of successful operations that you've done to save owners corporations, a lot of money. Now, you don't take commissions, so how do you make your money?
Joseph 22:26
I don't take commissions. I don't take a percentage of the savings. Like I said, I like transparency and clarity. I quote fees for running tenders or doing the commercial audit and the price check audit, I just charge a fixed fee to do that. Sometimes I need to do it on an hourly rate, if we're not quite sure what the scope is going to be. I just charge fees for the service I do and I think my fees get paid back, sometimes in three, four months, but always within the first 12 months. I've never had a scenario where my fees are not being paid back in the first 12 months, and often six months and very often also within three months. I like transparency. There's no deemed or potential conflict when you do it that way.
Jimmy 23:17
So the takeaway from this chat is, don't sign anything at your first AGM and then get in touch with Joseph and Embedded Networks Arena to come and do an assessment of your embedded networks. How about that?
Joseph 23:31
That sounds great!
Jimmy 23:34
Okay, so as I said before, we'll put links to Joseph's website, and you can read the material there and judge for yourselves. And thank you, Joseph, for coming on the Flat Chat Wrap.
Joseph 23:45
Thanks for the invitation. Much appreciated; thank you.
Jimmy 23:48
Thank you. And I get a feeling we'll be talking again at some time in the future.
Joseph 23:53
That sounds good. Thanks, mate.
Jimmy 23:55
Just to let you know, Joseph has said that Flat Chat readers and listeners who want to use his services will get a 10% discount, if you contact him through his website and tell him that you've come from Flat Chat. I think it's terrific! Well, that was really interesting. I think those of you who are on committees or are about to go for your first AGM in a new building will remember that advice. In the latter case, don't sign anything at your first AGM. I know this is going to be taken as being terribly disruptive, but it just makes common sense.
The things that you sign at your first AGM that are agreed by people who have probably not read the contracts, probably found it hard to read the contracts, it doesn't make sense to sign anything. You wouldn't do it for any other purchase that you made and this is the biggest purchase that you're making in your whole lives probably, so just don't sign stuff at the first AGM. Don't agree to anything at the first AGM, except to elect your committee and send them off to have a look at all the things you've been asked to sign up for, and then come back in maybe four weeks and say "we'll take this, this and this, but we're not having that one."
And on a more amusing note, there's an issue running in the Flat Chat forum about somebody in a townhouse complex, who has installed a beehive at the bottom of their garden. They put it at the bottom of their garden, because it's far enough away from the entrance to their home. Unfortunately, it's really close to the entrance of somebody else's home and they're getting bees in their house. So what do you do? What are the strata laws on keeping bees? Have a look at that in the forum.
And finally, we urge you all to listen into Amanda Farmer's podcast last week, about a case where there was two issues. One was a special levy imposed by the committee. And the other one was a bylaw that the committee wanted, actually got approved, both of which went to NCAT, which turned around and said "you can't have this this. This is a fraud on the power and the bylaw can't stand, because it benefits a minority of owners, to the detriment of the majority of owners." I will be posting on the website today, links to Amanda's summary of the case, which is quite amusing. It's an audio thing. It's like an extra podcast for you. I'm going to let people go to Amanda's website (linked above), because I don't feel comfortable in just taking stuff and and using it myself. I'd rather report on it and let you link to it, because this is not the Daily Mail.
Thanks for listening to the Flat Chat Wrap podcast. You'll find links to the stories and other references on our website, flatchat.com.au. And if you haven't already done so, you can subscribe to this podcast completely free on Apple podcasts, Google podcasts, Spotify or your favourite pod catcher. Just search for Flat Chat Wrap with a W, click on subscribe, and you'll get this podcast every week without even trying. Thanks again. Talk to you again next week.