Legal issues arising out of the Electricity Act, 2003

1
Legal issues arising out of the Electricity Act,
2003

• Presentation by
• Mohit Saraf, Partner
• Luthra Luthra Law Offices

2
The Power Market in India Today
Impediments to trading Solutions offered by the Act
Demand-Supply Imbalance Generation delicensed Surplus Capacity IPP/CPP
Power Grid Underdeveloped Increased investment in Transmission
Open Access To be introduced in phases
Single Buyer Model Bankrupt Utilities Multiple Buyer Model

3
The Power Market in India Today
Utility Risk Market Risk
T D Losses Unbundling will force reduction
Excessive Price Regulation Increase in Supply may lead to less regulation
Cross subsidy surcharge To be phased out
4
Enabling Framework for Trading

• Open access
• Principle buy and sell by wheeling power
  through the existing transmission lines
• Definite and mandated time frame not provided
• If no open access
• Limited private investment
• Limited trading
• Perpetuating monopolies
• High tariffs
• Consumers choice limited

5
Enabling Framework for Trading

• Tariff barriers to open access (Article 301
  prohibits expropriatory tariffs)
• Wheeling charges
• Surcharge for cross subsidy
• Additional surcharge for distribution licensee
  (S.42)

6
Enabling Framework for Trading

• Non-tariff barriers to open access
• STU/CTU no obligation to increase capacity
  (Compare Gas Policy)
• Excess capacity to be determined by STU/CTU
• Chicken Egg Situation Open Access v making
  Transmission a Stand alone business.
• Bundling v Unbundling

7
Trading the Legal Framework

• Trading defined by S.2(71) as purchase of
  electricity for resale thereof
• Trading licensed under S.12
• Jurisdiction of the commission to regulate
  trading provided under Ss.14 and 52
• Intra-state trade regulated by state commission
  under section 86(1)(d)
• Inter-state trade to be regulated by central
  commission under section 79(1)(j)

8
Regulation of Trading Under the Electricity Act,
2003

• Key administrative law principle is vice of
  excessive delegation.(Independent Regulator)
• Sufficient safeguards against excessive
  delegation in the Act
• Regulations subject to condition of previous
  publication (S.178(3) and S.181(3)).
• Regulation to be laid down before Parliament
  (S.179) or State Legislatures (S.182).
• Regulations to be in line with National
  Electricity Policy, National Electricity Plan and
  Tariff Policy published under S.3

9
Regulation of Trading Under the Electricity Act,
2003 (contd.)

• Three types of regulation
• Laying down financial and technical requirements
  (section 52(1))
• Guiding the evolution of the market structure
  (section 66)
• Coordinating regulatory overlaps (section 52(2))

10
Regulation - Financial and Technical Requirements

• The appropriate commission may specify the
  technical requirement, capital adequacy
  requirement and creditworthiness for being an
  electricity trader (section 52(1))

11
Regulation - Financial and Technical Requirements
(contd.)

• Suggestions of the CERC
• Trader to prove technical qualification no
  standards specified
• Capital adequacy norm linked to exposure limit
• Creditworthiness in form of bank guarantee to act
  as interim supplement to capital adequacy where
  trading limit exceeded
• License fee (section 15)
• Capital adequacy norms may be a barrier to entry

12
Regulation - Evolution of the Market Structure

• Development of Power Exchange Role and
  functions
• Exclusive Forum for Buy and Sell
• Settlement of imbalances
• Ensuring network access
• Arranging contracts
• Information disclosure and dissemination in
  relation to
• Spot contracts and prices
• Excess capacity available in networks

13
Regulation - Evolution of the Market Structure
(contd.)

• ERC to Power Exchange as SEBI vis-à-vis Stock
  Exchange
• Lay down disclosure norms
• Ensure compliance
• Balancing interests of stakeholders

14
Regulation - Jurisdictional Overlaps

• Financial derivatives in power similar to
  commodity futures
• Commodity futures trading regulated by Forward
  Markets Commission
• Is electricity a good?
• If not, who regulates trading in electricity
  futures?
• Regulation of electricity derivatives needs
  specialized knowledge is the ERC the
  appropriate regulator?
• Where legislation unclear, core functional role
  of each regulator should determine jurisdiction
• Pith and substance and harmonious
  construction relevant

15
The Electricity Act, 2003 (contd.)

• Ensures a level playing field
• Load Dispatch Centres prohibited from trading
  because of quasi regulatory nature (Ss. 26, 27
  and 31)
• Transmission Utilities prohibited from trading
  because of conflict of interest (Ss. 38 and 39)
• Transmission licensees also prohibited from
  trading (S. 41)

16
The Electricity Act, 2003 At a Glance

• Generation Delicense
• Competition and choice
• Multiple buyer model
• Freedom to set up captive power plants
• First time Recognition of Non-discriminatory Open
  Access
• Compulsory Metering
• Independent Regulatory Body
• Commission has power, both for granting license
  and tariff fixation.

17
The Electricity Act, 2003 At a
Glance..(Contd.)

• Transco cannot engage in Trading
• Excessive Tariff Regulation
• Reorganize Electricity Industry on modern
  principles
• Setting up of Standards of performance
• Consumer Protection
• CEA Role Streamline

18
Captive generating plant

• Captive generating plant means a power plant
  set up by any person to generate electricity
  primarily for his own use and includes a power
  plant set up by any co-operative society or
  association of persons for generating electricity
  primarily for use of members of such co-operative
  society or association
• non-discriminatory open access
• No surcharge