Legal issues arising out of the Electricity Act

Legal issues arising out of the Electricity Act, 2003 Presentation by Mohit. Saraf, Partner Luthra &Luthra Law Offices Luthra Law

Legal issues arising out of Electricity Act 2003 The Power Market in India Today Impediments to trading Solutions offered by the Act Demand-Supply Generation delicensed l. Surplus Capacity – IPP/CPP Imbalance Power Grid Increased investment in Underdeveloped Transmission Open Access To be introduced in phases Single Buyer Model – Multiple Buyer Model Bankrupt Utilities Luthra & Luthra Law Offices 2

Legal issues arising out of Electricity Act 2003 The Power Market in India Today Utility Risk Market Risk T & D Losses Excessive Price Regulation Unbundling will force reduction Increase in Supply may lead to less regulation Cross subsidy surcharge To be phased out Luthra & Luthra Law Offices 3

Legal issues arising out of Electricity Act 2003 Enabling Framework for Trading l 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 l l l Limited private investment Limited trading Perpetuating monopolies High tariffs Consumer’s choice limited Luthra & Luthra Law Offices 4

Legal issues arising out of Electricity Act 2003 Enabling Framework for Trading l Tariff barriers to open access (Article 301 prohibits expropriatory tariffs) – Wheeling charges – Surcharge for cross subsidy – Additional surcharge for distribution licensee (S. 42) Luthra & Luthra Law Offices 5

Legal issues arising out of Electricity Act 2003 Enabling Framework for Trading l 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. l Bundling v Unbundling Luthra & Luthra Law Offices 6

Legal issues arising out of Electricity Act 2003 Trading: the Legal Framework l l l 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) Luthra & Luthra Law Offices 7

Legal issues arising out of Electricity Act 2003 Regulation of Trading Under the Electricity Act, 2003 Key administrative law principle is vice of excessive delegation. (Independent Regulator) l Sufficient safeguards against excessive delegation in the Act l – 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 Luthra & Luthra Law Offices 8

Legal issues arising out of Electricity Act 2003 Regulation of Trading Under the Electricity Act, 2003 (contd. ) l 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)) Luthra & Luthra Law Offices 9

Legal issues arising out of Electricity Act 2003 Regulation - Financial and Technical Requirements appropriate commission may specify the technical requirement, capital adequacy requirement and creditworthiness for being an electricity trader” (section 52(1)) l “…The Luthra & Luthra Law Offices 10

Legal issues arising out of Electricity Act 2003 Regulation - Financial and Technical Requirements (contd. ) l 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 Luthra & Luthra Law Offices 11

Legal issues arising out of Electricity Act 2003 Regulation - Evolution of the Market Structure l 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 l Spot contracts and prices l Excess capacity available in networks Luthra & Luthra Law Offices 12

Legal issues arising out of Electricity Act 2003 Regulation - Evolution of the Market Structure (contd. ) l ERC to Power Exchange as SEBI vis-à-vis Stock Exchange – Lay down disclosure norms – Ensure compliance – Balancing interests of stakeholders Luthra & Luthra Law Offices 13

Legal issues arising out of Electricity Act 2003 Regulation - Jurisdictional Overlaps Financial derivatives in power similar to commodity futures l Commodity futures trading regulated by Forward Markets Commission l – 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? l Where legislation unclear, core functional role of each regulator should determine jurisdiction l – “Pith and substance” and “harmonious construction” relevant Luthra & Luthra Law Offices 14

Legal issues arising out of Electricity Act 2003 The Electricity Act, 2003 (contd. ) l 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) Luthra & Luthra Law Offices 15

Legal issues arising out of Electricity Act 2003 The Electricity Act, 2003 – At a Glance l l l l 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. Luthra & Luthra Law Offices 16

Legal issues arising out of Electricity Act 2003 The Electricity Act, 2003 – At a Glance………. . (Cont’d. ) l Transco cannot engage in Trading l Excessive Tariff Regulation l Reorganize Electricity Industry on modern principles l Setting up of Standards of performance l Consumer Protection l CEA Role Streamline Luthra & Luthra Law Offices 17

Legal issues arising out of Electricity Act 2003 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 cooperative society or association l non-discriminatory open access l No surcharge l Luthra & Luthra Law Offices 18