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 Luthra & Luthra Law Offices

3. The Power Market in India Today Luthra & Luthra Law Offices

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 • Consumer’s choice limited Luthra & Luthra Law Offices

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) Luthra & Luthra Law Offices

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 Luthra & Luthra Law Offices

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) Luthra & Luthra Law Offices

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 Luthra & Luthra Law Offices

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)) Luthra & Luthra Law Offices

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)) Luthra & Luthra Law Offices

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 Luthra & Luthra Law Offices

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 Luthra & Luthra Law Offices

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 Luthra & Luthra Law Offices

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 Luthra & Luthra Law Offices

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) Luthra & Luthra Law Offices

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. Luthra & Luthra Law Offices

17. The Electricity Act, 2003 – At a Glance………..(Cont’d.) • 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 Luthra & Luthra Law Offices

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 Luthra & Luthra Law Offices