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Regulating Power Exchanges: Making Unscheduled Interchange (U.I.) more effective, Shri R V Shahi, Former Secretary, Ministry of Power

During the course of last couple of weeks, a number of issues concerning power sector have been in the news. I propose to deal with the following two this week:

  1. Is the future Trading of power to be transacted through Power Exchange or through Commodity Exchange? To be regulated by CERC or by FMC?

  2. Has the system of Unscheduled Interchange been able to regulate grid discipline?

i.

Is the future trading of power to be transacted through Power Exchange or through Commodity Exchange? And, regulated by Central Electricity Commission or by Forward Markets Commission?

Ever since the Central Electricity Regulatory Commission has allowed the Power Exchanges to transact power purchase and sales on term-ahead basis, which means to start with, on a weekly basis, the issue whether such transactions would be regulated by the Central Electricity Regulatory Commission or by Forward Markets Commission has gone into controversy. In fact, the matter is already in the Court. In the last few days, the issue assumed importance because of a report which suggested that, between the Ministry of Power and Ministry of Consumer Affairs, the issue has been settled and that the Ministry of Consumer Affairs has agreed to take future Trading in electricity outside the purview of the Forward Contracts (Regulation) Act (FCRA). The controversy is in respect of the jurisdiction whether it belongs to the Central Electricity Regulatory Commission under the Electricity Act 2003 or to the Forward Markets Commission under the FCRA. The matter assumed further dimension when a contradictory news appeared that there was no understanding reached between the Ministry of Power and Ministry of Consumer Affairs and that since the matter was in the Court, the dispute remains unresolved.

In this context I would like to make following comments:

  1. Electricity Act 2003 is a comprehensive legislation covering all aspects of electricity. This legislation repeated even Electricity Act 1910 and Indian Electricity Supply Act 1948. This legislation has saved a few other Acts, but has not saved, in so far as provisions in this Act are concerned, the Forward Contracts (Regulation) Act. Therefore, its provisions are not subject to provision of FCRA.

  2. Electricity Act has made several provisions and stipulates that the Regulatory Commissions should take various steps to develop electricity market. National Electricity Policy has further elaborated on the steps that the Regulatory Commissions should take, including Power Exchange, to facilitate competition and to promote electricity market development. Therefore, when the CERC has allowed and issued necessary notifications on operations of Power Exchanges, it is in compliance of the Act and the Policy framed thereunder. It has full jurisdiction on the subject and is empowered to do so.

  3. Trading of electricity has been in existence for some years. More than 100 trading licensees have been authorised by the Central Electricity Regulatory Commission itself, besides a number of trading licensees, licensed by various State Regulatory Commissions. The trading licensees have been functioning to facilitate purchase and sale transactions between generating companies and distribution licensees, and large consumers wherever Open Access has been allowed. These future transactions of different periodicities and durations have been happening even before the Power Exchanges came into being. Power Exchanges have emerged as electronic and high-tech platforms for these transactions which have otherwise been happening.

  4. Power Exchanges were conceived as instruments to develop high tech platforms to facilitate sale and purchase transactions electronically online. The objective was that the process should be made more transparent, should lead to quick decisions and, when the volumes increase, should lead to more reliable price discoveries. It started with day-ahead trading, and both buyers and sellers not only accepted this mode of transactions, but, in fact, provided necessary support to stabilise the exchange operations.

  5. The Power Exchanges, when allowed term-ahead transactions by the CERC, have been making efforts to stabilise the procedure and process. It was expected that Exchanges would play an effective role in market development. The uncertainties and disputes between the two regulatory institutions has, unfortunately led to not only confusions but also has dampened the process which could have led to larger volumes and also eventually could have led to better and more reliable price discoveries, so badly needed in the electricity sector.

  6. There is a misconception among many that since the Forward Contract (Regulation) Act regulates all futures trading, the regulatory institution created under this Act, viz. Forward Market Commission is the only institution which can regulate electricity futures trading. The misconception has arisen because this school of thought thinks that it is the Act which has included and provided for electricity futures trading. It needs to be clarified that electricity is not listed, as such, as a commodity under the Act. The whole problem has arisen because, sometime in the year 2006, the Ministry of Consumer Affairs made a notification under Section 15 of the FCRA declaring electricity as a commodity under this Act. Therefore, it must be underscored that electricity has not been recognised under the Act as such but through an action of the Ministry of Consumer Affairs. A change in this position to restore the status, as existed prior to the above notification, therefore, is under the authority of the MCA and not Parliament.

  7. The notification by MCA in 2006 does not fully recognise the objective and contents of Electricity Act 2003. Ministry of Consumer Affairs should have had a better appreciation of the architecture of the Electricity Act. This Act provides, in entirety, regulation of all aspects, wherever needed, including for all types of purchase and sale transactions. In any case, electricity cannot be compared with other commodities. Unlike all other commodities it cannot be stored, it has to be consumed as instantaneously as it is produced. This single most important characteristic distinguishes electricity from all the rest of commodities. A careful interpretation of the FCRA will lead to the conclusion that electricity cannot be covered under this Law. It is a normal expectation and practices that when a new Law is enacted on a specific subject, that Law is respected and has the precedence. Besides, sale and purchase transactions in electricity are highly complex in nature involving complicated aspects of transmission and distribution systems. If nothing else, this aspect should, perhaps, have been better appreciated by the Ministry of Consumer Affairs before including electricity as a commodity under Section 15 of FCRA.

  8. Under Electricity Act, the Regulatory institution and Appellate authority are well defined and self contained. The Appellate Tribunal has been put at par with the High Court and appeal against the judgement of the Tribunal can be filed in Supreme Court. The whole idea was to reduce as much of uncertainty as possible through a well conceived architecture of the industry as provided in this Act.

  9. As per Section 66 of the Electricity Act 2003

"The Appropriate Commission shall endeavour to promote the development of electricity market (including trading) in power in such manner as may be specified and shall be guided by National Electricity Policy................"

  1. Section 5.7.1. of the National Electricity Policy provides a number of initiatives to promote market development. Sub Section 5.7.1 (f) provides "Enabling regulations on Power Exchange shall be notified by the appropriate Commissions within six months".

  2. Though the matter is in the Mumbai High Court, it is desirable that it is discussed and decided at the Government level, so that either an out-of-Court settlement is reached or both the concerned Ministries file a common Affidavit, so that it facilitates an easier dispensation and decision by the Court. This type of a controversy can be best handled through a co-ordinated approach among the concerned Ministries and Departments. Sooner this controversy ends better it would be for all concerned.

ii.

Has the system of Unscheduled Interchange been able to regulate Grid discipline?

In one of the recent judgements, Appellate Tribunal for Energy has upheld the decision of the Central Electricity Regulatory Commission imposing a penalty on the Delhi Transmission Company for over drawl of power beyond its entitlements. It may be recalled that the system of Unscheduled Interchange (U.I.) was introduced to act as a deterrent for such electricity distribution companies as draw power beyond their entitlements during the period when the grid frequency is low. It was seen in the past that such indiscipline in the system led to partial or total grid collapses disrupting not only the electricity transmission systems but also leading to damages in power plants. Any amount of persuasions and pressures on these Electricity Boards and distribution companies to appreciate the need for self-restrain, in the overall interest of grid, did not seem to work. It is in this background that the penal rates which are substantially higher than the usual tariff were provided, so that these distribution companies would try to restrict drawl of power from the grid by proper load management and will ensure that the grid frequency is maintained within prescribed limits.

We need to evaluate whether this objective has been met. There have been two types of comments in this regard:

  1. There are those who believe that these penal rates have worked as required deterrent and, therefore, the system has, by and large, fulfilled the objective.

  2. There are those who believe that the system has led to legitimising the indiscipline in operation of the grid. There are many distribution companies which indulge in such behaviour and believe that if the policy provides the scope for over drawls by paying higher rates, why not do so.

Obviously these are two extreme positions. The truth is in between the two. It will be unfair to say that the policy of Unscheduled Interchange and higher penal rates has not worked at all. But, at the same time, this will be a reasonable observation to suggest that in extreme situations of indiscipline these penal rates have not prevented such regular defaulters to restrain themselves from indulging in the indiscipline grid behaviour. I recall, in the year 2002 within couple of months of my joining the Ministry of Power, there were two major grid disturbances - one in the Northern region and another in the Western region. The National grid and regional grids had got used to many such partial and major grid disturbances in the previous years. We, in the Ministry of Power, decided that we needed to act harsh and put a stop to this situation. We believed then also that merely Unscheduled Interchange high rates, though necessary, are not sufficient. Something more was needed. We convened, one after another, high level meetings of all the stakeholders in Northern and Western regions. After analysing the reasons, and identifying the problem players, we formulated a set of course of actions beyond U.I. penal rates. We conveyed that we meant business. Those States who continue to regularly over draw could face serious problems in some of their strategic places including their capital cities, could be deprived of a few other benefits if they did not respond. The results were remarkable. If we analyse the grid disturbances prior to 2002 and those after 2002, we will be able to see distinct change. Practically we eliminated major grid disturbances in all the following years.

We have seen from the experiences that defaulting utilities get away by paying U.I. charges. A relevant point to mention in this regard is that U.I. charges cannot be such that these utilities prefer over drawls rather than buying power through short term trading or Power Exchanges. CERC will need to be somewhat more proactive and U.I. rates will need to be watched and reviewed more dynamically than is the case now, so that distribution utilities are encouraged to buy power from the market rather than indulge in over drawing power by paying U.I. charges. It is not to say that this aspect has been neglected. What is being suggested is that the frequency of review of U.I. rates, aimed at achieving the above objective, has to be faster than hitherto. Another remedial step could be to deprive such utilities from a part of unallocated power to put right pressure on them. Ministry of Power may consider and examine this approach.

It is reiterated that the system of U.I. is necessary. But, by itself it is not sufficient. We need to do everything possible to see that this system is not used (or misused) to legitimise over drawing of power from the grid.