Implications and Background of CERC’s Decision on Transaction Fee Limits for Power Exchanges

In the recent decision dated 05.04.2023 in Petition Nos. 143/MP/2022, 178/MP/2022 and 88/MP/2022, the Central Electricity Regulatory Commission (‘CERC’) allowed the Power Exchanges to charge a transaction fee up to the ceiling limit of 2 paisa/kWh from either party to the transaction under Regulation 23 of the Central Electricity Regulatory Commission (Power Market) Regulations, 2021 (‘PMR Regulations, 2021’). Emphasising that a differential transaction fee for different Power Exchanges on the basis of the volume traded may distort competition more than promoting it, the CERC upheld the flexibility of fixation of transaction fee so long as it is within the ceiling limit of 2 paisa/kWh from each party. 

BACKGROUND

Regulation 12(3) of the recently notified PMR Regulations, 2021 required Power Exchanges to realign their Byelaws, Rules and Business Rules. In terms of the afore-mentioned provision, Indian Energy Exchange Limited (‘IEX’) filed Petition Nos. 46/MP/2022 and 143/MP/2022 seeking an approval of transaction fee of up to 2 paisa/kWh from either party to the transaction for the contracts covered under Clause (1) to (3) of Regulation 5 of the Power Market Regulations, 2021.

SUBMISSIONS OF IEX

IEX submitted that Section 66 of the Electricity Act, 2003 promotes the development of power market and does not envisage deep regulatory functions to be undertaken by the Appropriate Commission. Regulation 23 of the PMR Regulations, 2021 only sets a ceiling limit of 2 paisa/kWh on the transaction fee to be charged from either party to the transaction and thereby allows requisite flexibility to decide the terms and conditions of the transaction fee to the Power Exchange. 

Micromanaging determination of transaction fees is antithetical to the spirit of competition. The voluntary nature of the power market fosters a healthy competition among the Power Exchanges. It is attributable to such competition that the prices discovered in the Power Exchange platforms have consistently been lower than the other avenues available in the market. 

While IEX acknowledged that it has a greater market share in comparison to the other platforms, it is a fact that reduction in the ceiling limit of transaction fees will create entry barriers and stifle competition in the power market.

Over the years, Power Exchanges have generated a substantial economic surplus which has resulted in an overall cost saving to the buyers. 

In so far as the Power Exchanges are providing a much higher value to the market participants in terms of offering a neutral & transparent automated platform as compared to the Trading Licensees, the Power Exchanges should also be eligible to a transaction fee of 2 paisa/kWh from either party to the transaction.

SUBMISSIONS OF THE ASSOCIATION OF POWER PRODUCERS

A correct interpretation of Regulation 23 provides for the regulation of transaction fee by the CERC and an evaluation of the proposal of Power Exchanges while granting approval of the transaction fee. 

IEX does not provide any justification or basis for arriving at the transaction fee of 2 paisa/kWh from either party to the transaction. The savings purportedly made by the Power Exchanges is notional, and therefore, irrelevant in the determination of transaction fee. 

Further, in view of the substantial increase in the volume of power traded on the Power Exchanges, the current level of transaction fees needs to be revised downwardly so as to protect the interest of the consumers and avoid any additional burden on the cost of power.  

ANALYSIS OF THE CERC

The CERC held that any change in the transaction fee might hurt competition rather than promoting it, and any reduction in the ceiling limit of transaction fee would create entry barriers for prospective entrants and also make the Power market less sustainable for the smaller Power Exchanges. Moreover, a differential determination of transaction fee based on the power traded on the Power Exchange will distort participation, resulting in inequitable incentives to a few Power Exchanges. 

While appreciating the changing trend in the price and consequent demand and supply of power, the CERC also noted that imposition of price caps across all market segments in the Power Exchanges has been undertaken in view of protection of consumer interest objective of the Electricity Act, 2003. 

ORDER PASSED BY CERC

In view of the above, the CERC allowed the Power Exchanges, including IEX, to charge a transaction fee of up to the ceiling of 2 paisa/kWh from either party to the transaction. Thereafter, the CERC also directed its staff to prepare a discussion paper on factors affecting transaction fee after examining the aspects of risks involves in Power Exchange Operations, international best practices, etc. 

Supreme Court Overrules APTEL Judgment, Asserts Regulatory Commissions Cannot Overstep Express Contractual Provisions

The Honorable Supreme Court, constituted by the bench of Justices K. M. Joseph and B.V. Nagarthna, recently overturned a judgment issued by the Appellate Tribunal for Electricity (APTEL). The Supreme Court addressed the question of whether the Tribunal has the authority to renegotiate the terms of an agreement on behalf of the parties. The Court examined if the Commission under Section 79 of the Electricity Act, 2003 has a plenary power that could be characterized as an all-encompassing authority, enabling the Tribunal to disregard the contract’s express language, uncover a new change in law unanticipated by the parties, or ultimately rewrite the contract and establish a new agreement.

In Paragraph 95, the Supreme Court concluded that when a matter is governed by the contract’s explicit terms, it may not be permissible for the Commission, even as a regulatory body, to overstep those terms.

In its interpretation of the case Energy Watchdog v. Central Electricity Regulatory Commission and Others (2017) 14 SCC 80, the Supreme Court observed that when the Commission is asked to exercise power under Section 63, it is beholden to the guidelines as it cannot depart from the same,” and that “in an area where the guidelines do not occupy the field, undoubtedly, the Commission is clothed with power as a regulatory body.

The Supreme Court expressed strong disapproval at the Tribunal’s findings, which were made without any supporting evidence and carried significant consequences. The Court allowed the appeals, stating that “the Tribunal was wrong in brushing aside the specific and unambiguous disclaimers under which the procurers stood exonerated from liability,” and that there was no change in law according to the terms of the PPA.

It has also been held that to successfully invoke change in law by the Generating Company, it must demonstrate that there was an interpretation earlier to or as on the date of the cut off date which was advantageous to the Generator and there has been a change in the said interpretation after the cut off date.

This ruling has been made in the context of Civil Appeals filed by Haryana Discoms, Punjab Discoms, Rajasthan Discoms, MP Discoms, UP Discoms, and Tata Power Distribution, which challenged the claims awarded by the Tribunal in favor of Sasan Power concerning (a) increased costs due to changes in the water intake system, (b) custom duty paid on mining equipment, and (c) the formula provided in the Power Purchase Agreement (“PPA”) for calculating relief on account of changes in the law.

Judgement: JUDGMENT DTD 06.04.2023 IN CA NO 11826 OF 2018

The team at R Associates, led by Shubham Arya (Partner) and Poorva Saigal (Partner) and comprising team members involving Pallavi Saigal (Senior Associate), Ravi Nair (Associate) Shikha Sood (Associate), Reeha Singh (Associate) and Anumeha Smiti (Associate) represented Haryana and Rajasthan Distribution Licensees before the Supreme Court.