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.