SOR Power Market Reg 28jan10

CENTRAL ELECTRICITY REGULATORY COMMISSION

NEW DELHI
L-1/13/ 2010-CERC
Coram:
1. Dr. Pramod Deo, Chairperson,

2. Shri Rakesh Nath, Member (EO)
3. Shri S. Jayaraman, Member
4. Shri V.S. Verma, Member
STATEMENT OF OBJECTS AND REASONS

OF
POWER MARKET REGULATIONS, 2010
1. Introduction
1.1. In due discharge of its statutory responsibility, the Central Commission

had floated a Staff Paper on “Developing a Common Platform for
Electricity Trading” in July, 2006 inviting comments/suggestions from the
stakeholders and the interested parties/persons on the viability, structure,
management and operational arrangement of Power Exchange.
Thereafter, the Commission passed an Order dated 18.1.2007 (in Petition
No. 155 / 2006) which contained the ‘Statement of Reasons’ for
‘Development of a common platform for electricity trading’ towards the
establishment and management of the Power Exchange. Subsequently,
the Central Commission laid down the ‘Guidelines for the grant of
permission for setting up and operation of Power Exchange’ vide its Order
dated 6.2.2007 (in Petition No. 155/2006).
1.2. Trading in electricity as a licensed activity has been in place since the
year 2003.Electricity Traders have played critical role transferring
electricity from surplus regions to deficit regions in the country.

1.3. It has been over a year that Power Exchanges have commenced
operations. They have been playing twin role of helping in price
discovery of electricity in the Day Ahead market and price dissemination
electronically in the country.

1.4. These regulations are being formulated not only as an extension of the
work done earlier but also with the objective of developing the market in
power (including trading), in accordance with the functions vested in the
Central Commission under the Electricity Act, 2003 and National
Electricity Policy notified there under. These Regulations deal with the
creation of a comprehensive market structure and enabling the
transaction, execution and contracting all types of possible products in the
electricity markets. The Legislative intent requires that the Central
Commission constituted by the Electricity Act 2003 ensures that
“electricity” be given the widest scope and be interpreted to extend to all
ancillary or subsidiary matters which can fairly and reasonably be
comprehended in it. Regulatory Commissions as expert bodies have been
created under the Act and empowered to govern all matters related to
power sector. As the markets are at a nascent stage, these regulatory
measures propose a calibrated approach for introducing electricity
derivatives keeping in view the present ground realities of demand –
supply gap and the pressing need for controlling the prices of electricity to
ensure its reasonableness.
1.5. A draft version of these regulations was published under a public notice
dated 22nd September 2009 for information of all stakeholders including
the persons likely to be affected thereby. Thereafter, two seminars were
held on 28th and 29th October 2009 with the purpose of disseminating
information about the draft regulations. Subsequently an oral hearing was
also organised on 25th November 2009. Written and oral suggestions and
objections have been received by the Commission from various
stakeholders listed in the Annexure attached to this statement of reasons.
All the comments have been examined thoroughly and the issue raised by
Statement of Objects and Reason Power Market Regulations, 2010 Page 2

the stakeholders has been deliberated exhaustively. The draft version has
been now finalised after taking into consideration suggestions and
objections. This Statement of Reasons inter alia advert to all significant
suggestions and objections in brief form and the decisions taken as
against them by the Commission with the rationale behind the decisions.
Some other comments of stakeholders on definitions, change in language,
typographical mistakes have also been incorporated in the regulations.
The regulation reference numbers used in this document are the draft
regulation numbers.
2. Probable Scenario
2.1. These regulations have been formulated keeping in mind the present
scenario and the probable scenario 3-4 years from now in the power
markets.
2.2. The National Electricity Policy, 2005 envisions that 85 % of power from
new capacities shall be contracted through long term PPAs. Such
contracts would take care of debt coverage and financing obligations of
the power players. It is expected that power players will transact
substantial part of the remaining 15% power capacity through market
mechanisms. Also it is expected that much more merchant capacity would
be available in the next few years as the power sector is beginning to
successfully attract equity investors.
2.3. The Commission intends to develop a market where power sector

participants can efficiently buy and sell power that is not tied up in long
term PPAs. The market can also be used for short term balancing needs
which arise from time to time in the power sector.
2.4. In addition, the Commission would encourage market participants to

develop price risk management tools to help power sector participants
manage price risk arising from the volatility of prices. This would

necessitate development of derivatives market as derivatives serve the

purpose of price risk management, hedging and risk transfer between
participants with different risk profiles.
2.5. However, we believe that a large, liquid and efficient spot market is
essential for the healthy development of derivative markets. For derivative
markets to function correctly, it is essential that the price discovery
process in the spot market is robust so that the spot market price
benchmark be used by the derivative market. Once supply demand deficit
reduces considerably, liquidity increases in spot markets, markets mature
and deepen, derivatives may be introduced.
2.6. It is expected that the role of Power Exchanges would transform with time.
From the present main purpose of acting as price signal for investments, it
will then have twin role of providing price signal and act as risk transfer
platform. The present trend world over is to promote Exchange traded
contracts ( in all types of markets ) ,since the robust risk management of
Exchanges/ Clearing Corporation takes care of any systemic risk issues.
Our intention is also to follow this newly gathered wisdom particularly from
risk management perspective. However, OTC traders are expected to
continue to play an equally important role of providing structured and
financing solution to power players and play the role of buyer / supplier
aggregator
2.7. In case these presumptions do not turn out as envisaged, mid course
correction in the regulation may be needed.

2.8. It is generally observed that markets follow the above depicted
developmental phases in its process of maturity. A strong and robust
coupling between these markets through arbitrage mechanism and
minimal entry barrier ensures convergence of prices between different
markets. Efficient pricing happens as different market participants price
the asset from different perspectives and manipulation of prices is difficult
as the integrated market is large in size.
3. Envisaged Macro Objectives of Power Market Development in India:
3.1. To serve the Interest of Society- Consumer Interest and Supplier Interest
3.2. To provide correct price signals and help raise more capital for
investment and thereby reduce supply deficit
3.3. To optimise asset utilisation through promoting short term trading
3.4. To promote competition, efficiency and economy in Power Markets
3.5. To create a level playing field between different types of entities
3.6. To facilitate market mechanisms whereby the consumers (1 MW and
above) are empowered to choose their source of supply from a trader and
/ or Power Exchange.

3.7. To facilitate Electricity traders to compete with local Discoms for supplying
power to open access consumer permitted under Section -42 (2) of the
Act.
3.8. To create a roadmap for future development in power markets in India

4. Legal Issues raised by Stakeholders
4.1. Some stakeholders have raised certain legal issues related to the scope
of the regulations, the type of contracts and entities recognised in the
regulations. The salient ones are listed below:-
(i) TPTCL –
(a) In the process of development of power market, only the entities
recognized and licensed under the Act can be the participants or
players. It is submitted that no new entity (which is not recognised or
licensed under the Act) can be given a role or recognition for the
development of electricity markets. Such power to create/ recognise
new players in the electricity market is not available to the Central
Commission. Hence the regulations appear to be re-writing and
materially adding to the Act itself.
(b) Traders are recognized as the only category of market makers under
the Act. So the development of market if done by putting traders at a
disadvantage will be contrary to letter and spirit of the Act.
(c) In the operation of the existing Power Exchanges it is observed that
even persons who are neither grid connected entities nor licensees are
being allowed to undertake obligations and responsibilities of a trading
licensee for carrying out transactions in the Power Exchange.
(d) Registration of Power Exchanges in contrast to licensing u/s 14 of the
Electricity Act, 2003 can result in ambiguity regarding the extent of
jurisdiction exercised by the Central Commission over the
operations and transactions of Power Exchanges, since the exercise
of regulatory jurisdiction by the Central Commission is limited under the
Act to licensees and other entities specified under the Act e.g. NLDC,
RLDC, STU, CTU, etc.

(e) Intervention Power - The powers of the Hon'ble Commission for the
fixation of tariff / cap on tariff is extremely limited and coextensive with
its power to determine tariff u/s 79(1) (a) and (b) of the Act.
(f) Intervention Power -The sudden increase, decrease or fluctuation in
price or volume of electricity are not recognized as valid grounds for
any intervention by the Hon'ble Commission in the sale, purchase or
trading of electricity. The legal validity of REC and their tradability in
Power Exchange has to be examined
(g) The Act does not provide for creation of funds in the nature of
Congestion Revenue Fund by subjecting buyers in the
congested region to higher market price.
(ii) WBSEDCL -
(a) In Sub-paragraph (f) of paragraph-5.7 of National Electricity Policy
separate regulations for intra-State trading and inter-State trading has
been specifically mentioned. Central Commission can make
regulations only for interstate transactions and has no jurisdiction on
intra state transactions. That should be categorically mentioned in the
scope of regulations.
(b) Imposing of floor and cap on prices of electricity in the market as
referred under sub-clause (a) of Clause-(ii) under proposed regulation
50 is beyond the jurisdiction of the Central Commission.
(c) Regarding Clause-(i) of the proposed regulation 52, Central
Commission can regulate licensee and generating Company involved
in inter-State trading only. Accordingly, such proposed Clause-(i) of
Section-52 may be redrafted.
(d) Regarding imposing of floor and cap on prices is beyond the
jurisdiction of CERC. WBSEDCL has already filed an appeal in the
Appellate Tribunal, we request that till such issue is settled in the Court
of Law, CERC may kindly refrain from framing such type of regulations
(iii) MCX – MCX has raised issues related to
(a) Exclusive jurisdiction of the Central Commission is over 'Electricity'
Spot Markets
(b) The Forward Market Commission ( FMC) and its activities are not
subject to regulatory domain of Central Commission

(c) There is Overlap / Concurrence of Jurisdiction of Central Commission

vis-a-vis Jurisdiction of the FMC. These need to be settled by the Court
of Competent jurisdiction
(d) The legal jurisdiction of the Central Commission to regulate forwards /
futures is sub-Judice
(e) Objection on definition of forward contacts and derivatives since these
are already defined in other Acts. Legality of such contracts might be
challenged in the court of law.
(iv) IEX- Congestion Revenue Related objections
(a) Whether Hon’ble Commission is legally empowered to decide
disbursement of Congestion Revenue; Section 79(1) does not specifically
authorize the Hon'ble Commission to decide the method of utilization of
Congestion Revenue. The concept of Congestion Revenue is neither
defined in Electricity Act, 2003 nor in the National Electricity Policy, 2006.
(b) Whether Hon’ble Commission can direct Power Exchange’s to deposit
money with NLDC without publication of rule as per section 179 of the Act
which provides that every Rule made by the Central Government or by the
Authority or Central Commission shall be laid before each house of the
Parliament.
(c) An expert group of members deliberating on utilization of Congestion
Revenue should have representatives of related and concerned parties i.e.
Exchange, on its board.
(d) Congestion Revenue, whether it is a Fee, Tax or Revenue generated by
Power Exchange Congestion?
(v) Lanco Electric Utility - Becoming a member on Power Exchange to buy or sell
power on behalf of client member is an activity which requires only net worth
criteria to be met. Is it not amounting to conflict with EA 2003?
4.2. The Commission has examined the provisions of the Electricity Act and
those of National Electricity Policy and has also examined the legal issues
raised here with assistance of legal opinion on the above mentioned
matters. The Commission is empowered to make these regulations in
accordance with a conjoint reading of Sections 3, 66, 79 and 178 of the
Electricity Act, 2003 and the National Electricity Policy. These regulations

provide for regulatory oversight on various market participants ,Power

Exchanges and other Exchanges dealing in electricity contracts and
transactions, which the Central Commission is competent to undertake
under the Electricity Act, 2003 as it is a special Act and is a complete
code with respect to all matters concerning electricity, including the
development of a market in power.
4.3. The regulations have been formulated keeping in view the legal position
as emerging on each of these issues and suitable modifications have
been made in several provisions of the draft regulations accordingly.

5. Scope of the Regulations – Part 2
5.1. The intention has been to make the regulations forward looking and to
have long shelf life with mid-course updations as may be required from
time to time. This has been attempted by introducing the concept of
derivatives contracts, financially settled Exchange traded derivatives and
other innovative contracts like Capacity Contracts, Ancillary Services
Contracts, Renewable Energy Certificates etc. However, derivatives,
ancillary services and capacity contracts would be introduced from a date
to be notified when the supply deficit scenarios ebbs and sufficient
liquidity gathers in day ahead market.
5.2. The scope of the regulations has been defined from three perspectives :-
(i) Types of Markets
(ii) Types of Contracts in Short term market
(iii) Types of Participants
5.3. Types of Markets- This has been defined from the market trade platform
perspective. It includes Over the Counter (OTC) markets and Exchange
traded markets. For regulatory purpose this bifurcation seems suitable as
Exchange driven markets need to be more closely regulated than OTC
markets. The reason being Exchanges handle a large number of
transactions at one place and any disruption in exchange operation has a

lasting and cascading affect on the overall market. In the Indian context
the Exchange traded markets presently are relatively small compared to
OTC markets. However these are expected to grow and hence having
appropriate structure in place is essential. Also, though the relatively
market share of Exchanges is small, in absolute numbers, this is
significant enough since the Indian power market is large. Markets can
also be looked at from delivery time perspective which then bifurcates into
Spot market and Term Ahead market.
5.4. Types of contracts in Short term market – Various types of OTC

contracts (back to back deals, deals with open position, aggregation of
sellers/ buyers, spot contracts, derivatives), contracts traded on
Exchanges (spot, day ahead, term ahead, financial derivatives on
Exchanges), capacity contracts, ancillary services market contracts and
renewable energy certificate contracts have been defined. Many of these
contracts would be developed in due course of time. However at this
stage it was felt necessary to recognise them. Long term delivery based
OTC contracts are not proposed to be controlled by these regulations.
These are mentioned in the market oversight section, only for the purpose
of reporting by electricity traders.
5.5. It needs to be appreciated that derivative markets cannot be viewed in

isolation as the larger purpose of derivatives is to provide participants of
the power sectors with services like price risk management and hedging,
the forward price curve to show the demand supply situation in the long
term and as a platform for risk transfer between participants of different
risk profile. There is strong theoretical and empirical basis to show that
activities in the derivative markets impact the spot/delivery market and
therefore regulation of derivative market by the sector regulator is
essential for successful development of power markets.

5.6. Types of Participants – The various stakeholders in the market include the
actual users (all grid connected entities, other transacting party like state
govt with free power, etc), the electricity traders, the market facilitators
(Such Members of Exchange who are not having trading license) and the
electronic trading platforms (Power Exchanges and Other Exchanges).
Other Exchanges have also been mentioned as stakeholders as they may
in future deal with electricity contracts, including derivative contracts as
and when permitted by Commission.
5.7. The market structure along with the contracts and participants is depicted
in the diagram below:-
5.8. Regulation 4 - Types of Contracts on which regulations apply

5.8.1. Comments and suggestions received
(i) NPEX- Markets for physical delivery contracts differ vastly from the
markets where there is no physical delivery (financial contracts), or other
legislation/regulations apply to delivery based contracts (forward
contracts). Therefore each market segment needs to have separate set
of Regulations.
(ii) NTPC –

(a) The present large power deficit in the country means it is a

predominantly sellers' market. It is submitted that the introducing
forward contracts in power market in India may be premature.
(b) The Central Commission may limit the forward market to month-ahead
contracts of durations not exceeding a week as has been ordered in
specific order. The derivatives market can start after the forward market
has stabilized.
(iii) Lanco Electric Utility –
(a) Are we geared up for derivative contracts?
(b) Does our regulation provide for sufficient incentives so that such
contracts can be undertaken by licensed electricity traders?
(iv) KSEB- The basic objective of introducing such large number of
derivatives in the short market is not explained.
(v) IIT Kanpur - The commission may tread with caution towards
development of a financially settled derivatives markets. Given the
power shortage scenario in the country, and limited liquidity on PXs, and
that the power market is yet to mature.
5.8.2. Decision and rationale
As mentioned earlier in draft regulations, derivatives shall be launched in
OTC and Exchanges only at a later date when supply deficit gap ebbs
and there is sufficient maturity in the markets.
5.9. Regulation 4 - Types of Contracts on which regulation apply

5.9.1. Other Comments and suggestions received –
(i) Adani Enterprise- It may be mentioned that bilateral contracts between
generators & beneficiaries based on long term PPAs, being also delivery
based contracts, should be covered under the scope
(ii) CEA- For the sake of completeness of market structure long term
delivery based contracts should also be defined.
(iii) PXIL – Instead of defining various types of contracts only contract areas
should be mentioned

As already mentioned since long term contracts are not being controlled
here, these contracts would only have a reporting requirement at this
stage in these regulations.
5.10. Regulation 4 ( v) - Renewable Energy Certificates ( REC) contracts

trading
(i) PTC-Renewable energy certificates (REC) can be traded both on
bilateral/ OTC markets and / or on Power Exchanges.
(ii) NVVN – Electricity Traders should be allowed to trade in such contracts ,
these should be elaborated
We are retaining the original provision according to which RECs shall be
transacted only on Power Exchanges for the time being in order to
ensure ease of operations and to concentrate liquidity during initial
development phase of REC mechanism.

6. Approval and Suspension of Contracts - Part 3
6.1. This section deals with approval and suspension of contracts traded on
Exchanges. The approach adopted for approval process requires an
Exchange to submit the complete contract specification to the
Commission at the time of seeking approval. The Commission would
particularly examine the nature of contract, pricing methodology of the
contract, trading period risk management adopted, delivery duration of the
contracts and penalty for contractual deviation. The other parameter shall
also be looked into in the initial approval stage. Once a contract has been
approved, changes on minor parameters (other than those specified in the
regulation) can be done by the Exchange themselves with intimation to
the Commission.
6.2. Contracts already approved by the Commission on the Power Exchange
do not require any approval again. Electricity Traders do not need any

approval for introducing any delivery based contracts. They shall need
approval for any financially settled derivatives contracts.
6.3. Regulation 6 - Approval of Contracts transacted on Exchange
6.3.1. Rationale
Some additional flexibility has been provided to the Exchange in contract
modification process in respect of minor issues.
As mentioned before, the process for new contract approval for the
Exchange includes submission of complete details of the contract for
approval. Once contract has been approved changes on certain
parameters can be done by the Exchange themselves with intimation to
the Commission. This process is being laid down to facilitate Exchanges
to respond quickly in a dynamic market environment
6.4. Regulation 8 – Suspension of Contracts
(i) WBSEDCL- If the Commission is of the opinion that it is necessary or
expedient so to do, it may after granting the concerned persons
and stakeholders the opportunity of being heard, "by order, provide for,
suspension of trading on any contract for the period specified in the order
or withdraw any contract.
It is clarified that the concerned person would include the Exchange
where the contract is transacted, Electricity Traders and / or participants.
Hence the clause is retained as it is.
7. Principles of Market and Market Design – Part 4
7.1. The Commission recognizes that a market is a social construct. The

Commission also recognizes that building a market place is a not a
onetime activity. The Regulations will have to evolve with the changing
needs and the advent of new financial technologies .Continuous dialogue
with all stake holders will be needed.
7.2. In keeping with this, Part – 4 of Power Market Regulation mentions the
principles that shall govern OTC and Exchange markets. The approach to

this regulation has been to have “principle based regulation”, manage the
macro picture with adequate safeguards and leave micro management to
participants. This will provide enough space for innovation by markets.
7.3. Having stated that general broad approach, it needs to be recognised that
world over Exchange operations are heavily regulated since Exchanges
are central agencies where a large number of participants trade. It is of
paramount importance that no disruption in operations of Exchange
happens due to any operational or risk management issues. As a fallout of
the recent financial crisis, regulation of Exchange and OTC market has
increased. In fact there is an extensive ongoing debate now to even
mandate OTC trades to be regulated to a certain extent and mandate
them to use clearing house. The change in the regulatory stance of this
Commission, as has been pointed out by certain stakeholders, has to be
seen in the light of these developments. The Commissions’ regulatory
approach is in line with the present regulatory approach across the world.
The challenge and the balancing act for the Commission is to have a
balance between regulation and innovation.
7.4. In this context, based on stakeholder feedback we have standardised the

price discovery methodology and the related process for the day ahead
market has been made as a part of these regulations.
7.5. For Term Ahead markets, the Exchanges can introduce any new products
recognised in these regulations, use innovation in the price discovery
methodology and formulate their own risk management framework system
based on their perception of risk. Electricity traders can innovate and
introduce new type of contracts based on market needs. They do not
need to take any approval for delivery based contracts.
7.6. The below mentioned concepts are the underlying principles which have
inter alia guided the formulation of the Power Market Regulations.

Comments and suggestions received from stakeholders as against each

of these regulations are also being dealt with in the following paragraphs.
7.7. Regulation 9 - The Power Exchange shall follow the following practices:-
(a) Ensure fair, neutral, efficient and robust price discovery
This shall provide equal opportunity to all participants in the market.
(b) Provide extensive and quick price dissemination
This shall reduce information asymmetry in the market and improve
informed pricing decisions for participants.
(c) Design standardised contracts and work towards increasing liquidity in
such contracts.
This is needed as liquidity improvement helps pricing to become more
efficient. Liquidity is a measure of ease of entering or exiting into a
trade (generally large trade) with minimal impact on the markets price
of the traded contract;
(i) NPEX- Liquidity is more relevant for continuous market and
should be deleted.
Liquidity is relevant in both continuous markets and auctions .It is an
important metric to measure the number of participants, bid - ask spread
quotes of participants and the hence the stipulation is retained.
7.8. Regulation 10 - Power Exchange shall also provide price signal for
efficiently allocating resources in power sector.
(i) PTC- This is not a function which could be demanded from Power
Exchange. Also Power Exchange is one amongst several platforms
for giving price signals in the market.
(ii) PXIL – Efficient allocation of resources happen once other policies
and regulations are also amenable.

This point has been removed from the regulation as all forms of markets
and not just Power Exchange provide price signals which could be used
for efficient allocation of resources.
7.9. Regulation 11- Principles of transaction in OTC Markets

(a) OTC market shall provide customized solution to sector participants
and bring innovation in the market place.
It is expected that Electricity Traders will innovate and as markets
mature introduce in future new types of products in the market like
tolling agreement, banking agreement, capacity contracts, and spread
contracts as standard back to back type of deals move to Exchanges.
(b) Contracts to be sold to client should be based on the suitability,
appropriateness and full material disclosure.
This is important since actual users may not always be fully aware of
the financial implications of contracts when markets move in an
unanticipated manner. Creation of standardised master agreements for
contracts reduces misinterpretations and misinformation ( Like
International Swaps and Derivatives Association (ISDA) kind of master
agreements) .This can be introduced over a period of time by the
Electricity Traders
(i) PTC - Complete material information may be replaced by
“necessary information.
For reasons stated above in (b) “full material disclosure” is retained
7.10. Regulation 12- The Market Design should complement security and
reliability of power system and under no circumstances should market
mechanism compromise grid security.
7.11. The market operators (Exchange / Electricity Traders) and system

operators should be in full co ordination to ensure power system reliability
management. The generating companies, transmission and distribution

licensees should also fully coordinate with the system operator to maintain
reliability.
(i) NTPC –
Inputs from the RLDCs/ NLDC regarding congested corridors resulting
in non-clearing of power market trades may also activate CTU to take
up system strengthening on such corridors. The Open Access
regulations may also be aligned to the needs of power markets, maybe
by providing for some assured transmission capacities for power
market trades. This will serve to improve customer confidence in
Power Exchanges / Bilateral Markets and increase depth in such
markets.
(ii) Adani Enterprise –
(a) Much threat to grid security comes from misuse of UI mechanism
for the purpose of buying & selling electricity from the grid. So long
as the rate of overdrawal and underdrawl from the grid under UI
mechanism is equal, there will be a tendency among beneficiaries
to use UI mechanism for trading.
It is suggested that the rate of reward for underdrawl should be much
less compared to the penalty for overdrawl under UI mechanism.
Under such situation, misuse of UI mechanism as a parallel trading
mechanism will be discouraged and more & more short term electricity
trading shall be channelized through bilateral or Power Exchange. This
would go a long way in improving the load generation balance of the
grid and developing electricity market
(iii) CEA-
The Physical market design shall follow the following principles:-
(a) In order to secure grid operation, UI mechanism shall not be
encouraged as a commercial trading mechanism and the average
penal rate for deviating from the schedule (UI rate) shall be kept at
level of deterrence.
(b) In order to secure balancing power to deficit entities, deviations from
contracted capacity in short term contracts, which are essentially
balancing contracts, shall be discouraged by imposing suitable penalty

on contractual deviations. Short term contracts (especially day ahead

and intraday contract) should be firm in nature with no flexibility to
revise the schedules. If at all there is a deviation the penalty for
contractual deviations should be very high.
(c) Not only should a good market design complement power system
reliability, it should also ensure optimum utilization of transmission
assets. A market design that induces conservative use of transmission
assets due to the pervasive fear of overloading of transmission lines in
real-time by over-drawal (UI) is not a good market design.
(d) Endeavour shall be to find a common optimum market solution in the
event of transmission congestion by aggregating the bids and offers of
multiple exchanges.
These concepts are not directly relevant to the present regulations. The
Commission would consider these suggestions in due course on
appropriate occasions.
7.12. Comments from CEA on market design from scheduling of power

perspective:-
The overall physical market design from the scheduling point of view can be
summarised as follows:-
(a) Long term contracts (Regulated, Case-1, Case-2; two part tariff;
penalty trigger below threshold level of capacity availability; flexibility in
day to day scheduling and intra day revisions)
(b) Medium term contracts (flexibility in day to day scheduling and intra
day revisions)
(c) Short term monthly contracts (starting on 1st day 00.00 hrs and ending
on last day 24.00 hrs of the month); ( Flexibility of scheduling on day-
ahead basis only ; penalty for contractual deviation)
(d) Short term weekly contracts ( starting on Monday 00.00 hrs and ending
on Sunday 24.00 hrs) ( Flexibility of scheduling on day-ahead basis
only ; penalty for contractual deviation)

(e) Day-ahead collective trades through Power Exchanges (Firm

schedules)
(f) Day-ahead and intra-day bilateral contracts (Firm schedules)
These are general market concepts. Some of these are being practised
presently. Many of these are related to OTC markets. The Commission is
not regulating the contractual aspects in these markets. It is hoped that
these principles would be followed by the participants (concepts like
penalty for contractual deviations)
7.13. Price discovery methodology for Day ahead markets

(i) IEX - Price discovery methodology has been left open to be decided by
the Exchanges although it is the primary responsibility of a market
regulator.
(ii) Eastern Regional Power Committee -Cut-off price should be
discovered through the methodology submitted .This is a detailed
paper using principle of social welfare maximisation.
Price discovery methodology for Day Ahead markets has been added in
the regulations to standardise the day Ahead market design. The method
prescribed in the regulations uses principles of social welfare
maximization. This is a time tested and well accepted method in line with
principles of economics.

8. Power Exchange – Part 5
8.1. This section covers all aspects and issues related to Power Exchanges.
This section has duly taken into account the earlier guidelines for Power
Exchanges published in February 2007. As mentioned earlier Exchanges
being central agencies where many participants converge to trade is a
critical market infrastructure and needs adequate regulation. Necessary
modification and additions have been made based on the experience so

far, issues that have come up before the Commission and the best
practices for regulating Exchanges and finally the stakeholder feedback
received.
8.2. Regulation 13 – Approval of Power Exchange for operations

(i) NPEX & NVVN - Power Exchanges granted In-principle approval by the
Commission should be considered registered
(ii) TPTCL – The rules, bye-laws and the business rules therefore should be
required to be redrafted and submitted for approval in light of the
regulations that are framed by the Commission.
(iii) NPEX - New conditions should not be introduced unless absolutely
necessary.
In view of the fact that Power Exchanges in operation and the one
already given in principle approval have undergone approval scrutiny as
laid down in the guidelines earlier issued by the Commission. Comment
(i) has been accepted and necessary insertions have been made in the
final version of the regulations. Comment (ii) has also been accepted as
it is correct legal position.
8.3. Regulation 14 – Eligibility Criteria for making an application for registration

of Power Exchange
(i) NPEX
(a) It is suggested that draft regulation 14(ii) may be deleted. As per the
Guidelines dated 6.2.2007 issued by the Hon'ble Commission, any
applicant including a Consortium, has to get registered as a limited
company under the Companies Act, 1956, before permission is granted. A
company for Power Exchange may be promoted jointly by different
companies and covers the intent of including a Consortium.
(b) Further, it should be specified that such companies shall be 'limited by
shares'.

(c) Stating that main objects of the Company shall be exclusively to set up
Power Exchange is confusing. Even with main objects being Power
Exchange, the company is entitled to undertake substantially other
businesses.
There should not be any objection if the Company which has been granted
registration for Power Exchange undertakes any other business without
violating any norms/ regulations for Power Exchange.
(ii) PXIL- The Main objects of a Power Exchange should definitely require
setting up and operating a Power Exchange however, the main objects
should also comprehensively cover a gamut of activities that such a
Company needs to do. Therefore it is suggested to change the clause ‘to
be primarily to undertake the business of Power Exchange." Instead of “be
to exclusively set up and operate Power Exchange”
Based on stakeholder suggestion it has been provided that registration of
Power Exchange shall be granted to a company limited by shares. Also
as suggested by stakeholders, Power Exchange would be able to
undertake other business related to energy sector and its ancillaries with
the approval of the Commission and the accounts for such other
business shall be maintained separately.
8.4. Regulation 17 – Prudential Norms for establishment of Power Exchange-

Networth, Composition of Settlement Guarantee Fund(SGF) , Settlement
Guarantee Fund investment and Liquidity Ratio and Current Ratio of
Exchange
(i) IEX- Networth of Exchange reduced to Rs 5 Cr after hiving off of clearing
functions is less considering the investment in well tested technology
(ii) PXIL - Requiring the Power Exchanges to keep such a high networth may
prove to be counter-productive, as the cost of maintaining such high
capital base would affect the viability of the Power Exchanges. Minimum
Networth should be 15 Cr and once clearing is hived off it should be 5 Cr

(iii) NPEX-SGF should be left to Exchange as to how it is formed. It is not

needed in day ahead markets as there is 100 % payment to be made
while executing the transaction in day ahead market.
(iv) IEX, PXIL – Other source of funds like Additional security deposits
,addition margin, transaction fee can be used and should be left at the
discretion of Exchange
(v) PXIL – Networth should not be linked to turnover but to open position of
type of contracts
(vi) IEX- There is no need of defining minimum SGF amount in the regulation
(vii) PXIL – As the provision of liquid investment in SGF is sufficient
,liquidity ratios for Exchange are not needed
(viii) PXIL – Exchange shall maintain minimum 50% of the SGF corpus in
the form of liquid investments
(ix) Lanco Electric Utility –
(a) Trader has to have a net worth of Rs 50 crore while Power
Exchange with Clearing function is expected to have net worth of
Rs 25 crore only,
(b) Quantum of electricity transacted at IEX for Financial Year 2009 -
2010 as on today is more than 3,500 MU and PXIL is more than
450 MU. Are the regulations in line with ground reality?
(x) TPTCL – In case of Category I inter-state licensed traders the minimum
networth is Rs.50 Crore. Networth of Rs. 25 crore prescribed in case of
Power Exchanges is very low.
(xi) IIT Kanpur –
(a) In line with Credit Information Bureau of India Ltd. (CIBIL), a
Clearing Corporation should compile a common database of
defaults across all Exchanges. These should be accessible to PXs
as well as traders to safeguard their interest in future.
(b) Settlement Guarantee Fund for Annual turnover of 100-500 MU
could be defined in smaller categories
After considering the relevant aspects , we have decided to retain that
the minimum networth of Power Exchange shall be maintained at 25 Cr
and post hiving off of clearing function it shall be (which is now optional)

atleast 5 Cr. These are minimum requirements only and in case it is felt
by the promoters that a higher capital is required to build world class
infrastructure and commence operations they would be free to raise
more capital.
Taking a broad approach that regulations should provide framework and
leave the micro management to Power Exchanges and recognising that
risk management will be the obligation of Power Exchanges, we have
provided that the size of the SGF shall be at the discretion of the Power
Exchanges. They may decide it based on the turnover value, open
position of trades, risk management methodology and margining system
they adopt and finally the risk appetite of the Exchange. This is a
specialised area and best handled by risk management professionals. As
a regulator we have now defined the time tested default remedy
mechanism similar to default mechanism being followed by the National
Securities Clearing Corporation.The mechanism balances systemic risk
being induced in the market with judicious introduction of new products
by Exchange with appropriate risk management and alignment of the risk
objectives of Exchange with those of members of the Exchange.
Accordingly, the source of funds for the SGF is also being left to the
Exchanges to decide. The SGF would be used to handle any defaults by
members on transactions executed. The risk management and margining
has already been left to the Exchanges to decide on.
The current ratio and liquidity ratio requirement for Exchange have been
removed as Exchanges are mandated to create a SGF and invest 50 %
of the corpus SGF in liquid assets and, liquidity concerns in case of
default on Exchange can be alleviated.
8.5. Regulation 18 and 19- Shareholding pattern of Power Exchange

Keeping in view the requirements of ringfencing, demutualisation and
need of having dispersed ownership of important market platforms,
modifications were proposed in the draft regulations in respect of the
capital structure and governance structure of Power Exchanges from the
earlier issued guidelines.

(i) Power Trading Corporation, PTC Financial Services, Indian Energy

Exchange and National Power Exchange have raised the following
objections:
(a) Initial investors are being put to huge disadvantage for its path
breaking and high risk initiative. Will lead to distress sale of
shares and loss of value for them
(b) Financial investors are not very keen in prevailing investment
climate and present investors will get poor valuation if they
have to reduce their stake to 5 %.
(c) Market is still in nascent stage and needs anchor strategic
investors, and investors from power sector.
(d) There is a need for vision and leadership and sectoral
participants commitment is needed to develop the market
and a long term view should be taken
(e) SEBI has revised limit to 15% in recognised stock Exchange
for shareholding by stock Exchanges, depositories, Clearing
Corporations, banking companies, insurance companies and
public financial institutions, irrespective of whether they have
any trading interest or not.
(f) Change in shareholding pattern within 2 years will be difficult
(g) “Indirectly” should be defined
(h) Only one-fourth of the total number of Directors, irrespective
of shareholding of trading members, thereby denying any
dominance to the Directors representing trading members in
day to day Management.
(ii) Power Exchange India Ltd- Capital structure should be aligned with
practices followed in financial / Commodity Exchange in India. Having
even 25% shareholding is on the higher side and ought to be brought
in line with norms in other markets (like stocks and commodities). As a
best practice, it may be useful to lower the shareholding by any one
non-trading member (whether directly or indirectly) to 15%. Additionally,
SEBI has also stipulated that no single owner or group shall own more
than 15% in any Stock or Commodity Exchange regulated by them.

Adopting a 15% norm will ensure that there is uniformity of regulation

across markets
(iii) Power Financial Corporation -
(a) Non-trading members of Power Exchanges (such as
professional clearing members) may be distinguished from
trading members and allowed individual shareholding upto 25
% shareholding of the Power Exchange
(b) Directly and indirectly should be defined
(iv) PTC - The period of 2 years provided to maintain shareholding
structure / pattern is too short a period for restructuring. As explained
above, such steps may hinder the growth of fledgling Power Market
and deter investments. It would, therefore, be advisable to provide a
reasonable period of 5 years
(v) PTC Financial Services Ltd-
(a) Linking indirect holding to members ceiling on shareholding is
not justified. PTC was set up under Government of India
initiative for development of power market in India and not just
for shareholder profit maximisation.
(b) Member’s voluntary initiatives started as an association and
allowed to flourish for growth of market. BSE (Bombay Stock
Exchange) after many decades was demutualised.
(c) Time is not yet ripe for such contemplation- Demutualisation
world over have been designed specific to requirements of
Exchange and accordingly provided special dispensation –
Financial services Reform Act Australia , an authority in
Singapore have given relaxation in ceiling of maximum
shareholding under special circumstances.
(d) Draft regulations provide adequately for distancing ownership
from management
(e) Allowing Non Traders to hold upto 25 % would be more
harmful
(vi) NHPC-

(a) Not more than one fourth of the Board of Directors shall
represent the trading members brings restriction on share
holders to become trading members.
(b) Members of a generating Company or a distribution or any
trading Company who are share holders of any Power
Exchange having more than 5% share holding will be
debarred from becoming the member of the Power
Exchange. The restriction of percentage shareholding pattern
should not be imposed.
(vii) IIT Kanpur - The PXs should maintain the shareholding
structure/pattern as specified in Regulation 18 within 1 year rather
than 2 years.
(viii) TPTCL - Two year period is too long merely for divestment in shares
by members of existing exchanges. No consequences have been
provided in case of failure of existing power exchanges to comply
with this clause
(i) The Commission has considered the views of all stakeholders. The
Commission maintains the view that Power Exchange is market based
institution and hence should be a widely held organisation. The
commission is also of the view that Power Exchange should be fully
demutualised and ringfenced organisation and hence a power sector
participant may have equity stake in the Power Exchange (as is an
internationally practice) but limited to 5 % of total shareholding.
(ii) As regards distinction between trading members and clearing members
for investment in Power Exchange it is felt that there should be no
distinction between the trading and only clearing members because
both bear similar risks and therefore require same regulation. Presently
there is no separate clearing membership only category recognised in
these regulations .Even in case of “clearing members only” it may be
justified to limit their influence on the operations for risk management /
clearing perspective.
(iii) Alignment of the shareholding pattern to the new norms - The capital
structure will need to be aligned by the existing Power Exchanges with

these regulations. The time period to align to the new capital structure
has been increased from two years to three years. This is based on the
stakeholder feedback. The Power Exchanges are in operation for over
a year now. This gives a total time period of 4 years in all ,from initial
investment time to realise value on its investment for investors
.However, alignment of governance structure shall be complied with in
one year time period.
8.5.3. In view of the reasons given in the above paragraphs, the

shareholding pattern in the final version of the regulations is as
briefly described below:-
(i) Any shareholder (in case of a corporate this is including its subsidiaries
and cross holding in other companies and associate companies) other
than member of the Power Exchange can have a maximum of 25%
shareholding in the Power Exchange. (Earlier in guidelines it was required
that 51 % of the equity share capital of the PX should be held by the public
other than the shareholder having trading rights in the Exchange).
(ii) A member of the Power Exchange can have maximum of 5 %
shareholding in the Power Exchange. (Earlier there was no limit on
individual member’s shareholding in the Power Exchange).
(iii) In total, a Power Exchange can have a maximum of 49 % of its total
shareholding owned by entities (in case of a corporate this is including
its subsidiaries and cross holding in other companies) which are
members of the Power Exchange.
(iv) One- third of Board of Directors, with at least 2 directors shall be
Independent directors. This will be from a panel of eminent
professionals / academics constituted by the Power Exchange and
approved by CERC. Earlier there was no such stipulation. However
Power Exchanges have appointed independent director as a best
practice.
(v) Maximum one-fourth board of directors can be representative of
member of Power Exchange. (This is same as earlier guidelines).

8.6. Regulation 20- Grant of Registration of Power Exchange and its

duration
(i) IEX – Registration should be for perpetuity with power to revoke in case of
discrepancy or if the Exchange is not acting in public interest. This aspect
has a far reaching implication on the valuation of Exchange.
(ii) PXIL - Clause 4 of SCRA deals with Recognition of Stock Exchanges and
the conditions that an Exchange needs to fulfil for grant of recognition.
Clause 5 of SCRA states that if the Central Government is satisfied that
the recognition of Exchange is not in the interest of the trade or in the
public interest then the recognition can be withdrawn.
After considering stakeholder feedback, the Commission has decided
that the registration granted to a Power Exchange shall continue to be
in force for a period of twenty five (25) years from the date of
commencement of operations, unless if such registration has been
revoked earlier. The registration shall be considered for renewal for a
period of another 25 years and an application for renewal can be made 5
years before expiry of registration. This should reduce any uncertainty in
business operations of the Power Exchange.
8.7. Regulation 21 – Ownership and Governance structure of Power

Exchange and Staffing of Power Exchange
(i) NPEX-
(a) The staffing of PX is very restrictive and should be deleted.
(b) A 'for profit' start-up enterprise in a marginal market segment is a
challenge from staffing point of view. On one hand, PX will require
experienced personnel with specialized knowledge to develop the
market. On the other hand, being a lean service organization, it will
offer very limited opportunities for career growth and development for
its employees. As such, short-term assignments and lateral entry/exit
from/to a pool of experienced persons of the promoters (both non-

trading and trading category) will address this problem and contribute
significantly to market development.
(c) Technology under which a Power Exchange shall operate and should
operate fully ensures complete protection and level playing field to all
players and there is no question of any person whether related party or
not, getting any preference whatsoever or influencing operation of PX
in any manner
(d) In case of RLDCs and NLDC, Government of India has decided for
setting up a wholly owned subsidiary of POWERGRID responsible for
the independent System Operation of RLDCs and NLDC to ensure
ring-fencing and functional autonomy. It is understood that a transition
time of five years has been considered before it will be hived off as an
independent entity.
(e) It is next to impossible to implement that advisors/ consultants will not
be advising utilities in addition to Power Exchanges. The clause should
be deleted.
(f) The Directors (except MD) should be non-executive, so that the Board
of Directors will be insulated from day to day functioning of the PX.
(g) In summary we submit that independent company structure, the
technology employed, uniform rules and absence of subjectivity, audit
trail and market surveillance, code of conduct, filing of declarations etc.
along with competitive market forces will ensure that the MD or CEO or
other staff cannot show bias to their parent organisation or be
influenced by the parent organisation and there is enough in-built
safeguard.
(h) Ringfencig can be achieved by having two separate groups – one
those dealing with price sensitive information and other handling
business development, customer training, policy , regulatory matters,
general administration finance& accounts
(i) PX can adopt ISO 27001 internal process and procedures can be
adopted and submit comprehensive information security and privacy
policy
(ii) PTC -
(a) Board Members should not have any say in the day-to-day operations

of PX
(b) CEO should not be a board member and should be made responsible
for day-to-day operations
(c) Managing Director should be made responsible for Marketing / Finance
(d) If MD and CEO are the same person, he should not be part of the
board
(iii) PXIL – As the number of eligible advisors in the power sector being
limited, it may be useful to distinguish between consultants or advisors
working with the Power Exchanges where they may have access to have
specific price / member sensitive information as compared to other
consultants or advisors etc.
(iv) TPTCL - Matching mechanism, rights and liabilities of trading members,
default and penalty mechanism, dispute resolution, congestion
management etc which will directly influence the operation of the market
has been left at the complete discretion of the power exchanges in an
uncanalized and unguided manner.
We appreciate that it may be practically difficult to find professional
experts who would deal with Power Exchange but do not deal with any
other matters in the power sector. This will have a negative effect on the
quality of talent available to Power Exchange and hamper capacity
building of Power Exchanges. At the same time, conflict of interest has
to be avoided. Therefore restrictions as proposed in the draft regulations
are being retained in respect of employees of the Power Exchanges. To
address the need of having access to professional advice we have now
provided that any consultant or advisor can be engaged as long as they
do not handle price sensitive information which can be used to benefit
the members or clients of Power Exchange and there is no conflict of
interest between the assignments undertaken by the consultant in the
Power Exchange and in other companies served by the consultant or
advisor .However , in order to ensure ring fencing between day to day
operation and participation in transacting, the provision with respect to
MD/ CEO/ director in charge of day to day operation/ employee is
retained as earlier.

8.8. Regulation 22 – Annual Registration Charge for Power Exchange based

on Turnover of transaction.
(i) IEX, PXIL - Registration charge is very high for the Exchanges in the
context that business is still a loss making business
(ii) PXIL - Annual registration fee should be of Rs. 5 Lacs at maximum
(iii) PXIL - Fee should be linked to turnover of trades on the Exchange like
SEBI practice for Stock Exchanges
(iv) NHPC- Registration charges for Power Exchange should be based on
the volume of electricity traded per annum on similar lines as in case of
trading licenses
In the final regulations, turnover based registration charge for Power
Exchange has been adopted. The registration charge increases with
increase in turnover of the Power Exchange as the revenue of the
exchanges also increases. This is an accepted practice for Stock
Exchanges in India. The change has been incorporated based on
stakeholder feedback.
8.9. Regulation 23 – Market Splitting methodology publication in its Bye Laws /

Rules by Power Exchange
(i) NVVN - The congestion methodology should be given in details and made
known to the members participating in the Exchange.
(ii) IEX - Price discovery methodology has been left open to be decided by the
Exchanges although it is the primary responsibility of a market regulator.
(iii) Mr. Ehsan Sharief, Individual Capacity - Market splitting methodology
should be approved by the Commission
(iv) TPTCL- There is no provision under the Act allowing differential pricing for
congestion.
We recognise the fact that market splitting is a complicated process and
markets participants need to clearly understand the mechanism. For

sake of transparency, the Power Exchanges should elucidate the

methodology with examples and scenarios for comprehension of
members and market participants and include it in the byelaws / rules.
This has been provided in final Regulations accordingly.
8.10. Regulation 24 - Management of Power Exchange, Qualification of senior

management and Management Committees
8.10.1. Rationale
Power Exchanges have been directed to form a Risk Management
Committee, a Market Surveillance Committee and a Settlement
Guarantee Fund Committee. This has to be complied within one year of
notification of the regulations. Risk committee headed by an independent
director shall oversee the complete risk management function of the
Power Exchange. It shall furnish reports to the Commission on a half
yearly basis along with board meeting minutes / observations on the
subject. Similarly, market surveillance committee headed by an
independent director shall oversee transaction and surveillance and
submit a quarterly report to the Commission. The SGF committee shall
have adequate representation from members of Power Exchange.
8.11. Regulation 25- Membership in Power Exchange, Networth of members in

Power Exchange
(i) NPEX - The given definition is applicable only for a joint stock company.
The members can have a variety of other constitutions e.g. an SEB,
Government or a Government department, partnership firm, sole
proprietary firm, an individual etc. Therefore prudential norms shall have to
be defined differently.
(ii) PXIL - Irrespective of the networth position of the member, the risk on the
transaction is completely covered through margins hence networth of
members need not be defined.
(iii) Reliance Infrastructure –
(a) Additional membership Criteria should be similar for Electricity
Traders and members of Power Exchange ,

(b) Membership in Power Exchange should be non-discriminatory for

all existing as well as prospective members- to avoid setting up of
any entry barrier for new players
In view of the provisions of the Electricity Act, the Commission has come
to a considered view that members, who are not Electricity Traders,
should only provide transaction facilitation services to their clients. They
should not be permitted to provide any credit, financing or working capital
related services to their clients. This is so because trading activity (
trading is defined in the act as purchase for resale thereof) and thereby
any risk taking activity relatable to trading under Electricity Act 2003 can
only be undertaken by licensed Electricity Traders for whom CERC
prescribes prudential norms through its regulations The prudential norms
for trading licensee is stipulated in Central Electricity Regulatory
Commission (Procedure, Terms and Conditions for grant of trading
license and other related matters) Regulations, 2009. This decision is in
line with the order dated 24th December 2009 of the Commission in
petition No 117/ 2009.
Subject to above, the provisions of the Act and regulations made
thereunder, the Power Exchange should have powers to propose in their
rules and byelaws any membership criteria for them including prudential
norms. Accordingly, the networth criterion for membership to power
exchange has been removed.
8.12. Regulation- 26 - Member Service Charge in Power Exchange

(i) TPTCL – Proposed upper limit for members is too high compared to what
is proposed for traders considering the fact that market price on Exchange
has gone up to Rs 18/ KWh, it works out to be 13.5 paise much more than
4 paise cap for traders.
(ii) PTC – Members provide infrastructure, advisory services and finance the
transaction of client. Working Capital requirement and credit risks are
higher on Power Exchange as compared to direct bilateral transactions
(iii) PTC-

(a) Commission of 0.75% is grossly inadequate considering the

services provided by the members. There should be no cap at all
and if at all there is a cap it should be at least 3 %
(b) Trading licensees are bound by regulations to furnish price-
sensitive information on monthly basis to CERC but members are
not under compulsion to provide business sensitive information to
another trader while the transactions are being clinched as they
may end up loosing business. The Central Commission may
therefore, devise necessary mechanism for full disclosure of the
margins charged by a service provider in the chain, rather than
fixing cap on 'member service charges
(iv) PXIL – There should not be any cap defined .If it has to be defined it
should be same as in the bilateral markets.
Ceiling on Member Service Charge for providing facilitation services to
their clients has been introduced at 0.75 % of transaction value. It needs
to be clarified that it does not include any charges levied by Power
Exchange, transmission (open access) charges, other charges payable
to NLDC/ RLDC/ SLDC, statutory taxes etc. Ceiling on service charges is
considered necessary to prevent the malpractices of Power Exchange
members’ charging high margin to infrequent and less informed clients.
This charge shall be for the entire chain of subordinate service providers
in between the member and the client. It is expected that the Member
Service Charge will be decided by competitive market forces and the
figures provided in the regulation are only the upper limit. Ceiling on
service charge is in vogue even in stock exchanges. The Commission
has also imposed similar ceiling on licensed traders in the form of cap on
trading margin. In view of the above, this regulation is retained.
Electricity Traders who are members of Power Exchange shall be
governed by CERC (Fixation of Trading margin) regulations.
8.13. Regulation 27 – Risk Management in Power Exchange


(i) PTC-Netting of margin requirement in same contract has not been

allowed whereas netting of margin requirement in different contracts for
a client has been allowed. This will lead to more capital requirement of
a member and may lead to liquidity problem.
(ii) PXIL - In the current market, only physical delivery is allowed and inter-
tradability among product categories is not possible. Hence buy and
sell trade margins cannot be netted against each other since sell bids
are not certain to be cleared in view of the current liquidity in
Exchanges.
(iii) NPEX- Power Exchanges should have the freedom to determine the
scheme for various margins
(iv) India Bulls Power Trading - The mechanism for arriving at the margin
calculation/ margins to be collected from the member is not defined or
explained.
8.13.2. Decision with rationale
As discussed in foregoing paragraphs, Risk Management has been now
left to the Power Exchanges. They can use any suitable risk
management techniques and tools to asses the risk and margin
accordingly. This leaves sufficient space for Power Exchanges to
innovate and adopt risk management principles based on its risk
appetite. However the Default Remedy Mechanism to be used by power
exchange has been stipulated to ensure that they do not induce any
systemic risk in the market. After considering the comments and
suggestions received, the provision on Netting of margins has been
removed from the final version of the regulations. Power Exchanges can
decide their margining mechanism based on best practices of the
industry.
8.14. Regulation 28 – Power Exchange to hive off Clearing and Settlement

function
(a) IEX – It is premature to hive off clearing and settlement into a
separate company as there is insufficient volumes and liquidity on
the Exchange. This will lead to increased cost of operations.

(b) IEX – Clearing Corporation should be introduced once derivatives

are introduced
(c) NPEX – Clearing Corporation should be optional for physical day
ahead Exchange
(d) NPEX –There are limited number of participants and the volume of
trade on individual PX shall not be large in near future
(e) PTC -It is a good concept however there should be minimal number
of clearing houses to bring economies of scale and provide
advantage of margining and easier monitoring of transactions.
(f) NHPC – Clearing Corporation is a welcome step.
(g) NVVN - A detailed procedure is needed in respect of functioning of
Clearing Corporation in clearing bilateral trades
(h) KSEB – The need for a Clearing Corporation and its working are
not clearly explained in the regulation. (i) IIT Kanpur - Single
Clearing house would allow ease of monitoring, tracking and
disincentivising defaults. A single clearing house would facilitate,
for margin requirements, netting of positions of same client in
different PXs.
(j) TPTCL- Clearing Corporation should also be allowed to settle and
clear OTC contracts for a prescribed fee
After considering the suggestions and comments received, creation of
Clearing Corporation has been made voluntary and left to the discretion
of the Power Exchange. However, Clearing Corporation would be
mandatory for dealing in derivatives, once permitted by Commission.
This is felt necessary in view of the higher risks involved and need of
special risk management thereof.
8.15. Regulation 29 – Default Remedy Mechanism in Power Exchange and

Clearing Corporation
(i) IEX, PXI, NPEX (All Exchanges) have a strong objection to their
networth being used for making good default of members.

(ii) IEX- In India SEBI has made provision of assigning retained

earnings of Exchange / Clearing Corporation to meet the remaining
default amount, that too, after all moneys of the Member, with the
Exchange are applied to meet the liability of the defaulter, including
money recoverable out of sale of his membership rights. (Ref section
12.8 of chapter “Settlement Guarantee Fund” of Model Bye-Laws of
SEBI)
(iii) PXIL- The Power Exchange’s / Clearing Corporation's networth is
the call of last resort as any measure which may affect the continued
sustenance of the Exchange/Clearing Corporation Clearing
Corporation can have an immense negative effect on the entire
market and may even result in complete market failure. the ultimate
risk of any default is managed by calling on the following in
descending order of priority
(i) Margins of the defaulting member
(ii) Members Deposit(s)
(iii) Members Networth
(iv) Settlement Guarantee Fund
(v) A levy or loss sharing on all the non-defaulting Members
(vi) Last resort - Power Exchange’s / Clearing Corporation's
Networth.
(iv) Lanco Electric Utility –The Risk being taken by Exchanges is
negligible as compared to the risk taken by traders.
(v) India Bulls Power Trading -Events which are to be considered as
default by a member of Power Exchange/ Power Exchange should
be defined
(vi) Mr. Ehsan Sharief- Individual – When the SGF is exhausted due to
default by one member, what would be the remedy in case of
another default.
(vii) TPTCL- Necessary contractual documents have to be put in place by
the Hon'ble Commission to work out the inter-party relationship
between the member, the power exchange and the clearing
corporation to work out the procedure for settlement of funds and
also to enforce the default mechanism.


The event of default has been defined as suggested in stakeholder
comments. Default remedy mechanism has been looked at from two
opposing point of views. One, to ensure that Power Exchange or
Clearing Corporation introduce risk management methods on new
products judiciously especially longer tenure products where the risk is
much higher than day ahead markets and align their risk management
objectives with that of the members of the Power Exchange . Second,
utilising the net worth of the Power Exchange to make good the default of
its members should not create any systemic risk and lead to market
failure.Commission has decided to provide the default remedy framework
for the same along with regular reporting requirements. The new default
mechanism adopted in final regulations is a time tested mechanism on
similar lines as used by National Securities Clearing Corporation Ltd in
the Indian Stock markets.
8.16. Regulation 30 – IT Infrastructure and Trading Systems

(i) IEX- There is no discussion on standardization of technology in the
regulation
(ii) PTC- Power Exchange need to be compensated for creating additional
infrastructure like disaster recovery and alternative trading site by allowing
them to charge appropriate fee.
The price discovery methodology submitted for approval in the bye laws
by Power Exchanges needs to be tested for its veracity in software
application used by the Power Exchanges. Hence it has been provided
that the Commission may audit or appoint an agency to audit the
Software application used by the Power Exchange for price discovery
and market splitting on a random basis. The Power Exchanges shall
produce the test results of test cases and scenarios provided by the
Commission.

Disaster recovery site is a basic requirement for Power Exchange

infrastructure since its operations are critical and time dependant in
nature .It is expected that contingency plans like disaster recovery are a
part of the initial business plan itself of the Exchange. The Power
Exchange is free to use any type of internal funds they feel appropriate to
create such infrastructure.
8.17. Regulation 31 - Physical settlement - Contractual Deviation , Maximum

Bid quantity declaration from members of Power Exchange
(i) CEA – Penalty for Contractual Deviation is a must and needed to bring
sanctity of contracts in the market
(ii) Reliance Infrastructure , PTC, PXIL, Reliance Energy Trading –
Penalty should not be stipulated as any contractual deviation risk can
be priced in the contract itself .It shall vary based on the counterparty
and will be priced.
(iii) IEX – Any specific number should not be given and the penalty value
should be floating with market price. In case the market volatility is high
the penalty shall be high and vice versa.
(iv) TPTCL -Can regulator charge a penalty? It is contrary to the principle of
restitution propounded u/s 73 of Indian Contract Act, 1872 as the basis
for imposition of damages. Damages / penalty for breach of contract
can be imposed only to the extent of loss suffered by the aggrieved
party.
(v) TPTCL- Penalty for Contractual deviation is a matter of contract
between the buyer and the seller and subjecting traders to penalty,
while imposing a cap on trading margin is not appropriate
(vi) TPTCL - Even if penalty for Contractual deviation applicable , it has to
be prospective in application to future contracts
(vii) TPTCL - For long term PPAs already executed by traders without any
penal provisions, the PSAs will be executed in future and thus being
the 2nd leg of the contract should also be exempted from penalty
(viii) TPTCL- Flexibility in practice is needed, 20% to 30% deviation is
considered normal and is preferred by both buyers and sellers

(ix) IIT Kanpur - Regulations should introduce a mechanism for monitoring

'contractual deviations' through PXs, traders and NLDC/RLDC/SLDC
through an appropriate committee to be appointed by the CERC.
(x) WBSETCL- Maximum Bid quantity declaration is difficult to monitor the
actual physical requirements vis a vis the traded quantity.
(xi) Reliance Infrastructure – Maximum Bid quantity declaration should
allow for buy bids exceeding maximum deficit (i.e. maximum consumer
load minus minimum generation.) or sale bid exceeding maximum
surplus (i.e. maximum consumer load minus estimated consumer load).
(xii) Reliance Energy Trading – Maximum Bid quantity is only relevant for
distribution licensee and hence it should be left to the prudence of
SERC.
(xiii) Lanco Electric Utility- Bilateral contracts or Term Ahead contracts
through PX -Can we have standardized contracts for Delivery based
market and financially settled markets?
(xiv) KSEB- “Members declaration of MW quantum in a buy bid shall not
exceed the maximum deficit.” This is totally against the basic objective
of short term trading. Almost all the SERC's direct the Distribution
utilities to follow schedules strictly on merit order principles.
(xv) India Bulls Power Trading - Minimum compensation for the contractual
deviation @20% of the contracted price is very low.
(xvi) IIT, Kanpur - Regulations should introduce a mechanism for monitoring
'contractual deviations' through PXs, traders and NLDC/RLDC/SLDC.
(xvii) Eastern Regional Power Committee – A detailed process using grid
frequency, KVS, power factor has been suggested to decide
compensation for contractual deviations.
(xviii) Mr. Eshan Sharief- In case of deviation ,the terms of the contracts
should prevail
For competitive market to develop freely, the players should have
flexibility to develop their own strategy to hedge their risk, based on their
risk taking potential. Hence, the proposed regulation with respect to
Contractual Deviation is being removed. This would mean that in OTC
markets contractual deviation can be decided by the participants

themselves. For Power Exchanges the clause shall be a part of contract

specification and the penalty mechanism can be defined by the
Exchange to create sufficient deterrent not to deviate from contracts and
provide adequate compensation to the affected party. However, it is
expected that short term contracts (being demand supply balancing
contacts) shall be firm in nature and there shall be high penalty for any
contractual deviation.
In view of the comments received, proposed regulation governing the
maximum bid quantity declaration from members of Power Exchange is
also being removed as it may be difficult to monitor the same practically.
8.18. Regulation 32- Congestion Amount Management

(i) IEX has submitted a detailed document raising it’s concerns on
Congestion fund utilisation proposed by the Commission. It is a self
contained separate document.
(ii) IEX -Congestion Revenue Utilization should be on quid pro quo
principle
(iii) IEX- Whether congestion charge is a fee, tax or revenue? Does the
Commission have powers to direct its usage?
(iv) IEX has objection on transfer of funds to NLDC as it is a technical body.
(v) IEX, PXIL, PTC - Expert group suggested to direct its utilisation should
have representation from Power Exchange and distribution company
representation. The corpus is generated from Power Exchanges and
they have the right to influence its usage.
(vi) APTRANSCO - Congestion Revenue Fund shall be refunded to the
respective beneficiaries in every month or quarterly basis on the pro-
rata power allocation
(vii) APTRANSCO -Congestion Revenue Fund utilization for construction of
new transmission lines and for providing Series Reactors etc., may not
be rational as CTU and respective STU are in a position to do so.
(viii) MSEDCL –
(a) Account could be transferred to NLDC once they are declared
functional as an Independent System Operator.

(b) Regional Power Committee representative to be included in the

expert group
(ix) PXIL -The following clauses to be included
(a) To develop a fund to manage the settlement of claims as has
been referred to in Clause 40
(b) To undertake capacity building measures and training of
participants – PTC, PXIL
(c) To develop an information dissemination mechanism for the
participants on the Exchange
(x) NPEX - Power Exchanges should be allowed to meet any financial
liability (settlement difference) arising from mismatches in the final/
implemented schedules approved by LDCs, by any of the methods
including:
(a) Socializing amongst all participants (with or without recourse to
SGF)
(b) Part utilization of congestion revenue
(xi) PTC- Fund can also be utilized for capacity building of stakeholders
towards commercial orientation, load forecasting, key
information
Congestion revenue is an amount arising from a regulatory mechanism
created from splitting the market. Hence, the Commission has powers to
levy the same. Being a regulatory charge it must be used for the
purposes having broad nexus to the measures for congestion avoidance.
The indicated use of the fund created by this amount was provided in the
draft regulation itself. The said uses would be permissible and the
Commission would permit use of amount so collected for those
purposes. In view of the legal position emerging from provisions of the
Act, Commission has decided to keep the process of approval to
proposals for utilisation of congestion amount within the regulations and
therefore has omitted the proposal of Committee for suggesting new
purposes.

After considering the suggestions received from stakeholders, the

following two types of usage has been added to congestion fund
utilisation
1. To undertake capacity building measures and training of
participants of Power Exchange.
2. To develop an information dissemination mechanism for the
participants on the Power Exchange.
As explained above, the constitution of a technical expert group is being

omitted from the final version of the regulations. The CTU, NLDC or
Power Exchange can directly approach the Commission with proposal for
utilisation of the congestion revenue fund.
8.19. Regulation 34 – Merger or Closure of Power Exchange

8.19.1. Comments and suggestions Received
(i) NPEX – The concept is anti competitive. It is purely a commercial
decision to be taken by the shareholders of Power Exchange
(ii) PXIL – There are situations where an Exchange creates its niche and
can remain viable NCDEX has less than 20 % of total commodity
Exchange volume but is a benchmark for agricultural commodities.
(iii) PXIL, NPEX- It should be 20 % of specific product traded on the
Exchange not overall market volume .There are niche Exchanges
which become a benchmark in their category.
(iv) NPEX- Investors in Power Exchange have taken a long term view and
are expected to work towards development of markets. It discourages
such entrepreneurship and market development
(v) NPEX- The size of the electricity trading market is not large and is not
expected to grow substantially in near future. There are a large number
of traders and participation in Power Exchange is voluntary, which
limits the market share and viability of each Power Exchange.
(vi) KSEB – The concept is anti competitive
(vii) Lanco Electric Utility –

(a) Will it not act as entry barrier for a new entrant? The risk perception
will change drastically and investment decision may get changed in
most cases.
(b) Will it not give undue advantage to existing Power Exchanges
specially the one having more than 90% market share?
(viii) IIT Kanpur - The presence of multiple Power Exchanges (PXs) at the
early phase of development of power market in the country comes at a
loss of liquidity and hence efficiency in price determination. Presence of
multiple Power Exchanges defeats the purpose of socially welfare
maximizing outcome due to sacrificed liquidity and very limited
opportunities for arbitrage to ensure interdependence of price discovery
across Power Exchanges.
(ix) Mr. Eshan Sharief- As the power exchanges are in a naïve stage, this
clause may be relaxed for a couple of years.
(x) TPTCL-
(a) This clause is an impediment on the right of a power exchange to
carry on business
(b) The clause also does not provide about the manner of calculation of
total market volume and market share of exchanges. Further, even
in the event of such merger or close of operation of smaller
exchanges, the rights of shareholders and of the existing members /
contracts have to be worked out in detail.
The rationale behind this provision in the regulations is to concentrate
liquidity in Power Exchanges for improved pricing of standardised
contracts. Numerous spot prices with low volume will provide confusing
signals and not serve the intended purpose of Power Exchange providing
investment signals. It shall also complicate corridor allocation process
adopted by NLDC and have a negative impact on social welfare
maximisation. Sufficient care has been taken to ensure that a situation
where monopoly of a single Power Exchange occur does not happen by
allowing two Exchanges to always co exist . Hence, any Power
Exchange with a market share less than 20 % for a continuous period of
2 (two) years after a period of two years of commencement of operations

shall need to close or merge with an existing Power Exchange. As such it

is vital for this regulation to be retained in the final version of the
regulations.
For the sake of clarity, it has been provided that market share calculation
methodology shall be based on the cumulative transaction volume in
Million units of all exchanges in operations.
After considering the matter further, for the running long dated contracts
the Power Exchange have been asked to work out a succession plan of
these contracts as per Regulation 35
8.20. Regulation 35 – Exit scheme for Power Exchange

(i) Reliance Infrastructure - Existing Exchange should get their exit
schemes approved by Commission within a period of six months
8.20.2. Decision with rationale
Power Exchanges are being required to create an exit scheme detailing
the process of winding up of business and the transfer mechanism of
running long dated contracts executed on the Exchange. This is also
being promoted by Financial Securities Authority (FSA), the UK financial
regulator through the concept of a “Living Will for banks”.
After considering the comment, a time period of one year has been
provided in the final version of the regulations for Power Exchanges to
adhere to this provision.
8.21. Regulation 54 - Information Dissemination by Power Exchange

8.21.1. Rationale
Power Exchanges are mandatorily being required to provide information
using website links for demand supply, weather, fuel, generators
information for informed pricing decisions for participants. This is to
emphasis the role of Power Exchanges in price and information
dissemination to reduce information asymmetry in markets.
9. Clearing Corporation -Part 6

9.1. Part - 6 introduces the concept of Clearing Corporation. Separating the

clearing function from the price discovery function is a good practice as
they are two distinct functions. Presently both are being performed by the
Power Exchange (they are acting as self clearing Exchanges).
Internationally Clearing Corporations are independent, well capitalised
institutions and clear high volume of trade for Exchanges as well as OTC
markets. For instance Nordpool Clearing ASA is a separate Clearing
Corporation which clears trades for Nordpool spot and derivative markets,
the LCH -London Clearing House clears trades for various stock and
commodity Exchanges and OTC trades, similarly DTCC - Depository
Trust and Clearing Corporation of US has similar business model. OTC
trades can also be cleared by the clearing house.
9.2. Presently in our markets if a Electricity trader executes trades, lets us say
on two Exchanges and one trade in OTC, he needs to pay margins /
collaterals individually to all the 3 (three) institutions thereby increasing his
overall capital requirement. The risk arising due to these positions remain
compartmentalised in different institutions. When Clearing Corporation
would clear trades of the same party on Exchange and OTC market, the
Clearing Corporation would have complete information about position and
risk of the party. Hence, it can provide cross margin advantages (buy
position in one platform and sell on the other on similar contracts
effectively reduces risk and this is recognised by Clearing Corporation and
advantage is given to the parties) based on position thereby bringing
more efficient use of capital for the Electricity trader. The economy of
scale reduces the transaction cost as well. Thus provision for creation of
Clearing Corporation is a necessary instrument.
9.3. Regulation 28 – Hiving off of Clearing Corporation

The comments of the stakeholders on this issue have been enumerated
in Para8.14.1
Creation of Clearing Corporation is a best practice internationally and
has become even more critical after the 2008 financial crisis world over.

There is a strong push by regulators to force even OTC traders to use

Clearing Corporation. In the Indian context the Power Exchanges have a
very conservative risk management policy. They charge 100 % margin
for any trade (they are free to margin lesser and use a clearing house).
Clearing Corporation will become more relevant when margining is not
100 % by Exchanges and derivatives are traded. Power Exchange or
any other organisation which are interested in clearing OTC business
can establish a Clearing Corporation as they shall be able to attract
bilateral trade business and help smaller Electricity Traders to increase
their turnover. It is being left to the market to judge any business
opportunity and to act accordingly. Therefore, such creation of Clearing
Corporation is being made voluntary and left to the discretion of Power
Exchanges or any other organisation interested in clearing business.
However it is mandatory for derivatives market .If it is formed it can also
clear OTC trades as has been proposed in the regulations. Clearing
Corporations will need approval from the Commission to commence
operations
9.4. In case Power Exchange hives off its clearing function, the Settlement
Guarantee Fund shall move from Power Exchange to the Clearing
Corporation. Clearing Corporations will be separate legal corporate
entities regulated by the Commission with appropriate capital adequacy
norms.
9.5. Since the Clearing Corporation may clear OTC trades also, it shall benefit
Electricity Traders as they can also use the services of the Clearing
Corporation thereby reducing their capital adequacy requirement.
9.6. Regulation 48 - Credit Rating of Clearing Corporation

(i) Reliance Infrastructure - Clearing Corporation to get such credit rating
within a stipulated time, preferably six months.

It has been provided that Credit rating of Clearing Corporation shall need
to be done through Securities Exchange Board of India (SEBI) accredited
credit rating agency within 6 month of its incorporation and inform the
Commission
10. Market Oversight & Surveillance Part -7
10.1. Market oversight is required to maintain the market integrity and credibility
and to ensure that the market is fair and efficient. The oversight function
becomes even more important when the market is in nascent stage of
development and the market is neither large and nor fully competitive. At
such a stage the regulator’s monitoring is crucial as checks and balances
through competitive forces is not sufficiently built in. In the initial stage as
presently is, the Commission is monitoring prices through Market
Monitoring Cell. Over a period of time as market size increases monitoring
aspect will become as important as prices. Prices in this scenario can be
expected to be taken care of by competitive forces. In these regulations
various new reports have been introduced to monitor risk for both
Exchanges and Electricity Traders. For Exchanges, with commencement
of Term Ahead markets risk management has become crucial. Reporting
of open position of participants, overall market open position reports have
been introduced for Exchanges. For Electricity Traders their composite
portfolio risk summary report has been introduced. This shall help the
Commission to quantify the overall open position in the market and the
risk emanating out of these positions.
10.2. The Commission’s oversight will be on the market as well as on the

market participants. Markets may be adversely affected due to abuse by a
participant. It may also be affected by the collective participant behaviour.
Hence, monitoring both markets as well as its participants is necessary.
Over a period of time the Commission would adopt the principle of “risk
based regulation” wherein transaction which induces higher systemic risk
will be monitored more rigorously than others.

10.3. The Commission shall have an oversight on the overall functioning of the
market through monitoring of prices, volatility, volumes of trades etc.
10.4. Regulation 49 - Commission shall have an oversight on market

participants behaviour through checks on manipulative or attempted
manipulative trading activity, trading that is misleading or deceptive, or is
likely to mislead or deceive; market abuse or gaming etc
10.5. Commission can intervene in markets when prices or volatility rises

unreasonably ,or sudden high trading volume is reported
10.6. Regulation 50 - The interventions methods can be appropriate price

caps for necessary duration, halting trading for a cooling period in case of
increased volatility , increasing margins on contracts ,imposing client /
market position limit, suspend contracts from trading etc. The exact band
of such interventions shall be based on the market conditions existing at
that time.
(i) NVVN- The provisions covered in clause (d) of the Regulation 7 of the
Central Electricity Regulatory Commission (Procedure, Terms and
Conditions for grant of trading license and other related matters)
Regulations, 2009 may also be considered while finalizing this
regulation so as to avoid any future ambiguity.
(ii) WBSEDCL - CERC should mention specifically the limit in rate of
changes in the prices of electricity beyond which the question of
abnormality will arise. Similarly specific parameters and their limiting
values required for intervention to be mentioned by CERC in case of
sub-clause (b) &(c) .In addition to this, the other terms and conditions
should also be mentioned. If accepted, the proposed changes may
please be again published before finalization in Order to capture the
stakeholders view.

For the sake of clarity, a new provision has been added to provide that
these regulations are in addition to other regulations made by the
Commission and not in derogation thereof.
The limits on prices or volatility when the Commission shall intervene
cannot be judged beforehand since these are dynamic market
parameters and have to be judged at that point in time. Also presently
there is little historic exchange data available to carry out exhaustive
analysis and fix such bands. Commission will take such measures in
the interest of orderly development of market after due analysis and
following the due process.

10.7. Regulation 55 ( v) – Market Surveillance by Power Exchange -Analysis
of bidding by participants
(i) PXIL
(a) Exchanges cannot analyze bidding strategies of participants.
Participants posses various other data and evaluate their bidding
strategies on various parameters which would not be known to
Exchanges.
(b) At the most, Exchanges can monitor the bids that have come to the
Exchange and do an analysis of parameters, positions, etc. post the
bids entering the Exchange
It is felt that Exchanges may not be in opposition to analyse the bidding
strategies of individual participants since that requires company specific
information or cost of generation of the plants, hence bidding strategies
has been replaced in the regulations with Bidding pattern. Bidding
patterns analysis is a historical analysis and is carried out for the market
as a whole and hence can be handled by the Exchanges competently.
Hence market surveillance committee shall analyse bidding pattern and
transaction and not bidding strategies of participant. The committee
should also check if the result of market splitting methodology is being
followed in line with the declared principles.

10.8. Regulation 56 ( vi) – Reporting of participant bid data to Commission

(i) PXIL -
(a) One month would be a very short period to disseminate
information related bid of participants. Since these are raw data
it would be useful for the Commission, if the said data is
processed and meaningful reports emanate out of it.
(b) The confidentiality of bids of Power Exchange is paramount and
Power Exchanges should also be indemnified from providing bid
details.
(c) It has been suggested that instead of asking for raw data each
month, it is requested that Exchanges do analysis and provide
reports on a quarterly basis and provide the same to the
Commission.
(ii) NPEX –
(a) Power Exchange has the prime obligation of ensuring
confidentiality of participants' bidding information. In such an
event, PX should be indemnified against any claim by the
member on account of loss of confidentiality.
(b) PX is not normally required to access the bid level information.
Proposed regulation is in conflict with this obligation of PX. It is
therefore, suggested that PX should be required to access &
analyze bid level details only when required specifically by the
Commission.
(iii) IIT Kanpur- Commercial interest can be safeguarded if 'individual
bids' can be disclosed after a week or so of the 'delivery of power'/
'expiry of contract'.
In view of the objections and suggestions received, it has been decided
that bids of the participants shall be called only on need basis. In addition
it would be monitored whether the Market Splitting methodology
approved by the Commission is actually being followed.

10.9. Regulation 56 – Trade Reporting Requirement- Various forms of reports

for Exchange participants and electricity traders have been introduced to
monitor prices and risk.
(i) PTC-The traders have been asked to provide open position
report, tenure of trades and risk summary report etc. This
information is of business sensitive nature and may lead to loss
of business.
(ii) TPTCL- Do long term trades also need to be reported?
(iii) NVVN- All Electricity Traders are required to submit information
to the Commission. NWN is complying with this requirement
without failure. It would not be possible to comply to the above
requirement of the draft Regulations as the same is not
consistent with the Central Electricity Regulatory Commission
(Procedure, Terms and Conditions for grant of trading license
and other related matters) Regulations, 2009.
(iv) IIT Kanpur – The proposed regulations should mandate reporting
of instances of defaults with scale (in quantity and value terms)
and conditions thereof for PXs to CERC.
The reporting of trades is for risk monitoring purposes. Reporting
requirements are being enhanced throughout the world on open
positions for Exchanges as well as OTC markets. These requirements
are over and above the ones stipulated in CERC (Procedure, Terms and
Conditions for grant of trading licence and other related matters) (Second
Amendment) Regulations, 2009. Any default by member needs to be
reported to the Commission which is a part of the reporting requirement.
This has also been suggested by stakeholders.
10.10. Further, Exchanges need to undertake analysis of transactions through

the surveillance department and submit that to the Commission on a
quarterly basis

10.11. Electricity traders need to report all trades including long term, medium
term and short term trades. This will help to understand the overall open
positions in the market and thereby the overall the risk present in the
system as mentioned earlier. This will also provide insights to the
Commission on pricing of long term contracts being executed in the OTC
market.
10.12. Bilateral deals (directly between buyers and sellers) of very large size
in short term market have an effect on market, both on price and well as
risk. These also need to be reported.
10.13. Regulation 57- Whistle blowing policy has been introduced. Market
participants being closest to the market get access to information
regarding practices that require to be curbed. Their access is even more
and faster than what comes to the knowledge of the regulator. Whistle
blowing shall promote reporting of any such abnormalities. To protect
such acts of courage, punitive action is prescribed against the affected
party in case s/he attempts to harm the whistle blower.
(i) PTC- In case it is found that this was done with a malafide intention and
the information provided was false, incorrect, and could not be factually
supported, then there should be a provision for strong penal action.
The regulation has been retained since proving mens rea (intention) is a
requisite for criminal actions but not civil actions contemplated in the
subject regulations.
10.14. Regulation 58 - Insider trading policy has been introduced so that price
sensitive information is not used for profiteering by any party.
(i) NPEX-Information related to generator outages, plant maintenance etc.
is required to be made available on the website of concerned
RLDC/RPC as per draft regulation 54 and PX has to provide only a link

to such websites. As such, there is no need of publishing this information

on the website of PX.
The comments and suggestions have been well taken and accordingly
suitable provision has been made in the final version of the regulations.
11. Conclusion
These regulations have been notified with the objective of developing the market in
power (including trading), in accordance with the functions vested in the Central
Electricity Regulatory Commission under the Electricity Act, 2003 and National
Electricity Policy notified thereunder.
Sd/- Sd/- Sd/- Sd/-

(V.S. Verma) (S. Jayaraman) (Rakesh Nath) (Dr. Pramod Deo)
Member Member Member (EO) Chairperson

New Delhi Dated 28th January 2010


12. Annexure
Public Hearing on “Draft Central Electricity Regulatory Commission (Power
Market) Regulations, 2009” held on 25th November, 2009 from 1030 hrs. to 1300
hrs at CERC , New Delhi .
List of Stakeholders who sent Written Submission and made Oral Submissions
Sl. Written
Oral
No. Name of the Organisation Comments
Submission
Received
I POWER EXCHANGEs
1. Indian Energy Exchange Limited ( IEX) Yes Yes
2. Power Exchange of India Limited ( PXIL) Yes Yes
3. National Power Exchange Limited ( NPEX) Yes Yes
II TRADERS
4. Reliance Energy Trading Limited Yes Yes
5. Tata Power Trading Company Limited ( TPTCL) Yes Yes

6. PTC India Limited, New Delhi ( PTC) Yes Yes
7. Indiabulls Power Trading Limited Yes Yes

8. Adani Enterprises Limited Yes -
9. NTPC Vidyut Vyapar Nigam Limited ( NVVN) Yes -
10. Lanco Electric Utility Ltd. - Yes
III STATUTORY ORGANISATIONS
11. Eastern Regional Power Committee, Kolkata Yes -
12. Central Electricity Authority ( CEA) Yes -
13. Kerala State Electricity Board ( KSEB) Yes -
IV TRANSCOs
14. West Bengal State Electricity Transmission Co. Ltd. ( WBSETCL) Yes -
V DISCOMs / PURCHASERs
15. West Bengal State Distribution Co. Ltd. 9(WBSDCL) Yes -
16. Andhra Pradesh Power Coordination Committee (APTRANSCO) Yes -
17. Maharashtra State Electricity Distribution Co. Ltd. (MSEDCL) Yes -

VI GENCOs

18. NTPC Ltd. Yes -

19. Reliance Infrastructure Limited Yes -
20. National Hydro Power Corporation Limited ( NHPC) Yes -
Sl. Written
Oral
No. Name of the Organization Comments
Submission
Received
VII OTHERS
21. PTC India Financial Services Ltd. (PFS ) Yes Yes
22. Individual - Sh. Ehsan Sharief – Hyderabad Yes -
23. Indian Institute of Technology, Kanpur (IITK) Yes -
24. Power Finance Corporation Limited ( PFC) Yes -
25. Multi Commodity Exchange ( MCX) Yes -
Two seminars were conducted where presentation were made on the Draft Power
Market Regulations and its content. These were organised on 28 th and 29 th October
2009 in Mumbai and New Delhi respectively.


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CENTRAL ELECTRICITY REGULATORY COMMISSION

1. Dr. Pramod Deo, Chairperson,

STATEMENT OF OBJECTS AND REASONS

1.1. In due discharge of its statutory responsibility, the Central Commission

2.3. The Commission intends to develop a market where power sector

2.4. In addition, the Commission would encourage market participants to

necessitate development of derivatives market as derivatives serve the

3. Envisaged Macro Objectives of Power Market Development in India:

(c) There is Overlap / Concurrence of Jurisdiction of Central Commission

provide for regulatory oversight on various market participants ,Power

5.4. Types of contracts in Short term market – Various types of OTC

5.5. It needs to be appreciated that derivative markets cannot be viewed in

5.8. Regulation 4 - Types of Contracts on which regulations apply

(a) The present large power deficit in the country means it is a

5.9. Regulation 4 - Types of Contracts on which regulation apply

5.10. Regulation 4 ( v) - Renewable Energy Certificates ( REC) contracts

7. Principles of Market and Market Design – Part 4

7.1. The Commission recognizes that a market is a social construct. The

7.4. In this context, based on stakeholder feedback we have standardised the

Comments and suggestions received from stakeholders as against each

7.9. Regulation 11- Principles of transaction in OTC Markets

7.11. The market operators (Exchange / Electricity Traders) and system

on contractual deviations. Short term contracts (especially day ahead

7.12. Comments from CEA on market design from scheduling of power

(e) Day-ahead collective trades through Power Exchanges (Firm

7.13. Price discovery methodology for Day ahead markets

8.2. Regulation 13 – Approval of Power Exchange for operations

8.3. Regulation 14 – Eligibility Criteria for making an application for registration

8.4. Regulation 17 – Prudential Norms for establishment of Power Exchange-

(iii) NPEX-SGF should be left to Exchange as to how it is formed. It is not

8.5. Regulation 18 and 19- Shareholding pattern of Power Exchange

(i) Power Trading Corporation, PTC Financial Services, Indian Energy

Adopting a 15% norm will ensure that there is uniformity of regulation

8.5.3. In view of the reasons given in the above paragraphs, the

8.6. Regulation 20- Grant of Registration of Power Exchange and its

8.7. Regulation 21 – Ownership and Governance structure of Power

8.8. Regulation 22 – Annual Registration Charge for Power Exchange based

8.9. Regulation 23 – Market Splitting methodology publication in its Bye Laws /

sake of transparency, the Power Exchanges should elucidate the

8.10. Regulation 24 - Management of Power Exchange, Qualification of senior

8.11. Regulation 25- Membership in Power Exchange, Networth of members in

(b) Membership in Power Exchange should be non-discriminatory for

8.12. Regulation- 26 - Member Service Charge in Power Exchange

(a) Commission of 0.75% is grossly inadequate considering the

8.13. Regulation 27 – Risk Management in Power Exchange

(i) PTC-Netting of margin requirement in same contract has not been

8.14. Regulation 28 – Power Exchange to hive off Clearing and Settlement

(b) IEX – Clearing Corporation should be introduced once derivatives

8.15. Regulation 29 – Default Remedy Mechanism in Power Exchange and

(ii) IEX- In India SEBI has made provision of assigning retained

8.15.2. Decision and rationale

8.16. Regulation 30 – IT Infrastructure and Trading Systems

Disaster recovery site is a basic requirement for Power Exchange

8.17. Regulation 31 - Physical settlement - Contractual Deviation , Maximum

(ix) IIT Kanpur - Regulations should introduce a mechanism for monitoring

themselves. For Power Exchanges the clause shall be a part of contract

8.18. Regulation 32- Congestion Amount Management

(b) Regional Power Committee representative to be included in the