Inside Financial Markets

CCI all set to approve amendments in Nepra law

The Council of Common Interests (CCI) is all set to approve amendments in the ”Nepra Act 1997” aimed at establishing electricity market trading, de-licensing power generation, removing provincial quota restrictions on appointment of members, and authority to impose surcharges, well-informed sources in Cabinet Division told Business Recorder Wednesday. Prime Minister Nawaz Sharif has already cleared the summary for onward submission to the CCI to solicit approval of proposed amendments in terms of article 154 of the Constitution of Pakistan, 1973 read with entries numbers 4 and 6 of part-II of the Fourth Schedule of the Constitution.

The CCI, in the 1992 Power Policy, approved the power sector reform plan, in furtherance of which the ECC on April 30, 2015 approved the segregation of the financial clearing and settlement function from the electricity despatch function. Consequently, the Central Power Purchasing Agency (CPPA) was made functional as an independent entity from the National Transmission and Despatch Company Limited (NTDC). This was approved as one of the steps in the transition of the power sector into a competitive market by July 1, 2020, the deadline, which was approved by the ECC.

These timelines have also been incorporated in the National Electric Power Regulatory Authority (Market Operator Registration, Standards and Procedure) Rules, 2015 whereby this phase of competitive market operations was given effect and the CPPA was registered with the regulator as an independent financial settlement and clearing house in the power sector (market operator).

The power sector reform plan envisages the market operator to eventually transit into an energy trading exchange, in line with international best practices, along with greater private sector investment in the sector. These reforms and many other such improvements are essential to move the country”s power sector towards a modern and advanced structure supported by an enabling regulatory environment.

However, since the present legal framework does not adequately allow for full effect to be given to the reforms and objectives envisaged in the successive power policies approved by the CCI, it has now become necessary to bring about certain amendments in the primary law governing the legislative and regulatory framework of the power sector ie Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997, the sources continued.

The sources said such amendments are aimed at provision of an enabling legal framework within which the power sector of Pakistan can evolve and be brought at par with the strongest regulatory structures globally, as well as to keep pace with upcoming technologies and requisite institutional developments for competitive market transactions, gradual elimination of circular debt and incentivisation of private sector investment.

Under the existing legislative regime, some limitations on moving to a competitive market structure include: (i) no specific provisioning for energy trading, power market exchange, exclusive clearing and settlement etc; (ii) need for clarity on regulatory role of Nepra apart from tariff setting and licensing; (iii) regulatory barriers for persons wishing to establish and operate a power generation facility; (iv) need for a tariff setting regime which is conducive to competitive power markets, setting up of an energy exchange and licensing of energy traders; (v) insufficient enforcement capacity of Nepra to protect consumer interests; and (vi) need for re-alignment of regulatory functions of Nepra to cater to proposed power sector structure, while accommodating socio-political and socio-economic objectives of the federal government.

Consequently, certain proposals for amendments in the Act have been developed and proposed after a cross jurisdictional review of regional as well as international regulatory frameworks of the power sector with a view to: (i) make provision for open market transactions in the power sector; (ii) reduce regulatory barriers to encourage private sector participation; (iii) strengthen the composition and capability of the Authority to improve regulatory quality; and (iv) re-align the role of Nepra as the regulator of the power sector while accommodating policy making by the federal government in accordance with its socio-economic objectives.

The Cabinet Division has divided the proposed amendments into three categories ie competitive market, strengthening Nepra and policy and regulations. The concept of details of proposed amendments to the Nepra Act are as follows: (A) generation to be de-licensed and captive generation to be freely permitted; (i) Amendment aimed to regulate connectivity to national grid instead of establishment and operation of generation plant, (ii) India, Brazil and Bangladesh have moved towards deregulating establishment of generation facilities, (iii) de-regulation is aimed at removing regulatory barriers on the supply side, (iv) expected to enhance standards and encourage investment in the supply side of the power market, (v) and hydro projects would continue to need clearance from Nepra; (2) introduction of concept of market traders;(i) present law does not cater to licensing of persons wishing to trade in electricity; (ii) the ECC has already granted approval to phase the power sector from a single buyer phase to multi buyer over a specified time period, (iii) the introduction of licensed market traders will ensure a necessary legal framework for regulating the open market trade of electricity, (iv) and the concept of market traders has also been adopted in other countries, including India, Brazil, European countries etc; (3) The Nepra will determine components of tariff instead of only determining entire tariff; (i) presently, Nepra determines the tariff in its entirety only which will make move to open market trading impossible, (ii) Nepra”s power to determine tariff to be redefined to determination of components of tariff, (iii) and determination of tariff through bidding processes also proposed to be recognised under the primary law. (4) Introduction of concept of registered entities for regulating activities other than licensed entities; (i) till date regulated sector is limited to licensed entities only, (ii) amendment to provide flexibility in the law to cater to newer services and technologies, (iii) and parameters for regulation of registered entities would be set by rules.

(B) Strengthening of Nepra; (1) reconstitution of Nepra- (i) Authority members to be appointed on basis of qualification, ability, capability and reputation; (ii) number of years of experience or provincial affiliation to not be a criterion for appointment; (iii) and constitutionally all decisions relating to electricity and Nepra already with CCI comprising provincial representation; 2- Establishment of an Appellate Tribunal ;(i) Nepra law only provides for establishment of a tribunal comprising officers of Nepra to resolve disputes between regulated entities;(ii) tribunal comprising both technical and legal members independently of the Authority to be established to hear appeals against orders of Nepra ;(iii) and amendment expected to reduce the burden of litigation in the power sector and speed up dispute resolution.

3. Strengthened powers of investigation and inspection; (i) the existing law does not give any express powers of enforcement to the regulator; (ii) powers of investigation and inspection have been granted to the Authority; (iii) necessitated by the proposed enhancement of private sector investment in the power sector;(iv) and powers will be exercised in accordance with a procedure prescribed through rules.

4. Power to impose penalties for violation of the Act, the rules, (i) presently the NEPRA Act only allows imposition of penalty in addition to suspending or revoking the licence – no stand-alone power to impose penalty; (ii) introduction of a power to impose penalties for violation of rules, regulations, directives etc thereby enhancing its enforcement power; (iii) and stand-alone punitive power necessitated in light of proposed enhancement of private sector investment in the power sector.

5. Indemnity of Chairman, Members and employees for acts done in good faith: (i) indemnity of Authority and the employees for acts done in good faith; (ii) aimed at strengthening decision making ability; (iii) restricted to acts done in good faith to ensure accountability of Nepra personnel; (iv) and indemnity exists for most other infrastructure regulators.

6. Specific power to issue directions, codes, guidelines etc (i) Nepra to be empowered to issue legislatively-backed directives, guidelines, codes etc; (ii) this power is expected to give additional tools to the regulator to execute its functions more effectively; (iii) and aimed at enabling the implementation of decisions which do not necessarily require punitive action and policy will be supplemented by specific five year plans for the sector.

C- Clarifying policy and regulation- ( 1) The federal government to prepare a National Electricity Policy with the approval of CCI; (i) globally, policy making vests with government, eg India, the US, Canada, Australia, etc (ii) and statutorily-backed power policy to enable the federal government to holistically set direction of power sector; (2) alignment of regulatory objectives of Nepra with socio-economic objectives of federal government; (i) the need to issue binding directives in matters of policy is required to address emergent issues of public interest faced by the federal government; (ii) matters of public interest include matters which pertain to sustainability and stability of power sector companies while maintaining right of consumers to quality service at a reasonable cost; (iii) such statutory directives are imperative in light of governments” role as the policymaker in utility regulation; (iv) and India and Bangladesh also statutorily-empowered empower governments to issue binding directions; (3) Introduction of power of federal government to impose surcharges; (i) under the existing legal regime, surcharges were deemed to be a part of the cost of the company; (i) this has created confusion regarding the status of surcharges in the scheme of the tariff setting regime; (iii) in accordance with settled principles of law under the Gadoon Textile judgement of the SC, a power to impose surcharges is being introduced;(iv) parameters for imposing surcharge are also being introduced to ensure a judicious imposition of such surcharges; (v) and existing surcharges which are under litigation are also proposed to be validated.

The sources said the Nepra”s top brass is unhappy with the proposed amendments and is using all-out efforts and sources to oppose the plan purportedly prepared by the ministry of water and power by using the name of the cabinet division.

Baqar Hussain

A Wannabe CFO, just had stepped in the corporate sector, willing to explore every aspect here and learn as mush as i can, awareness for those who dont, get the info where ever possible and stay up to date always.

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