GUL AHMED ELECTRIC LIMITED7th Floor, Al-Tijarah Centre, 32-1-A, Block 6, P.E.C.H.S. Main Shahra-e-Faisal Road, Karachi-75400 - Pakistan

Phone +92 21 34540270-73 Ext. 112 Fax +92 21 34540274 Email: inf~{ii1gulahmedelectric.com/ v a'E·'p:tr,.' ";'"0"~"'('."0)/ C[c>~.~

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CHIEF EXECUTIVE OFFICER '~~?./'CENTRAL POWER PURCHASING AGENCY (GUARANTEE) LIMITEUShaheen Plaza, Plot No. 73 - West,Fazal-e-Haq Road, Blue Area,Islamabad("CPP A-G")

LlCPPAIL19/000016

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Subject:; I .

PROPOSED AMENDMENT TO THE COMMERCIAL CODE•.2018. ~.-....-,..},Dear Sirs,

We, Gul Ahmed Electric Limited, a generation company licensed by the National ElectricPower Regulatory Authority (the "Authority"), (hereinafter referred to as the "Company") writewith reference to the captioned subject matter.

RELEV ANT FACTS AND CONTEXT

2. In terms of the National Electric Power Regulatory Authority (Market Operator Registration,Standards and Procedure) Rules, 2015, as amended from time to time (the "Market Rules"), CPPA-Gis responsible for a phased transition of the energy sector to a competitive market within the timelinesprescribed in Schedule I of the Market Rules. Phase I is the Single Buyer Phase, where procurementof power shall be exclusively carried out by CPPA-G on behalf of DISCOs. Phase II is the SingleBuyer Plus Phase, where procurement of power shall be carried out by DISCOs or by CPPA-G onbehalf of DISCOs. The final phase, Phase Ill, is the Competitive Market Phase, where CPPA-G willnot undertake the functions of procurement of power on behalf of DISCOs (or otherwise) and powerpurchase transactions will be bilateral between sellers and DISCOs.

3. In consonance with the phased approach under the Market Rules, CPPA~G applied to theAuthority for registration as market operator on April 12, 2017. It was a requirement of theapplication process that CPPA-G also submit a draft commercial code. In compliance, CPPA-Gsubmitted to the Authority the commercial code of 2015 (the ''2015 Commercial Code") forapproval.

4. On November 16, 2018, the Authority issued to CPPA-G the certificate of registration as amarket operator (vide registration No. MORIO 112018) (the "Registration") pursuant to Rule 3 of theMarket Rules.

5. The Registration was based on the Authority'S determination dated November 16, 2018(bearing reference No. NEPRAIRIDLILAM-O1/17884-90 (Case No. LAM-O1») (the"Determination"), which includes, infer alia, the new Commercial Code, 2018 (the "CommercialCode") approved by the Authority (Annex-B to the Determination). Through the Commercial Code,the Authority has introduced certain key modifications, which form the subject matter of theamendment proposed to the Commercial Code by the Company.

Pagell?

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GUL AHMED ELECTRIC LIMITED7th Floor, AJ-Tijarab Centre, 32-I-A, Block 6, P.E.C.H.S. Main Shahra-e-Faisal Road, Karachi-75400 - Pakistan

Phone +9221 34540270-73 Ext. 112 Fax +92 21 34540274 Email: infoCalgulahmedelectric.com

6. All capitalized terms used herein shall, unless specified otherwise, bear the meanings ascribedto such terms in the Commercial Code or the Determination, as the case may be.

SUBMISSIONS FOR AMENDMENT TO THE COMMERCIAL CODE

7. Pursuant to Clause 3.4.3 of the Commercial Code, inter alia, a Market Participant, whichincludes a generation company, may file a written request to CPPA-G proposing amendments to theCommercial Code with corresponding justifications and assessment of expected impact and benefits.The Company (being a Market Participant) is requesting certain amendments to the CommercialCode, as proposed in paragraph 27 below, for the reasons mentioned herein.

8. The Registration and the Determination are certainly welcomed steps taken by CPPA-G andthe Authority, not least, because they provide legal cover to actions taken by CPPA-G until the date ofRegistration and gives necessary authority to CPPA-G to sign power / energy purchase agreementsgoing forward.

9. A significant outcome of the Registration and the Determination is the promulgation of theCommercial Code. The Authority considered the 2015 Commercial Code, which was submitted to theAuthority by CPPA-G along with its application for registration as market operator, as inadequate forfulfilling its purpose and created legal anomalies and uncertainties for market participants. At page 19of the Determination, the Authority has stated, inter alia, that:

"The 2015 Commercial Code was temporary and a stopgap measure until a comprehensiveand suitable Commercial Code is submitted to the Authority for approval alongside a marketoperator application under Rule-3 of the Market Rules. Such a Code (to be submitted underRule-B of the Market Rules) is required to reflect the future market structure andprovide forthe principles. procedures; rights and obligations that will govern the Market Operator,Participants and other services providers. The 2015 Commercial Code as submitted by theCPPA-G along with this registration application, lack provisions that fulfil aforementionedrequirements."

[Emphasis added]

10. Whilst explaining the inadequacies of the 2015 Commercial Code, it also became clear fromthe Determination that the intended purpose of the Commercial Code, is to regulate market operationsin the Single Buyer Plus Phase and the Competitive Market Phase - not the Single Buyer Phase. Notonly is this amply clear from the Determination, but also from the provisions of the CommercialCode, which have been drafted keeping in view the future market structure and "by definition" not thecurrent structure (i.e. Single Buyer Phase). This is further evident from the fact that the CommercialCode requires a 'market' to operate in (i.e., multiple buyers and multiple sellers) - whereas, there isno such market in the Single Buyer Phase. This is a significant point, one which will be elaborated onin the submissions that follow.

11. CPPA-G and the Authority will appreciate that for the Commercial Code, in its current form,to operate effectively, some basic requirementsmust exist, namely:

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GUL AHMED ELECTRIC LIMITED7th HOOf,AI-Tijarah Centre, 32-1-A, Block 6, P.E.C.H.S. Main Shahra-e-Faisal Road, Karachi-75400- Pakistan

Phone +92 21 34540270-73 Ext. 112 Fax +92 21 34540274 Email: info@gulahmedelectric.com

• A Market. For reasons explained above, no such 'market' currently exists.• A Market Operator that is not conflicted (i.e., not a buyer of electric power and, at the

same time, the administrator of the Commercial Code).• No long-term power purchase agreements, except for balancing.• Protection of long-term power / energy purchase agreements executed in the Single Buyer

Phase by CPPA-G and those executed by CPPA-G in the Single Buyer Plus Phase.• Procedures of settlement and billing that promote fairness and impartiality on the part of

the Market Operator (who is not simultaneously acting as a Market Participant itself),• Standard contracts for sale and purchase of power between the Market Participants that

are reflective of the Commercial Code, subject to a corresponding policy framework asmentioned below.

• A policy framework that is aligned with the power market reform program.

12. From where the power sector stands today, none of the above requirements exist; the reality isthat the opposite is true for each of these requirements.

13. For example, reference is made to paragraph (iv) on page 23 of the Determination, where theAuthority, inter alia, states:

"At present, the CPPA-G is undertaking two junctions under the Market Rules, whichincluded (a). procurement oj electric power and (b). energy market development. Goingforward, the CPPA-G cannot Junction in this dual capacity. The CPPA-G is set to becomingthe Market Operator oj the Competitive Market Regime, under which it will be overseeing allMarket Operations as well as providing a Balancing and Settlement function. While doing so,the CPPA-G cannot continue its current function of power procurement since this would ineffect make the CPPA-G a Market Participant. This creates a blatant conflict of interestconcern. where the Market Operator/Regulator is itselfparticipating in the said Market.

In view thereof. the CPPA-G has to completely and effectively segregate or remove its powerprocurement function (and all underlying agreements, arrangements and elements) before thecommencement of the Competitive Market. This aspect needs to be considered and requiresappropriate amendment in the Market Rules. "

[Emphasis added]

14. As straight-out stated by the Authority, CPPA-G would also agree that to eliminate conflictissues, CPPA-G must step aside from its role as Market Participant before the commencement of theCompetitive Market Phase. Under this scenario, the Commercial Code becomes workable.and CPPA­G can assume its role as Market Operator for power / energy purchase agreements not signed byCPPA-G in the Single Buyer Phase (and the Single Buyer Plus Phase). If roles. are not effectivelyseparated, CPPA-G's conflicting position makes it impossible for it to act impartially, whenadministrating the Commercial Code and simultaneously acting as Market Participant, Notably, oncePhase II and Phase ill start, the power / energy purchase agreements signed in Phase I (and thosesigned by CPPA-G in Phase II) should continue to be governed by the terms of those agreements andnot the Commercial Code. This is necessary to protect the sanctity of the long-term contractualcommitments of CPPA-G under these power / energy purchase agree~ents and to avoid inherent

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GUL AHMED ELECTRIC LIMITED7th Floor, Al-Tijarah Centre, 32-I-A, Block 6, P.E.c.H.S. Main Shahra-e-Faisal Road, Karachi-75400 - Pakistan

Phone +92 21 34540270-73 Ext. 112 Fax +922134540274 Email: info@gulahmedelectric.com

conflict and inconsistencies between the terms of the Commercial Code and the respectiveagreements.

15. The conflicting roles of CPPA-G become more apparent when considered in the context ofthe payment and settlement provisions of the Commercial Code. For example, with effect from three(3) months from the date of Registration - i.e., February 2019, CPPA-G is to follow the proceduresfor settlement and invoicing as prescribed in Clauses 9.2 to 9.4 of the Commercial Code. Pursuant tothese provisions, generation companies can only submit an invoice as per the power / energy purchaseagreements after the issuance of a Final Settlement Statement by CPPA-G. The Final SettlementStatement itself is only issued after CPPA-G provides the Preliminary Settlement Statement to thepower generation company. These provisions, which effectively pass on control of the entire invoiceprocess to CPPA-G, are clearly in conflict with CPPA-G's contractual commitments under thestandard power / energy purchase agreements, where the sellers of power can issue an invoice of therespective generation payments on or after the first (I" ) business day of each month followingcommercial operations date (provided all relevant information is submitted), without having to gothrough the Preliminary Settlement Statement and Final Settlement Statement procedures provided inthe Commercial Code. The fact that CPPA-G (as the buyer of power) ultimately gains completecontrol of the entire sale and purchase process with the sellers of power being denied any meaningfulrecourse is a great concern for the sellers of power, including the Company.

16. The Company understands that CPPA-G in its position as the administrator of theCommercial Code, is under an obligation to comply with the terms of the Commercial Code and toensure compliance by the Market Participants of the Commercial Code. However, it is important thatthe Commercial Code must be given effect and implemented 'in cognizance of the on-groundcommercial/factual situation, namely, that the. power market is still in Phase I and CPPA-Gcontinues to enter into long-term power / energy purchase agreements with the sellers of power. Theprovisions of the Commercial Code cannot, therefore, conflict with the long-term power / energypurchase agreements signed by CPPA-G in Phase I and Phase II for obvious reasons. Again, wewould emphasize that in Phases II and III, where CPPA-G is the Market Operator but not the buyer ofpower, such provisions make sense - certainly not, however, where the judge and jury is thecounterparty to a contract.

17. Thus, it is important to ensure that the power procurement function of CPPA-G in the SingleBuyer Phase and the Single Buyer Plus Phase (for those contracts signed by CPPA-G) is adequatelyprotected and does not conflict with the role of CPPA-G as the administrator of the CommercialCode. For this reason, it is the Company's considered view that the amendments proposed to theCommercial Code in paragraph 27 below, are crucial as otherwise, the Commercial Code makesprojects with long-term contracts executed in the Single Buyer Phase (and those executed by CPPA-Gin the Single Buyer Plus Phase) uri-bankable.

18. We must emphasize that concerns on the bankability of projects in light of the current versionof the Commercial Code and the on-ground commercial/factual situation (including the concerns setout in this letter) have also been raised by foreign and local lenders who are looking to invest inpower projects in Pakistan. If the amendments proposed to Clause 2.2 of the Commercial Code inparagraph 27 below are not made at the earliest, this will not only result in conflicts that have the

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GUL AHMED ELECTRIC LIMITED7th Floor, Al-Tijarah Centre, 32-1-A, Block 6, P.KC.B.S. Main Shahra-e-Faisal Road, Karachi-75400 - Pakistan

Phone +92 2134540270-73 Ext. 112Fax +922134540274 Email: info@gulahmedelectric.com

effect of seriously undermining the bankability and viability of power projects being implemented byindependent power producers ("IPPs"), but will entail a contravention of the vested rights accrued tothe Company on account of the Company's, the sponsors' and the lenders' reliance on the protectionsand concessions offered under the prevailing power policy at the time of decision to develop andfinance the Company's project.

19, CPPA-G would appreciate that there are various other key provisions of the CommercialCode that are not consistent with the role of CPPA-G as buyer of power in the Single Buyer Phase.Significantly, pursuant to Clause 8.8.2 of the Commercial Code, there is no obligation on CPPA-G toassume payment responsibility towards Market Participants, including generation companies, unless ithas been paid by DISCOs in accordance with the applicable settlement and billing proceduresprescribed in the Commercial Code. For ease of reference, Clause 8.8.2 of the Commercial Codeprovides that,

"The CPPA-G in this process, shall act as an agent of DISCOs without assuming paymentresponsibilities. Payment and debts shall remain with the DISCOs. CPPA-G shall not be heldliablejor non-payment of Market Participants."

20. This provision runs contrary to CPPA-G's fundamental obligation to pay the generationcompanies under the power / energy purchase agreements, notwithstanding the status of paymentsfrom the DISCOs. CPPA-G's payment obligation to the sellers of power, backstopped by the GOPguarantee, has been the cornerstone of Pakistan's power sector since its inception.

21. Where CPPA-G is acting in its capacity as Market Operator, Clause 8,8.2 is entirelyjustifiable, since as an administrator of the Commercial Code, it cannot be held accountable for abreach arising from the underlying transaction between Market Participants - analogous to a stockexchange not being liable for any breach of contract between the buyer and seller of stocks on theexchange. However, when CPPA-G is a Market Participant itself, it cannot be allowed to benefit fromClause 8.8.2 on account of the principles of fairness, justice and 'impartiality, which have been thefoundation ofCPPA-G ever since its establishment as a separate power procuring agency.

22. This is not to say that an arrangement cannot be put in place for Clause 8.8.2 to operate,however, for this to happen major market and policy reforms are needed. In the first instance, theGOP would be required to announce a new power policy, which acknowledges the right of IPPs todirectly engage DISCOs for non-payments. A new contractual framework is needed to accompany thepolicy, creating effective and meaningful rights in favour of IPPs directly against DISCOs. Thecontractual framework would have to be agreed and finalized with all stakeholders and approved atthe relevant governmental forums. Finally, the whole arrangement will need to be comprehensivelyguaranteed by the GOP.

23. CPPA-G will appreciate that the above submissions demonstrate the inapplicability of theCommercial Code to the Company, which is required to sign a long-term energy purchase agreementwith CPPA-G. With the financial close deadline for the Company edging ever closer, we pray that theamendments proposed to Clause 2.2 of the Commercial Code in paragraph 27 below, which will

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GUL AHMED ELECTRIC LIMITED7th Floor, Al-Tijarah Centre, 32-I-A, Block 6, P.E.C.H.S. Main Shahra-e-Faisal Road, Karachi-75400 - Pakistan

Phone +9221 34540270-73 Ext. 112 Fax +92 21 34540274 Email: info@gulahmedelectric.com

adequately address the concerns expressed, are considered favorably by CPPA-G and submitted to theAuthority for approval in pursuance ofCJause 3.4.4 of the Commercial Code.

24. The submissions made herein and the prayer seeking amendments to the Commercial Codeare provided following detailed discussion with the Company's lenders, who have each highlightedthe necessity to implement the proposed changes to the Commercial Code, prior to financial close, toensure bankability of the Company's upcoming project.

PRAYER:

25. The Company prays for the amendment of Clause 2.2 of the Commercial Code; existingClause 2:2 is reproduced hereunder:

"Nothing herein shall apply, or be deemed to apply, or ,be construed or interpreted in a.manner which extinguishes, reduces, derogates from, is inconsistent or at variance with, orotherwise adversely affects, any rights, liabilities and terms set forth in any ImplementationAgreement, power purchase contract, or in any licence of any licensee, executed or grantedprior to the Date of Registration".

[Emphasis added]

26. Currently, the protection under Clause 2.2 of the Commercial Code is limited to, inter alia,power purchase contracts (i.e., power / energy purchase agreements) and Implementation Agreementssigned prior to the Date of Registration (i.e. November 16, 2018) - Clause 2.2 of the CommercialCode does not extend to power purchase contracts signed with CPPA-G (on behalf of DISCOs)executed or to be executed after the Date of Registration in the Single Buyer Phase.

27. The Company submits for the kind consideration ofCPPA-G, the following options to amendClause 2.2 of the Commercial Code. Both options are intended to provide lead-time for the marketreform process to be undertaken by the GOP and become operative, whilst protecting the sanctity ofpower / energy purchase contracts executed with CPPA-G in Phase 1.

(1) "Nothing herein shall apply, or be deemed to apply, or be construed or interpreted ina manner which extinguishes, reduces, derogates from, is inconsistent or at variancewith, or otherwise adversely affects, any rights, liabilities and terms set forth in anyImplementation Agreement, power purchase contract; or in any licence of anylicensee, executed or granted up to two (2) years following the Date ofRegisttation";

or

(ii) "Nothing herein shall apply, or be deemed to apply, or be construed or interpreted ina manner which extinguishes, reduces, derogates from, is inconsistent or at variancewith, or otherwise adversely affects, any rights, liabilities and terms set forth in anyImplementation Agreement, power purchase contract, or in any licence of any

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GUL AHMED ELECTRIC LIMITED7th Floor, AI-Tijarah Centre, 32-1-A, Block 6, P.E.C.H.S. Main Shahra-e-Faisal Road, Karachi-75400 - Pakistan

Phone +92 21 34540270-73 Ext. 112Fax +92 21 34540274 Email: info@gulahmedelectric.com

licensee, executed or granted up to the date of commencement of a CompetitiveMarket regime as such date is confirmed and notified bv the Authority".

28. The Company and its lenders remain available to CPPA-G for any additional information thatit may require to consider the amendments proposed to Clause 2.2 of the Commercial Code inparagraph 27 above.

For and behalf of:Gul d Electric Limited

(

ExecutiveDirector

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