power exchange india limited

www.powerexindia.com

Power Exchange India Limited

Round Table Discussion on Draft CERC Power Market Regulations

02 December 2009


Agenda

General Comments on the Regulations

Clause Wise Comments

Conclusion


General Comments

A key step taken underSection 66 read along with Section 178 of the Electricity Act 2003

Further guidance from Section 5.7.1 (d) and (f) of the National Electricity Policy

The draft Regulation has pointed the way towards:Ensuring fair, neutral, efficient and robust price discovery

Providing extensive and quick information dissemination

Designing standardized contracts and working towards increasing liquidity in such contracts

Giving impetus to transparency, fairness and liquidity in the Market

Underlining the importance of Power Exchanges in providing a price signal for efficiently allocating resources in power sector

Has touched upon all the seminal points in the structured development of the power markets in the country


Market Structure

Members

Power Exchanges

(Robust,Transparent

MarketInfrastructure)

Clearing Corporation

Banks/PCMs

RegulatorPolicy Makers

Traders

MarketParticipants

Convergence pointfor price, clearing

and settlement


Power ExchangesConceptual Framework

Power Exchanges developed as self-regulating market infrastructureSelf regulation

Under the regulatory jurisdiction of the market regulatorOn the basis of bye-laws, rules and business rulesClear guidelines on membership criteria, roles and responsibilitiesTransparent and fair market matching rules and price discovery mechanism

Market infrastructureProvides equal access to all kinds of participantsRisks managed through collective responsibility: so that participants can trade risk-free

Liquidity in the system: Central counter-party for all transactions Closing-out of position: Closing any open positions so as not to injure counter-parties Ultimate risk of default:

o Through adequate margins and collaterals from all members (depending upon members’ position)o Defaulting member(s) deposito Through a collective settlement guarantee fundo Levy on other memberso As a last resort – networth of the clearing corporation


Agenda



Conclusion


Clause wise comments

Ownership and Prudential Norms

Clause 17(i&iii): Networth of 25 Crores for Exchanges and 1:1 Current & Liquidity Ratio

Transaction Risks are managed by Margins and Risk Management Structure regulated by The Hon’ble Commission with a Settlement Guarantee Fund also being mandated for Exchange

We would request The Hon’ble Commission to allowExchanges to have minimum networth of Rs. 15 crores50% of SGF being maintained in Liquid Investments



Settlement Guarantee Fund

Clause 17 (iv) (a): Initial Security Deposit (ISD) to be part of SGFISD is minimum deposit required for continued admittance of Members and same is required to manage obligations beyond trading obligations.

We would request The Hon’ble Commission to create SGF as follows:25% of Annual Fee25% of the initial One-Time Deposit 50% of Penalties levied0.5 paise additional levy over and above the transaction fee on each leg90% of all investment returns gained from Settlement Guarantee Fund



Settlement Guarantee Fund

Clause 17 (iv) (e) 1 : SGF to be linked to turnoverRisks are managed by Margins and Risk Management so SGF should be linked to Outstanding positions of members with reference to type of contract traded

We would request The Hon’ble Commission to link SGF to Open Positions as follows:20% of daily value of Day Ahead Market25% of weekly value of Term Ahead Market



Shareholding pattern and Registration

Clause 18: Ownership – Non Member to hold maximum 25% 15% Shareholding will ensure uniformity of regulations across markets

Clause 20: Registration of Exchanges to be in force for 25 years unless revoked and Clause 22: Registration Fee of Rs. 30 Lakhs

SCRA also has prescribed that Registration of Exchanges shall be in perpetuity and can be revoked if found not to be in the public interest

We would request The Hon’ble Commission to allow Registration for perpetuityIn a shallow market with no definite flow of contracts through Exchanges, the Registration fee of Rs. 30 Lakhs seems onerous

We would request The Hon’ble Commission to modify the Registration Fee to Rs. 5 lakhs, if necessary.



Default Mechanism

Clause 29 and 42: Three-tier Default Mechanism and its bearing on Networth of Exchange

The three-tiered structure as proposed has no precedents worldwide, and if implemented will in itself create systemic risk to the Market as a wholeExchanges are voluntary market infrastructure, available for all to trade in a fair, efficient, transparent and most importantly, risk-free manner. They are also required to have robust margin system, a stable and adequate settlement guarantee fund and appropriate prudential norms for membership.The responsibility of creating this framework is shared by the both the exchange as well as the Hon’ble Commission and networth of Exchange/CC should be the call of last resort.


Clause wise commentsDefault Mechanism

We would request The Hon’ble Commission to have default mechanism in the following order:Margins of the Defaulting MemberDefaulting Member(s) DepositsSettlement Guarantee FundA levy or loss sharing on all the non-defaulting Members to cover remaining portion of default


Clause wise commentsOthers

Clause 34: Closure of Merger of Power ExchangeMarkets development is possible only through competition and every Exchange has a reasonable right to determine a commercially acceptable turnover and market share

We would request The Hon’ble Commission to delete this clause and let market find its own level of closure or merger



Others

Clause 54: Information Dissemination and Clause 32 (ii): Utilization of Congestion Revenue Fund

Exchanges are responsible for development of power market and dissemination of information.

We would request to add following clause for Utilization of the fundsDevelop a fund to manage settlement of claimsTo undertake capacity building measures and training of participantsTo develop information dissemination mechanism for Exchange


Agenda



Conclusion


Support to Critical Market Infrastructure

The power market regulations could have been utilizedTo define the extent as well as boundaries of the power marketTo delineate the roles and responsibilities of

Self-Regulating Organizations like power exchanges As also other market participants like traders, members on the exchange etc

Power Exchanges to adhere to several normsIn terms of eligibility criteria, responsibilities, information dissemination, capacity building etc.In the absence of sufficient volumes, the exchanges would find it difficult to take forward their natural role in the power market. Exchanges as neutral marketplaces require adequate support in order to fulfill their natural role.World over, exchanges have been supported as critical market infrastructure and some compulsory routing of contracts through Power Exchanges have taken place


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