Power Exchange India Limited

1. Round Table Discussion on Draft CERC Power Market Regulations 02 December 2009 Power Exchange India Limited MP POWER TRADING COMPANY LIMITED

2. Agenda General Comments on the Regulations Clause Wise Comments Conclusion

3. Agenda General Comments on the Regulations Clause Wise Comments Conclusion

4. General Comments • A key step taken under • Section 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

5. Market Structure Regulator Policy Makers Traders Clearing Corporation Power Exchanges (Robust, Transparent Market Infrastructure) Convergence point for price, clearing and settlement Market Participants Banks/ PCMs Members

6. Power ExchangesConceptual Framework • Power Exchanges developed as self-regulating market infrastructure • Self regulation • Under the regulatory jurisdiction of the market regulator • On the basis of bye-laws, rules and business rules • Clear guidelines on membership criteria, roles and responsibilities • Transparent and fair market matching rules and price discovery mechanism • Market infrastructure • Provides equal access to all kinds of participants • Risks 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: • Through adequate margins and collaterals from all members (depending upon members’ position) • Defaulting member(s) deposit • Through a collective settlement guarantee fund • Levy on other members • As a last resort – networth of the clearing corporation

7. Agenda General Comments on the Regulations Clause Wise Comments Conclusion

8. Clause wise commentsOwnership 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 allow • Exchanges to have minimum networth of Rs. 15 crores • 50% of SGF being maintained in Liquid Investments

9. Clause wise commentsSettlement Guarantee Fund • Clause 17 (iv) (a): Initial Security Deposit (ISD) to be part of SGF • ISD 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 Fee • 25% of the initial One-Time Deposit • 50% of Penalties levied • 0.5 paise additional levy over and above the transaction fee on each leg • 90% of all investment returns gained from Settlement Guarantee Fund

10. Clause wise commentsSettlement Guarantee Fund • Clause 17 (iv) (e) 1 : SGF to be linked to turnover • Risks 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 Market • 25% of weekly value of Term Ahead Market

11. Clause wise commentsShareholding 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 perpetuity • In 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.

12. Clause wise commentsDefault 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 whole • Exchanges 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.

13. Clause wise commentsDefault Mechanism We would request The Hon’ble Commission to have default mechanism in the following order: • Margins of the Defaulting Member • Defaulting Member(s) Deposits • Settlement Guarantee Fund • A levy or loss sharing on all the non-defaulting Members to cover remaining portion of default

14. Clause wise commentsOthers • Clause 34: Closure of Merger of Power Exchange • Markets 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

15. Clause wise commentsOthers • 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 funds • Develop a fund to manage settlement of claims • To undertake capacity building measures and training of participants • To develop information dissemination mechanism for Exchange

16. Agenda General Comments on the Regulations Clause Wise Comments Conclusion

17. Support to Critical Market Infrastructure • The power market regulations could have been utilized • To define the extent as well as boundaries of the power market • To 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 norms • In 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

18. THANK YOU