ISLAMABAD: National Electric Power Regulatory Authority (Nepra) has supported establishment of a new organisation to be named Independent System and Market Operator (ISMO), through merger of NPCC (System Operator) and CPPA-G (Market Operator) for operationalization of long-awaited wholesale electricity market in the country with some conditions, sources in Power Division told Business Recorder.

The National Electricity Policy 2021 and National Electricity Plan 2023-27 affirm the basis for the creation of ISMO as the institutional arrangement for competitive wholesale electricity market as part of Competitive Trading Bilateral Contract Market (CTBCM) design feature by the CCoE in its decision of January 14, 2021 which was further ratified by Federal Cabinet on January 19, 2021. Later, the Prime Minister, in his directive of May 15, 18 & 25, 2024, approved the restructuring of CPPA and NTDC for the creation of an ISMO for Pakistan.

Power sector reforms: Nepra supports setting up of ISMO

ISMO will be technical and commercial pillar of the electricity wholesale market with interdependent functions. This entity will also lead and perform the integrated power planning of power sector. It is imperative that these interdependent roles are performed by an independent, corporatized and credible institution to demonstrate credibility and ensure confidence and trust among market players to achieve the competitive wholesale market objectives.

Countries like USA, Canada and Australia that operate on Centralized Economic Dispatch, similar to Pakistan, assign such roles to a single independent entity functionally and generally named as ISMO.

Currently, CPPA is performing the roles of Market Operator as agent on behalf of DISCOs, while NTDC is performing the roles of Network Operator and System Operator. Operationalization of independent System Operator requires the transfer and assignment of Market Operator licence from CPPA and System Operator licence from NTDC. These licences as were issued under Section 23 of Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 as amended to be referred as Nepra Act 1997 to perform the roles in accordance with Sections 23A, 23B. 23G & 231-I of Nepra Act 1997 after the approval of its assignment/transfer pursuant to the Clause No. 8 of MO Licence and Clause No. 8 of SO Licence respectively through regulatory proceeding.

In order to operationalise ISMO as a single credible independent institution, Power Division has sought CCoE approval for: (i) creation of ISMO along with object clause; and (ii) corporate structure including board structure and first promoters of ISMO.

Power Division, in its summary has sought authority to: (i) approach SECP for incorporation of a Guarantee Limited Company with the name “Independent System and Market Operator of Pakistan (ISMO)” under the Companies Act, 2017;(ii) facilitate assignment of System Operator (SO) licence of NTDC and Market Operator (MO) licence of CPPA to ISMO through regulatory proceedings including issuance of any guidelines to stakeholders, where required; (iii) completion of all the steps required for operationalization of ISMO including execution of Business Transfer Agreement between CPPAG, NTDC with ISMO; and (iv) human resources transition to ISMO from NTDC on similar lines as was successfully done for transition of NTDC employees to CPPA-G.

Nepra, in its comments supported the restructuring of the System Operator and the Market Operator aligned with the National Electricity Policy, National Electricity Plan, decisions of the CCoE, Federal Cabinet and honorable Prime Minister for establishment of the ISMO.

The power sector Regulator maintained that the merger of these two functionally independent entities is a significant step forward towards the successful operationalization of upcoming competitive wholesale electricity market in the country, therefore the Authority has suggested that following aspects may also be considered for effective restructuring and merger of the SO and the MO: (i) pursuant to the Regulation of Generation, Transmission, and Distribution of Electric Power Act, 1997, the MO and the SO are independent entities regulated through separate licences and codes granted on May 31, 2022, and March 21, 2023, respectively.

The MO is governed under sections 23A and 23B, while the SO is regulated under sections 23G and 23K of the Nepra Act. Therefore, in the meanwhile legal, policy, regulatory and techno-commercial aspects may be thoroughly reviewed so that the merger and operationalization is carried out in line with the applicable policy and regulatory framework; (ii) cost-benefit assessment for the establishment of the ISMO may also be carried out to evaluate how the merger will benefit the power sector compared to the current structure where the SO and the MO operate independently and are obligated in their respective licences for legal separation from parent organizations i.e. NTDC and CPPA-G respectively; (iii) previously, the regulatory framework, including licences, Grid Code, Market Commercial Code, relevant rules and regulations, was developed and made applicable, keeping in view the independent functions of the SO and the MO.

Accordingly, in the meanwhile review and adjustment of the applicable regulatory framework may be required to support the successful implementation and operationalization of the ISMO; (iv) specific plans and details for the proposed ISMO, including key features of the Business Transfer Agreements (BTAs), the human resource and staffing policy/manual may be finalized for effective and successful merger.

A clear transition plan for existing resources and employees of the SO and the MO may be developed prior to the merger to ensure the onboarding and inclusiveness of human resources; and (v) independence of the ISMO Board is of critical importance and will be ensured similar to that of developed markets and the best practices functional around the globe so that the ISMO performs as an independent, corporatized, and credible institution to demonstrate credibility and aspire confidence and trust among market participants to achieve the competitive wholesale electricity market/CTBCM objectives.

Furthermore, the two functions may be ring-fenced to avoid any conflict of interest between the SO as technical and MO as commercial pillar of the market.

The Authority argued that these functions may complement each other however the functional independence and performance should not be affected, so it is advised that the two functions should be aligned with established organizational structure of the ISMO around the world.

Copyright Business Recorder, 2024