ISLAMABAD: The Power Division has approached the National Electric Power Regulatory Authority (Nepra) to amend power Distribution Companies’ (Discos) licensing regulations aimed at facilitating Private Sector Participation (PSP) in the sell-off process, well informed sources told Business Recorder.
According to the proposed amendment, an electric power supplier may sell electric power to another electric power supplier through bilateral agreement, provided that in case a supplier of last resort sells electric power to another electric power supplier, the rates, charges, and terms and conditions of such sale shall be approved by the Authority.
Sharing the details, sources in Power Division said that Nepra had issued Electric Power Supply Licences as Supplier of Last Resort (the Supplier) and Distribution Licenses to all Discos, except TESCO and SEPCO, during April to December 2023.
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In this regard, Nepra, through Article 28 of the Supplier Licences and Article 33 of the Distribution Licences, required the licensees to undertake legal separation of their supply and distribution businesses within a period of two years (i.e., by 2025).
Power Division argued that in accordance with Section 20 and Section 23E of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997, the eligibility criteria for the grant of distribution and supply licenses was required to be prescribed by the federal government through Rules.
Accordingly, the federal government notified Eligibility Criteria Rules in September 2023 for various types of licenses under the Nepra Act.
In line with this, the Eligibility Criteria (Electric Power Supplier Licenses) Rules, 2023 were notified on September 4, 2023. Rule 4(1) of the Supplier Rules states: “Provision with respect to the supplier of last resort: -(1) only an applicant holding a distribution licence shall he eligible to obtain a supplier of last resort licence from the Authority in its specified service territory as defined in the distribution licence.”
Power Division has argued that the prescribed Rules require a supplier of last resort applicant to also hold a distribution licence. In this respect, Regulation 9, read in conjunction with Regulation 11 of the Nepra Licensing (Application, Modification, Extension and Cancellation) Procedure Regulations, 2021 enables the Nepra to modify the terms of a licence, which is required on account of ‘Modification by Operation of Law’. Per Regulation 2
(i), Modification by Operation of Law is defined as “a modification to a licence to give effect to any change in law or the rules and regulations that licencees must comply with”. Moreover, Article 23 of the Supplier Licenses and Article 26 of the Distribution Licence obligate the licensees to comply with the Supplier Rules and eligibility criteria Rules for distribution license, respectively.
In the determinations of Distribution Licences, Nepra specifically noted that Discos confirmed that they possess the required human resource and technical expertise to carry out the functions of the distribution of electric power. The Discos also submitted an undertaking to Nepra in this context that they will align accordingly to the requirements of the eligibility criteria rules when they are notified.
Similarly, in the determinations of Supplier Licences, the Discos also confirmed that once the federal government notifies the required rules, they will fulfil the requirements in letter and spirit.
After explaining the background, Power Division requested the Nepra to take cognizance of the matter and modify the Supplier Licences and Distribution Licences to ensure alignment with the Supplier Rules.
Additionally, the federal government, under NE Policy 2021 (5.5.2), intends to gradually transition from a wholesale to a retail market, taking into account the readiness of the institutions and infrastructure.
Furthermore, global best practices suggest that a single company performs both distribution and supply functions at the time of the wholesale market’s opening, continuing for a certain period until these are legally separated as the power market evolves toward retail.
The government has initiated the process of Private Power Participation (PSP) for Discos. During a recent meeting of the review panel overseeing the PSP process, concerns were raised regarding the inconsistency between the issued licences and the federal government’s prescribed rules.
The panel identified the risks such as: (a) regulatory inconsistencies posing risks to potential investors, and (b) delays in the PSP process if the rules are amended, requiring Discos to commence the legal segregation of their and distribution functions. After thorough deliberation, it was concluded that the supplier and distribution licences should be brought in conformity with the regulatory framework, particularly of their supply and distribution functions.
Power Division proposed that considering the potential future evolution of the electricity market towards retail competition, where legal segregation of supply and distribution functions may be required, any amendment to the Articles may include a provision stating that such segregation shall be subject to the NE Policy, National Electricity Plan, and Eligibility Criteria Rules, as amended from time to time. The licencee shall always be following the applicable laws, policies and regulatory frameworks.
Power Division requested the Nepra to amend the Supplier and Distribution Licences by removing the provisions mandating the legal separation of supply and distribution businesses while retaining the requirement of functional separation so that the licences are in conformity with the applicable framework which will ensure compliance with the Eligibility Criteria Rules and eliminate potential uncertainty and legal risks for investors.
Furthermore, the matter of legal separation should remain contingent upon future developments in the electricity market and any subsequent amendments to the policy, legal, and regulatory framework. GEPCO has already filed review petition for such modification and for other Discos such modification may be incorporated based on this communication/ request.
Copyright Business Recorder, 2024