SECI Wins Crucial Case At APTEL On Trading Margins, For Now

The Ruling against orders by the Delhi and Punjab regulators will be a relief to the central agency.

In a detailed 77 page judgement delivered on July 2nd, a two judge bench of the Appellate Tribunal For Electricity  (APTEL) had delivered welcome news to SECI (Solar Energy Corporation of India) on its precious trading margin of 7 paise per unit. This trading margin was brought into focus by the decision taken by the Delhi Electricity Regulator(DERC), and the Punjab State Electricity Regulator (PSERC) of Punjab. In both cases, the state regulators had moved to reduce the trading margin to 2 paise/unit, something that aggrieved SECI no end obviously.

Without getting into the specifics of the order, the key issues that APTEL has tackled are the jurisdiction of state regulators, and the right of state regulators to make any modifications whatsoever to a contract between two parties in this case, between SECI and solar power developers, and secondly, between SECI and state discoms.

On the first issue, APTEL, quoted that “The power and jurisdiction of the State Commission under Section 86(1)(b) concerns source, quantum and price (tariff) of procurement by the distribution licensee. In inter-State transaction it is bound to follow the regulatory regime or determination of trading margin by the Central Commission and cannot sit in judgment over its propriety.” In this case, with power being sourced from projects outside the state/s, CERC’s write reigns supreme, as clearly repeated by APTEL.

On the second contention of the state discoms, wherein they had sought to exploit a condition of 2 paise per unit of trading marin for short term contracts, and extrapolate it to longer term contracts, APTEL ruled that “There was no provision for Trading Margin in case of long term transactions. Further, for short term transactions, there is a capping on Trading Margin @ 4 paise/kWh and 7 paise/kWh in case sale price is less than or equal to Rs. 3.00/kWh and sale price is more than Rs.3.00/kWh respectively.”

The Trading Margin Regulations 2010 framed by the Central Commission were replaced by Trading License Regulations, 2020. To recapitulate, by Regulation 7, the subject of “trading margin” is controlled vis-à-vis “transactions undertaken by the Trading Licensee” that include “Transactions under long term contracts (where period of the contract of the Trading Licensee with either the seller or the buyer or both is more than one year)” and “Transactions under Back to Back contracts, irrespective of duration of the contract”. Regulation 8 in no uncertain terms declares that “(f)or transactions under long term contracts, the trading margin shall be decided mutually between the Trading Licensee and the seller” but this being subject to the proviso stating that “in contracts where escrow arrangement or irrevocable, unconditional and revolving letter of credit as specified in clause (10) of Regulation 9 is not provided by the Trading Licensee in favour of the seller, the Trading Licensee shall not charge trading margin exceeding two (2.0) paise/kWh”. The same provision also provides that for transactions under Back-to-Back contracts, “where escrow arrangement or irrevocable, unconditional and revolving letter of credit as specified in clause (10) of Regulation 9 is not provided by the Trading Licensee in favour of the seller, the Trading Licensee shall not charge trading margin exceeding two (2.0) paise/kWh”. At the same time by clause (10) of Regulation 9, it is stipulated that “(t)he Trading Licensee shall make Appeal No. 52 of 2021and Appeal No 70 of 2021. Page 55 of 77 payment of dues by the agreed due date to the seller for purchase of the agreed quantum of electricity through an escrow arrangement or irrevocable, unconditional and revolving letter of credit in favour of the seller…”

Thus, even as SECI goes back happy with a win under its belt that protects its trading margin, it is clear that this is a battle that is far from over. Over time, discoms, especially if they improve their finances and credibility to the extent that they should always have, this trading margin will be questioned. After all, this is  the small price that state discoms are   paying for their own inefficiency and poor management, be it losses, delays in payment, or other arbitrary actions against generators. That necessitated the inclusion of  a centrally backed mediator into the power purchase game, in the form of SECI.

And it has worked. e have seen how in acquisition after acquisition  of solar assets by different firms from developers, care has been taken to highlight to investors that the assets have long term power purchase agreements with CENTRAL entities and PSU’s like SECI, NTPC, etc. Having a direct deal with a state discom is just not worth the same amount of money. Thus, SECI has actually more than justified its trading margin until now, thanks to the state of most state discoms. That SECI takes on significant risk by opening up irrevocable letters of credit in favour of developers for instance, is a fact. And it’s a condition that it has been held to repeatedly, by both the CERC and APTEL, whenever it has cited payment delays due to delay in payment from discom side.  Since it’s back to back PSA’s with state discoms rarely function as smoothly.

As discoms improve their finances and their behaviour vis a vis adherence to contracts, the better ones will surely ask for, and get a discount in time for SECI, or better still, they can consider the willingness of developers to sell to them at the same price as say, SECI, the best indicator of their progress.