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Home » Case Study » The ownership and consumption conundrum in captive power plants

The ownership and consumption conundrum in captive power plants

February 14, 2024 4:31 pm

The ownership and consumption conundrum in captive power plants
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A case comment on M/s Dakshin Gujarat Vij Company Ltd. v. M/s Gayatri Shakti Paper & Board Ltd.

BACKGROUND

The Supreme Court of India recently clarified the position on criterion on ownership and consumption of Captive Generating Plants (CGP)through the case of M/s Dakshin Gujarat Vij Company Ltd. v. M/s Gayatri Shakti Paper & Board Ltd. & Anr. This group of appeals originated as a result of the order of the Gujarat Electricity Regulatory Commission (GERC) relating to the captive status of some power generation units.

The appellant (Electricity distribution company) initially approached the GERC with a petition seeking to direct respondents to furnish necessary information to a competent authority and to take action against such persons who are violating the conditions for the operation and maintenance of CGP and utilisation of power from CGP. Aggrieved by the order of the commission, the appellant approached the Appellate Tribunal For Electricity (APTEL) vide an appeal challenging the following findings of the Commission viz. (a) that the transferee of the share of the captive users could qualify as a captive user and (b) that no license was required for CGPs to distribute, supply and deliver electricity to the captive users by use of dedicated transmission lines. The APTEL dismissed the appeals of the appellants and allowed the appeals of the respondents. Aggrieved by this order the appellant approached the Hon’ble Supreme Court of India. Hence this case.

ISSUE OF LAW

The case dealt with three legal issues:

a)     Eligibility criteria for a CGP/captive user under Rule 3(1)(a) of the Electricity Rules, 2005.

b)     Interpretation of the second proviso under Rule 3(1)(a) of the Rules.

c)      Whether a company set up as a Special Purpose Vehicle for generating electricity is an “association of persons”, (AoP) in terms of the second provision to Rule 3(1)(a) of the Rules.

Thus, it could be said that the legal issue at hand revolves around the matter of the definition of CGP and the use of electricity by captive users. The first and second issue establishes what CGP is and who are its consumers. The third issue deals with the intricacies of group users of CGP. The comment is divided into two parts, Part: I deals with issues (a) and (b), analysing the intricacies of a CGP and differentiating a CGP user from a third-party consumer. Part: II deals with the ownership and consumption requirements of a CGP group user.

PART: I: CGP & CGP USER

Section 2(8) of the Electricity Act defines a CGP, Section 9 of the Act deals with Captive Generation, wherein due regard is given to the usage of such generated electricity. The Act mandates that the electricity so produced shall be primarily for ‘his own use.’ However, if the CGP is owned by a cooperative society or association of persons, then the produced electricity shall be primarily for the use of members of such cooperative society or association of persons. It is in this context that Rule 3 of the Electricity Rules, 2005 must be examined, since it lays down the requirement to determine ‘ownership’ and ‘usage’ for becoming eligible to draw the benefit of CPP.

According to The Electricity Rules, 2005, Rule 3, when read with Section 176 of the Electricity Act, 2003, provides for the minimum eligibility criteria in terms of energy consumption as well as ownership of the CGP. Rule 3 (1) states that a captive user must have a minimum of 26% ownership in the power plant and must consume at least 51% of energy for the captive use on an annual basis out of the aggregate electricity generated by the power plant to qualify it as a CGP. Here, it should be duly understood that there is a classification between the requirements of a cooperative society and an association of persons. The former is only required to ‘collectively satisfy’ the requirements mentioned under clauses (i) and (ii) of Sub-clause (a) of Rule 3 (1). Whereas the latter is required to ‘proportionately satisfy’ the requirements, and a variation of ± 10% is made permissible.

Here, it has to be understood that the second provision to Section 9(1) states that no license is required under the Act for the supply of electricity generated from a CGP to any licensee in accordance with the provisions of the Act, rules, and regulations made thereunder. However, supply to any other “consumer” is subject to regulations made under Section 42(2) of the Act. Thereby emphasizing that the violation of the ‘proportionality clause’ in the case of AoP shall amount to the sale of electricity to a consumer and thereby would invite the attention of Section 42 (2) of the Act. 

It is in this context it is pertinent to note that in the case of Maharashtra State Electricity Distribution Company Ltd. v. JSW Steel Ltd & Ors., it was held that a ‘captive consumer’ is different from a general ‘consumer’ as defined under Section 2(15) of the Electricity Act of 2003 . The question of law raised here was whether captive consumers are liable to pay an additional surcharge leviable under the Act. It was decided in negative giving due regard and recognition to Section 42 (2) of the Act. The court, while establishing the reasonable classification between a captive consumer and a consumer u/r Section 2 (15), examined the scope of the term ‘set up,’ which has an inclusive trait and includes ‘to construct,’ ‘to operate,’ and ‘to maintain’ a CGP for their own use, whereby they incur huge expenditure or invest the substantial amount for the purpose of construction, maintenance, and operation of the CGP and sometimes on the dedicated transmission lines. Making them a separate class different from the “consumers” defined under Section 2(15). In another case, the court examined the framework of ‘set-up’ and declared that it should be read disjunctively owing to the presence of the word “or.” Further, the court is also of the opinion that the acquisition of shares/ ownership after the establishment of the power plant will also amount to ‘set-up’. Here, the court widened the scope of ownership in a CGP.

Thus, in summation, it could be said that Section 9 of the Act, when read with the entirety of the Act, envisages three different scenarios viz. First, when the person who constructs, maintains, or operates a CGP for their own use and supplies electricity to himself through dedicated transmission lines. Secondly, when the person who constructs, maintains or operates a CGP to supply electricity by exercising their right to open access for the purpose of carrying electricity from their CGP to the destination of their use. Thirdly, when the electricity generated from the CGP is supplied through the grid for any licensee or consumer, while no license is required for the supply of electricity to a licensee or consumer, the supply is subject to the regulations made under Section 42(2) of the Act. At the same time, it should also be noted that the Act prohibits the levy of surcharge, cross or additional surcharge, even when open access is provided to a person who has established a CGP for carrying the electricity to the destination of their own use. Thereby emphasizing the benefits of captive power plant users.

Here, the cause of concern is the induction of the latest amendment into the Electricity Rules, which is popularly referred to as the Electricity (Third Amendment) Rules, 2023, wherein a subtle yet significant amendment has been introduced by replacing the term ‘captive user’  with the term ‘captive users,’ which inadvertently leads to the assumption that each of the users must hold 26% of equity individually and the consumption must be proportional to their ownership.

PART: II: CGP & GROUP USER

The court, while dealing with Issue 1, referred to the case of Chhattisgarh State Power Distribution Company Ltd. v. Chhattisgarh State Electricity Regulatory Commission & Anr. And declared it as per-incuriam for the rationality it had elucidated. It declared that an AoP collectively consuming more than or a minimum of 51% of the power generated could be considered as a captive user, this is fundamentally antithetical to the intention of the provision that is aforementioned. This rationality would result in abuse or gaming where there are multiple owners with different shareholdings. The ill effect of gaming is the disproportionate use of electricity by a user who would otherwise be treated as a consumer rather than as a captive user. A natural question that arises here is whether a disproportionate use of electricity is equivalent to an ‘unauthorised use’ of electricity.

To address the question of whether a user is a ‘captive user’ or not when an AoP is formed, the second provision to Rule 3(1)(a) should be considered and scrutinized in length. At the outset, the court concedes to the ambiguity of the later part of the proviso wherein the consumption requirement is meant to be proportionate to their shares in the ownership of the CGP with an allowed variation of ±10 percent. The court, while reiterating and elaborating upon the judgment of the Kadodara Power case, held that the proportionality principle specifies a unitary qualifying ratio. The unitary qualifying ratio is the consumption requirement divided by the shareholding requirement, that is, 51 percent divided by 26 percent. This means the owner of every 1 percent shareholding of the CGP should have a minimum consumption of 1.96 percent of the electricity generated by the CGP, with a variation of +10 percent being permissible. Upon compliance with this requirement, such person shall be treated as a member of the group captive user.

Further, whether a company formed as a special-purpose vehicle for generating electricity is an association of persons and are they absolved from meeting the eligibility criteria specified in paragraphs (i) and (ii) of Rule 3(1)(a) of the Rules read with second proviso to Rule 3(1)(a) of the Rules? According to Explanation 1(d) to Rule 3 of the Rules, it defines an SPV as a legal entity owning, operating, and maintaining a generating station with no other business or activity to be engaged in by the legal entity. Thus, SPVs have a single purpose as envisaged under the Rules, i.e., owning, operating, and maintaining a generating station. An SPV cannot consume the electricity generated by the CGP by itself, i.e., it cannot be a captive user since its only purpose is to own, operate, and maintain a generating station. Thus, the purpose and objective of companies or body corporates in setting up an SPV, they cannot enjoy the benefits provided to captive users themselves. According to the APTEL in the case of Tamil Nadu Power Producers Association v. Tamil Nadu Electricity Regulatory Commission, an SPV cannot be equated to AoP u/r Rule 3 of the Electricity Rules. APTEL held that the second provision to Rule 3(1)(a) is a stand-alone provision and, as such, does not relate to Rule 3(1)(b). Therefore, APTEL has held that the proportionate consumption requirement only applies to AoPs and not SPVs. However, the reasoning in the Kadodara case emphasizes that the group of persons who are eligible under Section 2(8) of the Act are the cooperative societies and AoP’s. Jurisprudentially, an SPV can be a ‘person’ as well as an ‘association of persons’. According to the given factual matrix here, an SPV is, at best, an AoP with regard to setting up a CGP and thereby is required to adhere to the ‘proportional consumption’ criterion as that of AoP. Hence, it could be asserted that Rule 3(1)(b) does not have an overriding or prevailing effect over Rule 3(1)(a) of the Electricity Rules of 2005. Thus, SPVs that own, operate, and maintain CGPs are an “association of persons” in terms of the second proviso to Rule 3(1)(a) of the Rules read with the second proviso of the Rules.

A cardinal question that should be examined here is about the intelligible differentia between the classification of power plants set up by cooperative societies and power plants set up by AoP. Jurisprudentially, neither a company is barred from forming cooperative societies for the furtherance of common business objectives nor a cooperative society is barred from constituting an SPV, which could be in the form of a company. The Act emphasises that such generated electricity must be primarily for his/her ‘own use.’ Since the etymology of ‘set up’ has been further bifurcated and made to be read disjunctively and the jurisprudence of ‘person’ has been further broadened, the classification should be further scrutinised through the lens of Article 14 of the Constitution of India.

Conclusion

In light of the foregoing, it is humbly submitted that the rationality elucidated by the Hon’ble Court is good in law. The core of the judgment lies in identifying and dissecting the etymology of ‘set up’. The court very emphatically linked the terms ‘set up’ and ‘personal use’ and classified the class of consumers into two, further, they also widened the scope of the term ‘set up’ by promoting it to be read disjunctively.

This approach of the court goes in tandem with the intention of the legislature wherein a practical interpretation is preferred, giving due regard to the variable such as the will of the market and the will of the people, so much so that it promotes and encourages business activities. The intelligible differentia between the classification of captive users and electricity consumers are intra-vires to Article 14 of the Constitution of India. The issue of whether a company formed as an SPV is an AoP has arisen because the word ‘association of persons’ is not defined anywhere in the Act or in the Rules. The petitioner could not elucidate a scenario where an SPV is formed other than as an AoP. The legislative intent must be duly considered here, had the Central Government wanted to provide an exemption to an SPV it would have done it just as it has done for a cooperative society.

Nevertheless, the legislature can adopt cues from the rulings of the Constitutional Courts and bring in necessary changes to the law through amendments. The generation of electricity is vital for the economy of the country, and a narrow interpretation or misinterpretation will affect the realities, which might lead to an irrational result.

Authored by :
Sachinkumar P.P, Research Scholar (Energy Law & Policy) Rajiv Gandhi School of Intellectual Property Law, IIT Kharagpur

Dr. Uday Shankar, Associate Professor (Law) Rajiv Gandhi School of Intellectual Property Law, IIT Kharagpur

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