Jan 10, 2024

Captive Plants: Much Needed Clarifications Provided by Supreme Court

Numerous electricity regulators have time and again provided conflicting interpretations of certain provisions of the Electricity Rules, 2005 (‘Rules’), framed under the Electricity Act, 2003 (‘EA 2003’), in relation to captive generating plants (‘CGP’).[1] The group captive power arrangement (in which a developer sets up a power plant, allots at least 26% equity to large consumers, typically in the commercial & industrial sector, and sells power on ‘captive’ basis to such consumers) has always been an area of interest on account of lower cost of electricity and non-applicability of cross subsidy surcharge and additional surcharge.

Recently, a two-judge bench of the Hon’ble Supreme Court of India (‘SC’), in DGVCL v. Gayatri Shakti Papers and Board Limited[2] (‘DGVCL Judgment’), provided much awaited clarity on interpretation of Rule 3 of the Rules:

i.   Special Purpose Vehicle as an ‘Association of Persons’ Under Rule 3(1)(a): For qualifying as a CGP, a two-fold test under the Rules has to be met. Under this test, captive users are required to hold not less than 26% ownership[3] in the CGP (‘26% Ownership’) and consume not less than 51% electricity generated by the CGP (‘51% Consumption’). An additional eligibility criterion has been specified in the Rules for the captive users of a CGP set up by an ‘association of persons’ (‘AoP’). The consumption of electricity by captive users of a CGP should be in proportion of the shares held by them, with a variation not exceeding 10% (‘Proportionality Requirement’).

The SC considered whether captive users of a special purpose vehicle (‘SPV’) (being a company set up only for generating power) are required to meet the Proportionality Requirement. This is in light of certain past rulings, such as Tamil Nadu Power Producers Association v. TN Electricity Regulatory Commission[4] (‘TN Power’), where the Proportionality Requirement was held to be inapplicable to SPVs. That is to say, if a 1% shareholder consumes 50% of electricity generated and a 25% shareholder consumes just 1%, then both of them would qualify to be captive consumer (generally referred to as “gaming”). The SC held that for the purposes of the EA 2003, SPVs qualify as AoP and, therefore, the captive users of a CGP owned by an SPV are required to comply with the 26% Ownership, 51% Consumption and the Proportionality Requirement. The SC reasoned that an AoP is one where two or more persons join with a common purpose to achieve some common benefit. In the context of the EA 2003 and the Rules, body corporates may come together and set up an SPV, with a common purpose to achieve the benefit of becoming captive users and thereby enjoy the economic advantages provided to captive users.

ii.   26% Ownership Requirement To Be Met Throughout Relevant Financial Year: The Appellate Tribunal for Electricity (‘APTEL’) has held in TN Power that the 26% Ownership requirement is to be satisfied by the captive users collectively only at the end of the relevant financial year, e., if the captive users fail to hold 26% in between the financial year then too they would pass the 26% Ownership test so long as at the end of financial year their ownership is not less than 26%. The SC dissented with the aforesaid ruling of APTEL and held that the 26% Ownership requirement is to be satisfied by the captive users collectively throughout the relevant financial year and not at the end of the financial year alone.

iii.  51% Consumption Test: The Rules do not provide adequate guidance on how annual power consumption should be analysed to examine compliance with the qualification requirements. It is in this context that the judgment of the SC is most helpful.

The SC has laid out that every user of a CGP set up by an SPV will qualify to be a captive user if (i) such user annually consumes at least 1.96%[5] (+/-10%) of power produced for each 1% of ownership of such user in the SPV (‘1.96 Test’); and (ii) all such users which meet the test (i) collectively meet the 26% Ownership requirement and also the 51% Consumption requirement. All such users who do not meet the 1.96 Test will not qualify to be captive users. Further, all power consumption by captive users (i.e., users which have satisfied the tests in (i) and (ii) above), even beyond the 1.96 Test, will qualify to be captive power. Importantly, ‘gaming’ (see paragraph 1 above) has been clamped down.

iv.   Change of Ownership of CGP and Weighted Average: One of the aspects affecting the group captive industry was inadequate regulatory clarity on effect of change in shareholding of an SPV during a financial year. The SC has held that in case of change in shareholding of the SPV, effective shareholding for the financial year (required for testing the compliance with 51% Consumption requirement and Proportionality Requirement) should be computed as weighted average. Further, the SC held that if a captive user exits in the middle of a financial year, transferring its shareholding to a new captive user, then the new captive user should be required to consume the electricity proportionate to its shareholding, such that the 26% Ownership and 51% Consumption requirements are simultaneously maintained for the financial year.

The DGVCL Judgment clarifies that the 51% Consumption requirement is to be tested on an annual basis. Consequently, even if there is a transfer of shareholding between captive users during a year, it seems that the 51% Consumption requirement would be tested only on yearly basis. This could result into a new captive user (which has complied with its consumption obligation for its period of shareholding) being penalized for an under-consumption of an outgoing captive user. However, captive users (including the outgoing and new captive users) could agree to indemnify each other in case under consumption by one captive user imposes liabilities (such as, levying of cross subsidy surcharge and additional surcharge) on other captive users who have met their consumption obligations.

[1] For example, Kadodara Power Pvt. Ltd. & Ors. vs. Gujarat Electricity Regulatory Commission & Anr., [2009] APTEL 119; and Tamil Nadu Power Producers Association vs. TN Electricity Regulatory Commission, 2021 SCC OnLine APTEL 19.

[2] Dakshin Gujarat Vij Co. Ltd. v. Gayatri Shakti Paper & Board Ltd., 2023 SCC OnLine SC 1276 dated October 9, 2023.

[3] ‘Ownership’ in relation to a CGP set up by a body corporate means equity share capital with voting rights.

[4] Tamil Nadu Power Producers Association vs. TN Electricity Regulatory Commission, 2021 SCC OnLine APTEL 19.

[5] Being 51 (the 51% Consumption requirement) divided by 26 (the 26% Ownership requirement).




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