Supreme Court: While hearing a batch of civil appeals for the interpretation of the provisions of the Electricity Act, 2003 (‘the Act’) and Rule 3 of the Electricity Rules, 2005 (‘the Rules’) for being classified as a Captive Generating Plant (‘CGP’) and a captive user, the division Bench of Sanjiv Khanna* and M.M. Sundresh, JJ. held that in case of change of ownership, shareholding, or consumption, the principle of weighted average should be applied to ensure compliance of the proportional electricity consumption requirement stipulated under the second proviso to Rule 3(1)(a).
Analysis of Law
The Court pursued Section 2(8) and Section 2(49) of the Act which defines ‘captive generating plant’ and ‘person’ respectively, and stated that on a conjoint reading of both the Sections, a CGP can be an individual, body corporate, association or body of individuals, whether incorporated or not, ‘primarily for his own use’ and ‘primarily for use of the members of the co-operative society or association of persons’. The Court also said that an association of body corporates is permitted to set up a CGP.
The Court also perused Section 9 of the Act which states that ‘any person may construct, maintain or operate a CGP and dedicated transmission lines’ and proviso to Section 9(1) provides that that no licence is required under the Act for supply of electricity generated from a CGP to any licensee in accordance with the provisions of the Act, rules and regulations made thereunder. However, the Court noted that supply to any consumer is subject to regulations made under Section 42(2) of the Act and the first proviso to Section 9 states that the supply of electricity from the CGP through the grid shall be regulated in the same manner as the generating station of a generating company.
Analysis of Issues
1. Eligibility criteria for a CGP/captive user under Rule 3(1)(a) of the Rules.
The Court noted that Rule 3(1)(a) of the Rules was interpreted in Chhattisgarh State Power Distribution Co. Ltd. v. Chhattisgarh SERC, 2022 SCC OnLine SC 604, whereby it was held that an association of corporate bodies can establish a power plant, as the two-fold requirement under Rule 3(1)(a) of the Rules was satisfied. The Court perused Rule 3 of the Rules which provides for ‘Requirements of Captive Generating Plant’. The Court said that the requirement under Rule 3(1)(a) of the Rules is two-fold, firstly, the captive user should not hold less than 26 percent of the ownership in the CGP. Secondly, the captive user should consume not less than 51 percent of the aggregate electricity generated by such CGP. Further, the Court noted that the second proviso to Rule 3(1)(a)(ii) of the Rules states that in case of an association of persons, the captive user(s) shall not hold less than 26 percent of ownership of the plant in aggregate and the captive user(s) shall not consume less than 51 percent of the electricity generated, determined on an annual basis, in proportion to their shares in ownership of the CGP within a variation not exceeding 10 percent.
The Court explained that to qualify as a CGP under Section 9 read with Section 2(8) of the Act, the two-fold requirements under Rule 3(1)(a) of the Rules have to be satisfied. The Court explained that the words ‘not less than’ under Rule 3(1)(a) of the Rules shows that the stipulations regarding the 26 percent ownership and 51 percent consumption is the minimal or lowest threshold. The Court said that a captive user who owns 100 percent of the CGP and consumes 51 percent or more electricity generated from such a plant would satisfy the parameters prescribed and equally, a captive user who owns 26 percent of the CGP and consumes 51 percent or more of the electricity generated would qualify as a captive user.
The Court noted that the first proviso to Rule 3(1)(a) of the Rules applies in case of a CGP set up by a registered Coopertive society. The Court said that if the members of the cooperative society consume more than 51 percent of the electricity generated collectively, the power plant is to be treated as a CGP and the members of the cooperative society as captive users. The cooperative society may supply 49 percent or less of the aggregate electricity generated to third parties, and any third party, who is not a member of the cooperative society, will be a non-captive user and a consumer, who will be liable to pay a cross-subsidy and an additional surcharge, as applicable.
The Court said that the expression, ‘set up’ used in clause Section 2(8) of the Act should not be read in a pedantic manner as referring to initial set up and it should not be read as impliedly incorporating a prohibition to transfer of ownership once the CGP has been set up. Rather, in Section 9(1) the words used are, “construct, maintain or operate a captive generating plant”. The Court also explained that the words used in Section 9(1) of the Act construction, maintenance or operation of a CGP can be read disjunctively, it is not necessary that the person who maintains and operates the CGP must have also constructed the CGP, hence, the construction, maintenance or operation can be by different persons.
2. Interpretation of the second proviso under Rule 3(1)(a) of the Rules and in particular the words “association of persons”.
The Court perused second proviso to the Rule 3(1)(a) which provides an additional eligibility requirement where the captive users are ‘an association of persons’. Interpreting the rule of proportionality in terms of the second proviso to Rule 3(1)(a) of the Rules, the Court said that it, specifies a unitary qualifying ratio, which is the consumption requirement divided by the shareholding requirement, that is, 51 percent divided by 26 percent. The Court further explained that the owner of every 1 percent shareholding of the CGP should have minimum consumption of 1.96 percent of the electricity generated by the CGP, with a variation of +10 percent being permissible.
Further, the Court said that in case of change of ownership, shareholding, or consumption, the principle of weighted average should be applied to ensure compliance of the proportional electricity consumption requirement stipulated under the second proviso to Rule 3(1)(a). The Court said that the concept of weighted average shareholding comes in aid to calculate the relevant average shareholding of the captive user in the year and the proportionate electricity required to be consumed by him. The Court said also said that the weighted average shareholding method is applied by taking average shareholding held by particular shareholder for the year for the purpose of calculating proportionate electricity required to be consumed by it in terms of the second proviso of Rule 3(1)(a). The Court said also said that the weighted average shareholding method is applied by taking average shareholding held by particular shareholder for the year for the purpose of calculating proportionate electricity required to be consumed by it in terms of the second proviso of Rule 3(1)(a). The Court explained with an illustration that, if a captive consumer exits or drops out in the middle of the year, transferring its shareholding to another or new captive user, it would be fair to hold that the captive user who has become a shareholder in the middle of the year, is required to consume proportionately to the electricity generated.
3. Whether a company set up as a Special Purpose Vehicle (‘SPV’) for generating electricity is an “association of persons” in terms of the second proviso to Rule 3(1)(a) of the Rules.
The Court noted that in T.N. Power Producers Assn. v. T.N. ERC, 2021 SCC OnLine APTEL 19, it was viewed that a company set up as a SPV, in view of clause Rule 3(1)(b) of the Rules, is 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. However, in Kadodara Power Pvt. Ltd. v. Gujarat Electricity Regulatory Commission, 2009 SCC OnLine APTEL 119, the opposite view was taken.
The Court agreed with the view taken in Kadodara Power (supra), and said that Rule 3(1)(b) of the Rules does not negate or undo the eligibility requirements specified in paragraphs (i) and (ii) to Rule 3(1)(a) of the Rules, which in case of an association of persons mandates the satisfaction of the proportionality requirement under the second proviso to Rules 3(1)(a). The Court noted that Rule 3(1)(b) refers to a situation where a company set up as a SPV has multiple units generating electricity and that the company formed as a SPV can identify one or more of such generating units for its captive use. The Court said that all the generating units need not be identified for captive use, the units which are not identified for captive use need not satisfy the conditions mentioned in paragraphs (i) and (ii) of Rule 3(1)(a) of the Rules. The Court stated that the unit or units identified for captive use, in other words, must satisfy the requirements of paragraphs (i) and (ii) of Rule 3(1)(a) of the Rules read with the second proviso. Therefore, the Court held that Rule 3(1)(b) does not undo or override the eligibility criteria specified under Rule 3(1)(a) read with second proviso.
Further, the Court held that SPVs which own, operate and maintain CGPs are an ‘association of persons’ in terms of the second proviso to Rule 3(1)(a) of the Rules, however, the companies, body corporates and other persons, who are shareholders and captive users of a CGP set up by a SPV, are required to comply with Rule 3(1)(a) of the Rules read with the second proviso of the Rules.
[Dakshin Gujarat Vij Co. Ltd. v. Gayatri Shakti Paper & Board Ltd., 2023 SCC OnLine SC 1276, Decided on 09-10-2023]
Judgment Authored by: Justice Sanjiv Khanna
Advocates who appeared in this case :
For Appellant: Advocate on Record K.V. Mohan, Advocate on Record Nikunj Dayal, Senior Advocate Sanjay Sen, Advocate Rohit Singha, Advocate on Record Tatini Basu, Advocate Nitipriya Kar, Advocate Shraddha Deshmukh, Advocate on Record Supriya Juneja; Advocate on Record D. S. K Legal, Advocate G. Saikumar, Advocate Samir Malik, Advocate Nikita Choukse, Advocate Akash Lamba, Advocate Krishan Kumar, Senior Advocate G. Umapathy, Advocate on Record Rohit K. Singh, Advocate Vijay Kumar, Senior Advocate Basava Prabhu S.patil, Advocate on Record Ishita Jain, Senior Advocate Sudhir Nandrajog, Advocate Anand Kumar Shrivastava, Advocate Shivam Sinha, Advocate Ankit Bhandari, Advocate Geet Rajan Ahuja, Senior Advocate C. A. Sundaram, Advocate on Record Sharmila Upadhyay, Advocate Matrugupta Mishra, Advocate Nipun Dave, Advocate Rohini Musa, Advocate Zafar Inayat, Advocate on Record Mohit D. Ram, Advocate Sapna Chauhan, Advocate Bhagirath N. Patel, Advocate Anubhav Sharma
For Respondent: Advocate on Record Nikunj Dayal, Advocate Sanjeev Kapoor, Advocate Divya Chaturvedi, Advocate Saransh Shaw; Advocate on Record Khaitan & Co., Advocate on Record B. Krishna Prasad, Senior Advocate Nakul Dewan, Advocate Pradhuman Gohil, Advocate Taruna Singh Gohil, Advocate Ranu Purohit, Advocate Alapati Sahithya Krishna, Advocate Nidhi Mittal, Advocate Rushabh N. Kapadia, Advocate on Record Taruna Singh Gohil; Advocate on Record D.S. K. Legal, Advocate on Record Samir Malik, Advocate on Record Hasan Murtaza, Advocate on Record K. V. Mohan, Advocate on Record Amita Singh Kalkal, Advocate on Record Hemantika Wahi, Advocate on Record M. Y. Deshmukh, Advocate Manjeet Kirpal, Advocate Adviteeya Sharma, Advocate on Record D. Kumanan, Advocate Advocate Sheikh F Kalia, Advocate on Record Rajeev Maheshwaranand Roy, Advocate P. Srinivasan, Advocate Gunjan Kumar, Advocate on Record Senthil Jagadeesan, Advocate Sajal Jain, Advocate Sonakshi Malhan, Advocate on Record Ishita Jain, Advocate Anand Kumar Shrivastava, Advocate Shivam Sinha, Advocate Shivam Sinah, Advocate Ankit Bhandari, Advocate on Record Arunima Dwivedi, Advocate on Record Gurmeet Singh Makker, Advocate on Record Anand Shankar Jha, Advocate Meenakshi Devgan, Advocate Sachin Mintri, Advocate on Record T. Sundar Ramanathan, Advocate Vivek Pandey, Advocate D Balaji, Advocate Krishan Singhal, Advocate on Record Abhinav Mukerji, Advocate on Record Senthil Jagadeesan, Advocate Sajal Jain, Advocate Sonakshi Malhan, Advocate Sanjeev Kapoor, Advocate Divya Chaturvedi, Advocate Saransh Shaw; Advocate on Record Khaitan & Co., Advocate on Record Nikunj Dayal, Advocate on Record Hasan Murtaza, Senior Advocate V.S. Pillai, Advocate Hitesh Kumar Sharma, Advocate Akhileshwar Jha, Advocate R.L.K. Sundram, Advocate S.S. Stalian, Advocate V. J. Stlani, Advocate on Record Vinodh Kanna B.
