Supreme Court clarifies norms for Captive Generating Plants under Electricity Act: Dakshin Gujarat Vij Company Ltd. vs. Gayatri Shakti Paper and Board Ltd. (2023) INSC 886 (09 October 2023)

Date of the Judgment: 09 October 2023
Citation: (2023) INSC 886
Judges: Sanjiv Khanna, J., M.M. Sundresh, J.
Can a power plant qualify as a ‘Captive Generating Plant’ (CGP) if its ownership changes after it has been set up? The Supreme Court of India has recently addressed this crucial question, interpreting key provisions of the Electricity Act, 2003 and the Electricity Rules, 2005. This judgment clarifies the eligibility criteria for a plant to be classified as a CGP and for a user to be considered a captive user, particularly in cases involving an ‘association of persons’ and Special Purpose Vehicles (SPVs). The bench comprised Justices Sanjiv Khanna and M.M. Sundresh, with the majority opinion authored by Justice Sanjiv Khanna.

Case Background

The case involves multiple appeals concerning the interpretation of the Electricity Act, 2003, and the Electricity Rules, 2005, specifically regarding the classification of a power plant as a Captive Generating Plant (CGP) and the eligibility of a user as a captive user. The core issue revolves around determining the criteria for a power plant to qualify as a CGP, especially when ownership changes or when the plant is set up by an association of persons or a Special Purpose Vehicle (SPV). The appellants, Dakshin Gujarat Vij Company Limited and others, are primarily distribution licensees, while the respondents, Gayatri Shakti Paper and Board Limited and others, are entities claiming to be captive users of electricity generated by CGPs. The dispute arises from the distribution licensees’ claims that certain entities do not meet the requirements to be classified as captive users and are therefore liable to pay additional surcharges.

Timeline

Course of Proceedings

The legal proceedings began with disputes before various State Electricity Regulatory Commissions concerning the eligibility of certain power plants as CGPs and their users as captive users. These disputes were then appealed to the Appellate Tribunal for Electricity (APTEL). The APTEL issued conflicting judgments on the interpretation of the relevant provisions. Specifically, the APTEL’s decision in Kadodara Power Pvt. Ltd. and Others v. Gujarat Electricity Regulatory Commission and Another was later held to be per incuriam in Tamil Nadu Power Producers Association v. Tamil Nadu Electricity Regulatory Commission. A subsequent decision in Sai Wardha Power Generation Limited and Others v. Maharashtra Electricity Regulatory Commission largely agreed with the view in Tamil Nadu Power. Due to these conflicting views, the matter was brought before the Supreme Court of India for final adjudication.

Legal Framework

The Supreme Court referred to the following key provisions:

• Section 2(8) of the Electricity Act, 2003: Defines “Captive Generating Plant” as a power plant set up by any person to generate electricity primarily for their own use, including plants set up by cooperative societies or associations of persons for the use of their members.
• Section 2(49) of the Electricity Act, 2003: Defines “person” to include any company, body corporate, association, or body of individuals, whether incorporated or not, or an artificial juridical person.
• Section 9 of the Electricity Act, 2003: Allows any person to construct, maintain, or operate a captive generating plant and dedicated transmission lines. It also specifies that no license is required for supplying electricity from a CGP to a licensee, and supply to other consumers is subject to regulations under Section 42(2).
• Section 42(2) of the Electricity Act, 2003: Empowers State Commissions to introduce open access for electricity distribution, subject to conditions, including cross-subsidies and operational constraints. It also specifies that no surcharge is leviable if open access is provided to a person who has established a CGP for carrying electricity to the destination of their own use.
• Rule 3 of the Electricity Rules, 2005: Specifies the requirements for a power plant to qualify as a CGP. It mandates that not less than 26% of the ownership is held by the captive user(s), and not less than 51% of the aggregate electricity generated is consumed for captive use. It also includes specific provisions for cooperative societies and associations of persons.

The Court emphasized that the Electricity Act, 2003, aims to promote the growth of industries by ensuring reliable and cost-effective power through captive generation. The legal framework seeks to balance the interests of captive users, distribution licensees, and the general public.

Arguments

The arguments presented before the Supreme Court revolved around the interpretation of the term “Captive Generating Plant” and the eligibility criteria for captive users, particularly in the context of Rule 3 of the Electricity Rules, 2005.

Submissions on behalf of the Appellants (Distribution Licensees):

• The distribution licensees argued that the term “set up” in Section 2(8) of the Electricity Act, 2003, implies that only the person who originally established the power plant can be considered a captive user. They contended that subsequent transferees of ownership cannot claim captive status.
• They argued that the second proviso to Rule 3(1)(a) of the Electricity Rules, 2005, which stipulates that in the case of an “association of persons,” the captive users must consume electricity in proportion to their shareholding, should be strictly applied.
• They contended that Special Purpose Vehicles (SPVs) should not be treated differently from other “associations of persons” and should also be subject to the proportionality requirement.
• They argued that captive users who do not meet the ownership and consumption criteria should be liable to pay cross-subsidy surcharges.

Submissions on behalf of the Respondents (Captive Users):

• The captive users argued that the term “set up” should not be interpreted narrowly to exclude subsequent owners of the power plant. They contended that the focus should be on whether the current owner meets the ownership and consumption criteria.
• They argued that the second proviso to Rule 3(1)(a) should not be applied to SPVs, as SPVs are distinct legal entities and not merely an “association of persons.” They contended that SPVs should only be required to meet the minimum consumption criteria of 51%, without the proportionality requirement.
• They relied on the National Electricity Policy, 2005, to argue that the provisions related to captive generation should be interpreted liberally to encourage industrial growth and employment opportunities.

Innovativeness of the argument: The distribution licensees innovatively argued for a strict interpretation of “set up,” aiming to limit the transferability of captive status, while the captive users emphasized a practical interpretation that promotes the ease of doing business and encourages captive power generation.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. What are the eligibility criteria for a Captive Generating Plant (CGP) and a captive user under Rule 3(1)(a) of the Electricity Rules, 2005?
2. How should the second proviso under Rule 3(1)(a) of the Electricity Rules, 2005, be interpreted, particularly concerning the term “association of persons”?
3. Is a company set up as a Special Purpose Vehicle (SPV) for generating electricity considered an “association of persons” under the second proviso to Rule 3(1)(a) of the Electricity Rules, 2005?

Additionally, the Court also considered the following sub-issues:

• Whether the term “set up” in Section 2(8) of the Electricity Act, 2003, includes the acquisition of shares/ownership after the power plant has already been set up.
• Whether the minimum ownership and consumption criteria for captive users are required to be satisfied only on the last day of the financial year.
• How to calculate the proportional consumption of electricity when an existing captive user exits/transfers their shareholding/ownership to a new captive user.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that:

• The term “set up” in Section 2(8) of the Electricity Act, 2003, should not be interpreted narrowly to exclude subsequent owners of a power plant. The focus should be on whether the current owner meets the ownership and consumption criteria.
• The minimum ownership and consumption criteria for captive users must be met and maintained throughout the financial year, not just at the end of the financial year.
• The second proviso to Rule 3(1)(a) of the Electricity Rules, 2005, which stipulates that in the case of an “association of persons,” the captive users must consume electricity in proportion to their shareholding, should be strictly applied.
• A company set up as a Special Purpose Vehicle (SPV) for generating electricity is considered an “association of persons” and must meet the proportionality requirement under the second proviso to Rule 3(1)(a) of the Electricity Rules, 2005.
• The principle of weighted average should be applied to ensure compliance with the proportional electricity consumption requirement when there is a change in ownership or shareholding of the CGP.

How each authority was viewed by the Court?

✓ Kadodara Power Pvt. Ltd. and Others v. Gujarat Electricity Regulatory Commission and Another [2009 SCC OnLine APTEL 119]: The Court agreed with the interpretation that a CGP does not lose its status upon transfer of ownership, provided the new owner meets the eligibility criteria.

✓ Tamil Nadu Power Producers Association v. Tamil Nadu Electricity Regulatory Commission [2021 SCC OnLine APTEL 19]: The Court disagreed with the view that minimum ownership and consumption criteria need to be satisfied only at the end of the financial year and that SPVs are not required to meet the proportionality requirement.

✓ Chhattisgarh State Power Distribution Company Limited v. Chhattisgarh State Electricity Regulatory Commission and Anr. [(2022) SCC Online SC 604]: The Court reiterated its view that captive consumers are a separate class and are not liable to pay additional surcharges.

✓ Maharashtra State Electricity Distribution Company Limited v. JSW Steel Limited and Ors. [(2022) 2 SCC 742]: The Court referred to this judgment to reiterate that captive consumers are not liable to pay additional surcharges.

✓ SESA Sterilite Limited v. Orissa Electricity Regulatory Commission and Others [(2014) 8 SCC 444]: The Court distinguished this case, stating that it did not deal with the definition of CGP and captive users, and therefore, not applicable to the present case.

✓ Global Energy Ltd. and Another v. Central Electricity Regulatory Commission [(2009) 15 SCC 570]: The Court referred to this case to emphasize that regulatory statutes should be interpreted in a manner that promotes their purpose and object.

✓ Ramanlal Bhailal Patel and Others v. State of Gujarat [(2008) 5 SCC 449]: The Court referred to this case to clarify that the meaning of “association of persons” may vary based on the particular context of a statute.

✓ S. Sundaram Pillai and Others v. V.R. Pattabiraman and Others [(1985) 1 SCC 591]: The Court referred to this case to explain the different purposes that a proviso can serve in a statute.

✓ Monnet Ispat & Energy Ltd. And Others v. Union of India and Others [C.A. No. 18506-18507 of 2017]: The Court referred to this case to reiterate that the minimum electricity consumption requirement under Rule 3(1)(a)(ii) conforms with the requirement under Section 2(8) of the Act.

✓ Section 2(8) of the Electricity Act, 2003: The Court analyzed this section to define the term “Captive Generating Plant” and its scope.

✓ Section 2(49) of the Electricity Act, 2003: The Court used this definition to clarify the scope of who can set up a CGP.

✓ Section 9 of the Electricity Act, 2003: The Court analyzed this section to understand the rights and obligations of persons who construct, maintain, or operate a CGP.

✓ Section 42(2) of the Electricity Act, 2003: The Court used this provision to clarify the conditions for open access and the exemption of surcharge for captive users.

✓ Rule 3 of the Electricity Rules, 2005: The Court extensively analyzed this rule to determine the eligibility criteria for a CGP and its captive users.

✓ National Electricity Policy, 2005: The Court referred to this policy to understand the legislative intent behind promoting captive generation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure that the benefits of captive generation are not misused. The Court emphasized that the provisions of the Electricity Act, 2003, and the Electricity Rules, 2005, are intended to promote genuine captive use, where the electricity generated is primarily for the consumption of the plant’s owners.

The Court was also concerned with preventing gaming by owners who might try to circumvent the rules by having a small shareholding but consuming a large portion of the generated electricity. The proportionality requirement was seen as a necessary safeguard to ensure that the consumption of electricity is genuinely related to the ownership of the plant.

Additionally, the Court aimed to provide clarity and certainty in the interpretation of the rules, especially concerning SPVs, to ensure that all stakeholders have a clear understanding of their rights and obligations. The Court also sought to harmonize the various provisions of the Act and the Rules to give effect to the legislative intent behind promoting captive generation.

The Court’s reasoning was also influenced by the need to protect the interests of the distribution licensees, who are responsible for maintaining the electricity distribution system. The Court recognized that if the rules are not strictly applied, it could lead to a loss of revenue for the distribution licensees.

The Court’s reasoning was also influenced by the need to protect the interests of the distribution licensees, who are responsible for maintaining the electricity distribution system. The Court recognized that if the rules are not strictly applied, it could lead to a loss of revenue for the distribution licensees.

Logical Reasoning:

Dissenting Opinion

There was no dissenting opinion in this case. The judgment was unanimous, with Justice Sanjiv Khanna authoring the majority opinion and Justice M.M. Sundresh concurring.

Conclusion

The Supreme Court’s judgment in Dakshin Gujarat Vij Company Ltd. vs. Gayatri Shakti Paper and Board Ltd. provides much-needed clarity on the eligibility criteria for Captive Generating Plants (CGPs) and captive users under the Electricity Act, 2003, and the Electricity Rules, 2005. The Court’s interpretation of key terms and provisions will have a significant impact on the electricity sector, particularly for industries that rely on captive power generation.

The judgment clarifies that the benefits of captive generation are intended for genuine captive users who meet the ownership and consumption criteria throughout the financial year. It also establishes that Special Purpose Vehicles (SPVs) are considered “associations of persons” and must adhere to the proportionality requirement. This will prevent gaming by owners with disproportionately low shareholding and high consumption.

The Court’s decision is expected to promote a more transparent and equitable system, protecting the interests of both captive users and distribution licensees. By ensuring that the rules are strictly applied, the judgment will also contribute to the stability and reliability of the electricity distribution system.

Impact on the Electricity Sector:

• Clarity for Industries: The judgment provides clarity to industries that rely on captive power generation regarding the eligibility criteria for CGPs and captive users.
• Prevention of Misuse: The ruling prevents the misuse of captive generation benefits by ensuring that ownership and consumption are proportional.
• Impact on SPVs: The judgment clarifies that SPVs are considered “associations of persons” and must adhere to the proportionality requirement.
• Protection of Distribution Licensees: By preventing gaming, the judgment protects the revenue of distribution licensees, ensuring the stability of the electricity distribution system.
• Promotion of Genuine Captive Use: The ruling promotes genuine captive use, where the electricity generated is primarily for the consumption of the plant’s owners.