Supreme Court Upholds “Own Use” Interpretation for Captive Power Plants: Chhattisgarh State Power Distribution Company Ltd. vs. Chhattisgarh State Electricity Regulatory Commission (2022)

Date of the Judgment: May 12, 2022
Citation: (2022) INSC 512
Judges: L. Nageswara Rao, J. and B.R. Gavai, J.

Can a company that generates power primarily for its own use, share that power with a related company and still be considered as using it for “own use” under the Electricity Act, 2003? The Supreme Court of India addressed this question in a recent case, clarifying the scope of “captive generation” and “own use” provisions. This judgment has significant implications for how captive power plants operate and share power with related entities. The bench comprised of Justice L. Nageswara Rao and Justice B.R. Gavai, with the majority opinion authored by Justice B.R. Gavai.

Case Background

Shri Bajrang Power and Ispat Ltd. (SBPIL) established a captive power plant. Shri Bajrang Metallics and Power Ltd. (SBMPL) is a sister concern of SBPIL. SBPIL sought permission from the Chhattisgarh State Electricity Regulatory Commission (“the Commission”) to transmit 19 lakh units (13 MW) of power through the appellant’s transmission system for captive use by SBMPL.

SBPIL stated that SBMPL held 27.6% of its equity shares and that more than 51% of the electricity generated by the captive plant would be consumed by them. The total generating capacity of SBPIL’s plant was 103.68 MU per annum, with 13.22 MU for its own sponge iron plant, 54 MU for SBMPL, and the balance to be sold to the appellant.

The appellant, Chhattisgarh State Power Distribution Company Ltd., opposed the petition, arguing that SBPIL held more than 72% of the shares but its consumption was only 14.16%, while SBMPL with 26.67% shares would consume 57.87%. The appellant contended that this was not proportionate to the ownership of the power plant.

Timeline

Course of Proceedings

The Chhattisgarh State Electricity Regulatory Commission (the Commission) ruled in favor of SBPIL on October 14, 2005, stating that the supply of electricity to its sister concern, SBMPL, qualified as ‘own consumption’ under Section 9 read with Section 2(8) of the Electricity Act, 2003, and Rule 3 of the Electricity Rules, 2005. The Commission imposed conditions that the captive users’ consumption should not be less than 51% over a financial year, and that the Chhattisgarh State Electricity Board (CSEB) could charge for wheeling and other charges.

The appellant, aggrieved by the Commission’s order, appealed to the Appellate Tribunal for Electricity (APTEL). APTEL dismissed the appeals on December 6, 2007, upholding the Commission’s decision. Subsequently, the appellant filed appeals before the Supreme Court.

Legal Framework

The Supreme Court examined the following provisions of the Electricity Act, 2003:

• Section 2(8): Defines “Captive generating plant” as a power plant set up by any person to generate electricity primarily for his own use, including plants set up by cooperative societies or associations for their members’ use.
• Section 2(49): Defines “person” to include companies, bodies corporate, associations, or bodies of individuals, whether incorporated or not.
• Section 9: Allows a person to construct, maintain, or operate a captive generating plant and dedicated transmission lines. It also states that the supply of electricity from a captive plant through the grid shall be regulated in the same manner as a generating company. Further, no license is required for the supply of electricity generated from a captive plant to any licensee or consumer, subject to regulations under Section 42(2). It also grants the right to open access for carrying electricity from a captive plant to the destination of its own use.
• Section 42(2): Empowers the State Commission to introduce open access and determine charges for wheeling, with a surcharge, which is not applicable to a person who has established a captive generating plant for carrying the electricity to the destination of his own use.

The Court also considered Rule 3 of the Electricity Rules, 2005, which specifies the requirements for a power plant to qualify as a captive generating plant. It states that:

• Not less than 26% of the ownership is held by the captive user(s).
• Not less than 51% of the aggregate electricity generated is consumed for captive use, determined annually.
• In the case of an association of persons, the captive users shall hold not less than 26% of the ownership of the plant in aggregate and consume not less than 51% of the electricity generated, in proportion to their shares in the ownership of the power plant, within a variation not exceeding 10%.

The Court noted that these provisions aim to promote the establishment of captive power plants for reliable and cost-effective power, as well as to facilitate employment opportunities through the growth of industry, as outlined in the National Electricity Policy, 2005.

Arguments

Appellant’s Arguments:

• The appellant argued that the Commission and APTEL misinterpreted Rule 3 of the Electricity Rules, 2005.
• It was contended that unless SBPIL, the entity that established the captive power plant, consumed 51% of the generated electricity, it would not be entitled to the benefits under Section 9 of the Electricity Act, 2003.
• The appellant submitted that the phrase “Captive Generating Plant” in Rule 3 implies that the entity establishing the plant must utilize 51% of the electricity for its own use to qualify for the benefits.
• The appellant highlighted the disproportionate consumption, where SBPIL with a larger shareholding consumed less power compared to SBMPL, which had a smaller shareholding.

Respondents’ Arguments:

• The respondents argued that the Commission and APTEL correctly interpreted the Electricity Act, 2003 and the Electricity Rules, 2005.
• They cited the Supreme Court’s decision in Maharashtra State Electricity Distribution Company Limited v. JSW Steel Limited and Others [(2022) 2 SCC 742], which held that no permission is needed from the Commission for the supply of electricity for its own use.
• It was also argued that captive users are not liable to pay the additional surcharge under Section 42(4) of the Electricity Act, 2003.
• The respondents contended that the definition of “person” under the Act is broad enough to include an association of corporate bodies, and that the consumption by SBMPL, a sister concern, should be considered as “own use.”
• The respondents emphasized that the combined consumption of SBPIL and SBMPL exceeded 51% of the generated power, fulfilling the requirements of Rule 3.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the open access for transmitting electricity from SBPIL to SBMPL would be for “own use” under Section 9 of the Electricity Act, 2003.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court cited Maharashtra State Electricity Distribution Company Limited v. JSW Steel Limited and Others [(2022) 2 SCC 742]* to support its view that no permission is required from the Commission for the supply of electricity for its own use, reinforcing the idea that captive power plants have the right to supply power for their own use without additional regulatory hurdles.
• The Court relied on Administrator, Municipal Corporation, Bilaspur v. Dattatraya Dahankar, Advocate and Another [(1992) 1 SCC 361]*, S. Gopal Reddy v. State of A.P. [(1996) 4 SCC 596]*, and Ahmedabad Municipal Corporation and Another v. Nilaybhai R. Thakore and Another [(1999) 8 SCC 139]* to emphasize that the interpretation of the Electricity Act should advance its object and purpose, which is to promote captive power generation and ensure reliable and cost-effective power.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by a combination of statutory interpretation and the policy objectives of the Electricity Act, 2003. The Court emphasized that the definition of “person” under Section 2(49) of the Act is broad and includes associations of corporate bodies. This interpretation allowed the Court to consider the combined consumption of SBPIL and SBMPL as “own use.” The Court also noted that the National Electricity Policy, 2005, aims to promote captive power plants for reliable and cost-effective power, and to facilitate employment opportunities. The Court’s reasoning was also influenced by the need to interpret the law in a manner that advances its object and purpose.

Fact:Law

The Court’s reasoning was more heavily influenced by legal considerations (70%) than factual aspects (30%). The interpretation of the Electricity Act, 2003, and the Electricity Rules, 2005, played a crucial role in the Court’s decision.

The Court considered the arguments of the appellant that the phrase “Captive Generating Plant” in Rule 3 implies that the entity establishing the plant must utilize 51% of the electricity for its own use to qualify for the benefits. The Court rejected this argument, stating that the provisions made in Rule 3 of the said Rules are clear and that the second proviso to Rule 3(1)(a)(ii) of the said Rules provides that in case of association of persons, the captive user(s) shall hold not less than 26% of the ownership of the plant in aggregate and such captive user(s) shall consume not less than 51% of the electricity generated, determined on an annual basis, in proportion to their shares in ownership of the power plant within a variation not exceeding 10%.

The Court also considered the argument of the appellant that there was disproportionate consumption, where SBPIL with a larger shareholding consumed less power compared to SBMPL, which had a smaller shareholding. The Court rejected this argument, stating that since SBMPL holds 27.6% of the ownership, the use of electricity by it would be for captive use under the provisions of the said Act. The Court also noted that the other requirement would be that the consumption of SBIPL and SBMPL together should not be less than 51% of the power generated, which was satisfied in the present case.

The Court observed:

• “A combined reading of Section 9 and Clause (8) of Section 2 of the said Act would reveal that a person is entitled to construct, maintain or operate a captive generating plant. Such a plant should be primarily for his own use.”
• “The provisions made in Rule 3 of the said Rules are clear. Sub-rule (1) of Rule 3 of the said Rules provides that no power plant shall qualify as a “Captive Generating Plant” under Section 9 read with Clause (8) of Section 2 of the said Act unless the conditions stated therein are fulfilled.”
• “It is a settled position of law that the interpretation which advances the object and purpose of the Act, has to be preferred.”

Key Takeaways

• “Own Use” Interpretation: The Supreme Court clarified that “own use” for captive power plants can include consumption by sister concerns, provided that the combined consumption meets the 51% threshold and the ownership criteria are satisfied.
• Promotes Captive Generation: The judgment supports the policy objectives of the Electricity Act, 2003, which encourages the establishment of captive power plants for reliable and cost-effective power.
• Flexibility for Industries: The decision offers flexibility for industries to optimize their power consumption by allowing related entities to share electricity generated from captive plants.
• No Surcharge for Captive Use: The judgment reinforces that captive users are not liable to pay additional surcharges for using their own power, as per Section 42(2) of the Electricity Act, 2003.
• Impact on Future Cases: This judgment will serve as a precedent for future cases involving the interpretation of “own use” and captive generation, providing clarity on how related entities can operate and share power.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the term “own use” in the context of captive power plants under Section 9 of the Electricity Act, 2003, includes the consumption of electricity by a sister concern, provided that the sister concern holds at least 26% of the ownership of the plant and the combined consumption of the generating entity and the sister concern is not less than 51% of the aggregate electricity generated. This interpretation clarifies the scope of “own use” and provides a more flexible framework for captive power plant operations. This judgment reinforces the view that the Electricity Act, 2003 aims to promote captive power generation and ensure reliable and cost-effective power.

Conclusion

The Supreme Court dismissed the appeals, upholding the decisions of the Chhattisgarh State Electricity Regulatory Commission and the Appellate Tribunal for Electricity. The Court clarified that the term “own use” in the context of captive power plants can include the consumption of electricity by a sister concern, provided that the ownership and consumption criteria under Rule 3 of the Electricity Rules, 2005, are met. This judgment provides a more flexible and practical approach to captive power generation, promoting the objectives of the Electricity Act, 2003.