presentation on captive power plants - cii mumbai

© Luthra & Luthra Law Offices

5th NATIONAL CII CONFERENCE ONCAPTIVE POWER PLANTS

Mohit SarafPartner

Luthra & LuthraLaw Offices

October 7, 2005


Structure of PresentationStructure of Presentation Captive Generation under Electricity Act, Captive Generation under Electricity Act,

2003 2003 Electricity Rules, 2005 Electricity Rules, 2005 Sale of Power from Captive Power Plants Sale of Power from Captive Power Plants

– Analysis (including critical analysis of – Analysis (including critical analysis of Judgments) Judgments)

Conclusion Conclusion


Electricity Act : ProvisionsElectricity Act : Provisions

Captive Generating Plant Captive Generating Plant Power Plant Power Plant set upset up by any person to generate by any person to generate

electricity electricity primarily for his own useprimarily for his own use – – Section 2(8) of the Act Section 2(8) of the Act

Permitted to set up a Permitted to set up a Captive Generating Captive Generating PlantPlant and and dedicated transmission linesdedicated transmission lines – – Section 9 of the ActSection 9 of the Act


Electricity Rules, 2005Electricity Rules, 2005 Conditions for setting up a Captive Generating PlantConditions for setting up a Captive Generating Plant

• Rule 1:Rule 1: Plant should be set up Plant should be set up primarily for captive consumptionprimarily for captive consumption and a and a

minimum of 51% of the power generatedminimum of 51% of the power generated should be used for should be used for captive consumption.captive consumption.

++ At least 26% ownershipAt least 26% ownership must vest with captive user(s). must vest with captive user(s).

• Rule 2:Rule 2:Association of PersonsAssociation of Persons – In case of ‘association of persons’, in – In case of ‘association of persons’, in addition to the above two conditions, the captive consumption by addition to the above two conditions, the captive consumption by the members should be in the proportion of their ownership in the the members should be in the proportion of their ownership in the plant (“plant (“Proportionality TestProportionality Test”)”)


Electricity Rules, 2005Electricity Rules, 2005

Not clear whether Rule 2 i.e. the “Not clear whether Rule 2 i.e. the “Proportionality Proportionality TestTest” to be satisfied for ” to be satisfied for SPV. SPV. However, maybe However, maybe prudent to be followed for SPV. prudent to be followed for SPV.

Whether a new plant needs to be constructed or Whether a new plant needs to be constructed or whether an existing plant may be converted into a whether an existing plant may be converted into a captive power plant, to qualify as a CPP?captive power plant, to qualify as a CPP?


Electricity Rules, 2005Electricity Rules, 2005

Ownership defined in relation to equity share capital with Ownership defined in relation to equity share capital with voting rights – Are preference shares covered in the ambit voting rights – Are preference shares covered in the ambit of this definition? of this definition?

Option available for an SPV to declare only a unit or Option available for an SPV to declare only a unit or particular units as a captive generating plant and the users particular units as a captive generating plant and the users (captive) of such unit(s) are required to hold not less than (captive) of such unit(s) are required to hold not less than 26% of the proportionate ownership of the company related 26% of the proportionate ownership of the company related to such unit(s).to such unit(s).


Sale of Power by Captive Power Sale of Power by Captive Power Plant Plant

(a) Supply of power to its stakeholders through the (a) Supply of power to its stakeholders through the Grid Grid

Right to Open Access for carrying electricity from CPP Right to Open Access for carrying electricity from CPP to destination of use [Section 9 (2)]to destination of use [Section 9 (2)]

Cross subsidy surcharge not payable by CPPs for Cross subsidy surcharge not payable by CPPs for use use of Open Access [Section 38, 39, 40 and 42 (2)] of Open Access [Section 38, 39, 40 and 42 (2)]


Sale of Power by Captive Power Sale of Power by Captive Power PlantPlant

(b) Supply of power to its stakeholders through Dedicated (b) Supply of power to its stakeholders through Dedicated Transmission Lines Transmission Lines

Ministry of Power through the Fifth removal of Difficulties Order Ministry of Power through the Fifth removal of Difficulties Order (dated June 8, 2005) (dated June 8, 2005)

- - no “license is required” provided the “no “license is required” provided the “dedicated transmission linededicated transmission line” ” is neither a “is neither a “transmission linetransmission line” nor a “” nor a “distribution systemdistribution system””

Definition of “Definition of “dedicated transmission linesdedicated transmission lines”, “”, “transmission linestransmission lines” and ” and ““distribution systemdistribution system”.”.



Distribution license is in relation to an area of Distribution license is in relation to an area of supplysupply: imposes : imposes universal service obligationuniversal service obligation

Imposing “license requirement” on a Imposing “license requirement” on a Captive Captive Power Plant supplying to its own stakeholders Power Plant supplying to its own stakeholders not intended under the Act. not intended under the Act.



The provisions of opening up streets, carrying out The provisions of opening up streets, carrying out works and installing overhead lines (Sections 67, 68 works and installing overhead lines (Sections 67, 68 &69) are only in relation to a “&69) are only in relation to a “licenseelicensee”. ”.

Does the Act Does the Act not contemplate a captive generating not contemplate a captive generating plant setting up dedicated transmission lines, carrying plant setting up dedicated transmission lines, carrying on works, etc.on works, etc. or is it a “drafting” issue? or is it a “drafting” issue?



(c) Sale of Surplus Power to third parties (c) Sale of Surplus Power to third parties through the Grid through the Grid CPP CPP in capacityin capacity ofof supplying surplus power to third parties may supplying surplus power to third parties may

be treated as a be treated as a generating companygenerating company. . Section 10(2) Section 10(2) provides that aprovides that a generating company generating company maymay subject to subject to

regulations made under Section 42(2) of the Act regulations made under Section 42(2) of the Act supply electricity supply electricity to any consumer.to any consumer.

Surcharge (provisos to Sections 38, 39, 40 and 42(2)) and Surcharge (provisos to Sections 38, 39, 40 and 42(2)) and additional surcharge (Section 42(4)) payable by CPP’sadditional surcharge (Section 42(4)) payable by CPP’s

Open access subject to availability and applicable regulations Open access subject to availability and applicable regulations - Long-term open access is favoured (25 years) - Long-term open access is favoured (25 years)



(d) Sale of Surplus Power to Third Parties through (d) Sale of Surplus Power to Third Parties through Dedicated Transmission Lines Dedicated Transmission Lines

Ministry of Power through the Fifth removal of Difficulties Ministry of Power through the Fifth removal of Difficulties Order (dated June 8, 2005) Order (dated June 8, 2005)

One of the objects and reasons in the Statement of objects and One of the objects and reasons in the Statement of objects and reasons of the Electricity Act, 2003 stated “Where there is reasons of the Electricity Act, 2003 stated “Where there is direct commercial relationship between a consumer and a direct commercial relationship between a consumer and a generating company the price of power would not be regulated generating company the price of power would not be regulated and and only the transmission and wheeling charges with surcharge only the transmission and wheeling charges with surcharge would be regulatedwould be regulated.” .”



Section 10(2) Section 10(2) uses uses ““maymay” ” for supply to third parties for supply to third parties subject to subject to open access under open access under Section 42(2)Section 42(2) – the Act – the Act therefore recognizes the possibility of supply therefore recognizes the possibility of supply through mediums other than the Grid i.e. through through mediums other than the Grid i.e. through dedicated transmission linesdedicated transmission lines

However, However, the Supreme Court in a casethe Supreme Court in a case has held that has held that “In the interpretation of statutes the courts always “In the interpretation of statutes the courts always presume that legislature inserted every part thereof presume that legislature inserted every part thereof for a purpose and the legislative intention is that for a purpose and the legislative intention is that every part of the statute should have effect.”every part of the statute should have effect.”



In sale of surplus power by CPP to third parties In sale of surplus power by CPP to third parties through dedicated transmission lines – stakeholders through dedicated transmission lines – stakeholders of the CPP are merely substituted by a third party of the CPP are merely substituted by a third party

Does sale to third parties through dedicated Does sale to third parties through dedicated transmission lines lead to establishment of a transmission lines lead to establishment of a “Distribution System” requiring a distribution “Distribution System” requiring a distribution license ? license ?

Distribution Licensee – Universal Service Obligation Distribution Licensee – Universal Service Obligation


Regulatory Orders and Judicial Regulatory Orders and Judicial DecisionsDecisions

Karnataka Electricity Regulatory CommissionKarnataka Electricity Regulatory Commission: : Jindal Jindal Thermal Thermal Power Co. v. M/s Bhulawka Pipes and othersPower Co. v. M/s Bhulawka Pipes and others

• generating company intending to supply to consumers through dedicated generating company intending to supply to consumers through dedicated transmission lines transmission lines would require a distribution license under the Actwould require a distribution license under the Act ..

• no rationale given for decision.no rationale given for decision.

• In a subsequent petition KERC dismissed application for limited area In a subsequent petition KERC dismissed application for limited area supply license.supply license.

However, However, the Supreme Court has in a casethe Supreme Court has in a case held that statutes held that statutes have to be interpreted to give full effect to the whole statute not have to be interpreted to give full effect to the whole statute not to restrict its meaning. to restrict its meaning.



Maharashtra State Electricity Commission: Maharashtra State Electricity Maharashtra State Electricity Commission: Maharashtra State Electricity

Board v. Bhushan Steel & Strips LimitedBoard v. Bhushan Steel & Strips Limited ((order dated August 3, 2004)order dated August 3, 2004)

• a “captive generating plant” can supply surplus energy to a third party a “captive generating plant” can supply surplus energy to a third party consumer through dedicated transmission lines, consumer through dedicated transmission lines, without taking any without taking any particular licenceparticular licence. .

Reverse Flip by Bombay High Court (order dated April 4, 2005) Reverse Flip by Bombay High Court (order dated April 4, 2005)

• MERC order in Bhushan Steel reversed (without a license Bhushan Steel MERC order in Bhushan Steel reversed (without a license Bhushan Steel (a captive generating plant)) (a captive generating plant)) cannot sell surplus power to third party cannot sell surplus power to third party consumer without a licenceconsumer without a licence..



However, the However, the Supreme Court has held in a caseSupreme Court has held in a case that “a decision that “a decision not accompanied by reasons and not proceeding on conscious not accompanied by reasons and not proceeding on conscious consideration of all issue cannot be deemed to have binding consideration of all issue cannot be deemed to have binding effect as is contemplated under Article 141.”effect as is contemplated under Article 141.”

The Bombay High Court in the Bhushan Steel Case further held The Bombay High Court in the Bhushan Steel Case further held that “Preamble of the Act intends to ‘promote competition in that “Preamble of the Act intends to ‘promote competition in generation, transmission, distribution, trading and use of generation, transmission, distribution, trading and use of electricity, and electricity, and protect the interest of consumersprotect the interest of consumers…’. …’.

Industrial Consumers are also consumers Industrial Consumers are also consumers



The Bombay High Court also held that “The Bombay High Court also held that “If the intention of If the intention of the legislature was to give complete freedom to the CPPs the legislature was to give complete freedom to the CPPs to sell excess power, the legislature would have said soto sell excess power, the legislature would have said so”.”.

However, it is a well established principle of statutory However, it is a well established principle of statutory interpretation that a interpretation that a legislation cannot be meant to be legislation cannot be meant to be prohibiting an activity if such legislation does not prohibiting an activity if such legislation does not expressly provide for the same.expressly provide for the same.

The Supreme Court has held that Courts must avoid the The Supreme Court has held that Courts must avoid the danger of a priori determination of the meaning of a danger of a priori determination of the meaning of a provision based on their own pre-conceived notions.provision based on their own pre-conceived notions.


Supreme Court Decision Supreme Court Decision

Supreme Court Supreme Court dismisses dismisses the Special Leave the Special Leave Petition of Bhushan Steel on May 12, 2005Petition of Bhushan Steel on May 12, 2005

Captive generating plant cannot sell surplus power Captive generating plant cannot sell surplus power to a consumer without a license using its own lines to a consumer without a license using its own lines i.e., dedicated transmission lines. i.e., dedicated transmission lines.


Critical Analysis of the Judgment Critical Analysis of the Judgment

If the Act does not contemplate payment of a If the Act does not contemplate payment of a surcharge surcharge for third party sales by a CPPfor third party sales by a CPP through its dedicated through its dedicated transmission linestransmission lines and if such omission is causing and if such omission is causing revenue losses to state utilities, then in the words of the revenue losses to state utilities, then in the words of the SC “the duty of correcting misuse of this provision is SC “the duty of correcting misuse of this provision is the job of the legislature and not the judiciary”.the job of the legislature and not the judiciary”.

Though the Act does not impose licensing obligations Though the Act does not impose licensing obligations

on CPPs, the Court has attempted to impose an on CPPs, the Court has attempted to impose an obligation on CPPs to obtain a license in relation to obligation on CPPs to obtain a license in relation to dedicated transmission lines resulting in dedicated transmission lines resulting in frustrating frustrating part part of the Act relating to CPPs.of the Act relating to CPPs.


Critical Analysis of the JudgmentCritical Analysis of the Judgment

The Court has attempted to The Court has attempted to create a separate create a separate category of licensescategory of licenses (apart from licenses (apart from licenses contemplated for transmission, distribution and contemplated for transmission, distribution and trading under the Act) to be obtained by a CPP, trading under the Act) to be obtained by a CPP, such attempt conflicts with the Doctrine of such attempt conflicts with the Doctrine of Separation of Powers under the Constitution.Separation of Powers under the Constitution.

The Act is a The Act is a reform statutereform statute which should be which should be

liberally and widely interpreted for the benefit of liberally and widely interpreted for the benefit of electricity industry. electricity industry.


Conclusion Conclusion

In the words of the Supreme Court “Courts In the words of the Supreme Court “Courts cannot usurp legislative function under the cannot usurp legislative function under the disguise of interpretation”.disguise of interpretation”.


Thank You Thank You

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presentation on captive power plants - cii mumbai

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