Captive Generating Power Plants: Supreme Court Clarifies Key Aspects Of The Rules: A Recap

BACKGROUND

• Commercial and Industrial (C&I) users are increasingly meeting their power requirements through group captive structures wherein a captive generating plant (a CGP) is set-up in an SPV company.
• A group captive structure offers certain advantages to C&I consumers. These are as follows:
  • CGPs are granted "open access" (i.e., non discriminatory access to existing transmission infrastructure).
  • The captive users of a CGP are also exempt from paying two types of charges (cross subsidy and additional surcharge payments).
• A key regulatory requirement of such CGPs is that the captive users must collectively own at least 26% stake in the plant and must consume at least 51% of the power generated by the plant.

THE ISSUE

The Law

• The Electricity Rules, 2005 (Rules): Where a CGP is set-up by an "association of persons" (AoP), the Rules prescribe a proportionality requirement wherein the electricity consumption by each captive user of a CGP, must be proportional to the shares held by such user in the CGP, with a permissible variation of 10% on either end (the Proportionality Requirement).

Applicability of Proportionality to captive users in an SPV

• It has been unclear as to whether the Proportionality Requirement applies to CGPs. In other words, there have been differing views on whether companies can be classified as AoPs.

Why is this Important?

• If the Proportionality Requirement does not apply to each captive user/shareholder in an SPV structure, the Rules can be "gamed". For instance, a small captive user/shareholder of an SPV, could disproportionately consume the bulk of the requisite 51% of the electricity generated by the CGP.
• In its most recent order in the case of Tamil Nadu Power Producers Association v. TN Electricity Regulatory Commission (TN Power), the Appellate Tribunal for Electricity (APTEL) stated that companies do not qualify as AoPs under the Rules, and the shareholders would therefore not be required to meet the Proportionality Requirement.

THE SUPREME COURT JUDGEMENT

• The Supreme Court in its judgement dated October 9, 2023, in the case of Dakshin Gujarat Vij Company Limited v. Gayatri Shakti Papers and Board Limited and Another (Judgement), provided clarity on the qualifying criteria for CGPs.

Companies are AoPs and the Proportionality Requirement applies to Companies

• The Supreme Court held that for the purpose of the Rules, SPV companies should be treated as AoPs and therefore, each captive user of a CGP (that is owned by an SPV) is required to comply with the Proportionality
• The Supreme Court stated in relation to the Proportionality Requirement that every user of a CGP that is set up by an SPV, will qualify to be a captive user if, (i) such user annually consumes at least 1.96% (+/-10%) of power produced for each 1% of ownership of such user in the SPV (the Unitary Qualifying Ratio); and (ii) all such users complying with the aforesaid test also meet the 26% ownership requirement and the 51% consumption requirement, collectively. Accordingly, any user who fails to meet the Unitary Qualifying Ratio would not qualify as a captive user.

Shareholding Requirements

The Judgement clarified that in the event of a change in shareholding or ownership of the CGP:

• The minimum ownership requirement of 26% is required to be maintained continuously, throughout the financial year, i.e., from 1st April of the current year to 31st March of the next year.
• The proportional consumption of electricity by a captive user shall be calculated with reference to the relevant average weighted shareholding of the captive user for the relevant financial year.

PRACTICAL IMPLICATIONS

• Prior to the Judgement, there were different views taken at the APTEL level about whether the Proportionality Requirement would apply to companies. Pursuant to the Judgement, it is now well-settled that the Proportionality Requirement does indeed apply.
• The Judgement shows that the Supreme Court was cognizant that the existing framework could be "gamed". By applying the Proportionality Requirement to companies, and also applying consumption against the weighted average of a user's equity during a financial year, the scope for such "gaming" has been reduced.
• The Judgement has also helpfully provided illustrations, which are set out in the following pages.

Download : Touchstone-Partners-Captive-Group-1-July-2024.pdf (touchstonepartners.com)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.