captive power plants

1. CAPTIVE POWER PLANTS
Jay Ranvir
Chemtrols Solar Private Limited
Saki Vihar Road, Powai
Mumbai – 400 072

2. Captive Generation under Electricity
Act, 2003
Electricity Rules, 2005
Sale of Power from Captive Power
Plants – Analysis (including critical
analysis of Judgments)
Conclusion

3. Captive Generating Plant
 Power Plant set up by any person to
generate electricity primarily for his
own use – Section 2(8) of the Act
 Permitted to set up a Captive Generating
Plant and dedicated transmission lines –
Section 9 of the Act

4. Conditions for setting up a Captive Generating Plant
• Rule 1:
Plant should be set up primarily for captive consumption and a
minimum of 51% of the power generated should be used for
captive consumption.
+
At least 26% ownership must vest with captive user(s).
• Rule 2:
Association of Persons – In case of ‘association of persons’, in
addition to the above two conditions, the captive consumption
by the members should be in the proportion of their ownership
in the plant (“Proportionality Test”)

5.  Not clear whether Rule 2 i.e. the “Proportionality Test”
to be satisfied for SPV. However, maybe prudent to be
followed for SPV.
 Whether a new plant needs to be constructed or whether
an existing plant may be converted into a captive power
plant, to qualify as a CPP?

6.  Ownership defined in relation to equity share capital
with voting rights – Are preference shares covered in
the ambit of this definition?
 Option available for an SPV to declare only a unit or
particular units as a captive generating plant and the
users (captive) of such unit(s) are required to hold
not less than 26% of the proportionate ownership of
the company related to such unit(s).

7. (a) Supply of power to its stakeholders through
the Grid
Right to Open Access for carrying electricity
from CPP to destination of use [Section 9 (2)]
Cross subsidy surcharge not payable by CPPs for
use of Open Access [Section 38, 39, 40 and 42
(2)]

8. (b) Supply of power to its stakeholders through Dedicated
Transmission Lines
 Ministry of Power through the Fifth removal of Difficulties
Order (dated June 8, 2005)
- no “license is required” provided the “dedicated
transmission line” is neither a “transmission line” nor a
“distribution system”
 Definition of “dedicated transmission lines”, “transmission
lines” and “distribution system”.

9.  Distribution license is in relation to an
area of supply: imposes universal
service obligation
 Imposing “license requirement” on a
Captive Power Plant supplying to its own
stakeholders not intended under the
Act.

10.  The provisions of opening up streets, carrying
out works and installing overhead lines
(Sections 67, 68 &69) are only in relation to a
“licensee”.
 Does the Act not contemplate a captive
generating plant setting up dedicated
transmission lines, carrying on works, etc.
or is it a “drafting” issue?

11. (c) Sale of Surplus Power to third
parties through the Grid
 CPP in capacity of supplying surplus power to third
parties may be treated as a generating company.
 Section 10(2) provides that a generating company may
subject to regulations made under Section 42(2) of the
Act supply electricity to any consumer.
 Surcharge (provisos to Sections 38, 39, 40 and 42(2))
and additional surcharge (Section 42(4)) payable by
CPP’s
 Open access subject to availability and applicable
regulations - Long-term open access is favoured (25
years)

12. (d) Sale of Surplus Power to Third Parties through
Dedicated Transmission Lines
 Ministry of Power through the Fifth removal of
Difficulties Order (dated June 8, 2005)
 One of the objects and reasons in the Statement of
objects and reasons of the Electricity Act, 2003 stated
“Where there is direct commercial relationship between a
consumer and a generating company the price of power
would not be regulated and only the transmission and
wheeling charges with surcharge would be regulated.”

13. (
 However, the Supreme Court in a case has
held that “In the interpretation of statutes
the courts always presume that legislature
inserted every part thereof for a purpose and
the legislative intention is that every part of
the statute should have effect.”

14.  In sale of surplus power by CPP to third
parties through dedicated transmission lines –
stakeholders of the CPP are merely
substituted by a third party
 Does sale to third parties through dedicated
transmission lines lead to establishment of a
“Distribution System” requiring a
distribution license ?
 Distribution Licensee – Universal Service
Obligation

15.  Karnataka Electricity Regulatory Commission: Jindal
Thermal Power Co. v. M/s Bhulawka Pipes and others
• generating company intending to supply to consumers through
dedicated transmission lines would require a distribution license
under the Act.
• no rationale given for decision.
• In a subsequent petition KERC dismissed application for limited area
supply license.
However, the Supreme Court has in a case held that statutes
have to be interpreted to give full effect to the whole
statute not to restrict its meaning.

16.  Maharashtra State Electricity Commission: Maharashtra State
Electricity Board v. Bhushan Steel & Strips Limited (order dated
August 3, 2004) Reverse Flip by Bombay High Court (order
dated April 4, 2005)
• MERC order in Bhushan Steel reversed (without a license Bhushan
Steel (a captive generating plant)) cannot sell surplus power to
third party consumer without a licence.

17.  However, the Supreme Court has held in a case that
“a decision not accompanied by reasons and not
proceeding on conscious consideration of all issue
cannot be deemed to have binding effect as is
contemplated under Article 141.”
 The Bombay High Court in the Bhushan Steel Case
further held that “Preamble of the Act intends to
‘promote competition in generation, transmission,
distribution, trading and use of electricity, and
protect the interest of consumers…’.
 Industrial Consumers are also consumers

18.  The Bombay High Court also held that “If the
intention of the legislature was to give
complete freedom to the CPPs to sell excess
power, the legislature would have said so”.
 However, it is a well established principle of
statutory interpretation that a legislation cannot
be meant to be prohibiting an activity if such
legislation does not expressly provide for the
same.
 The Supreme Court has held that Courts must
avoid the danger of a priori determination of the
meaning of a provision based on their own pre-
conceived notions.

19.  Supreme Court dismisses the Special
Leave Petition of Bhushan Steel on May
12, 2005
Captive generating plant cannot sell surplus power
to a consumer without a license using its own lines
i.e., dedicated transmission lines.

20.  If the Act does not contemplate payment of a
surcharge for third party sales by a CPP through its
dedicated transmission lines and if such omission is
causing revenue losses to state utilities, then in the
words of the SC “the duty of correcting misuse of
this provision is the job of the legislature and not
the judiciary”.
 Though the Act does not impose licensing obligations
on CPPs, the Court has attempted to impose an
obligation on CPPs to obtain a license in relation to
dedicated transmission lines resulting in frustrating
part of the Act relating to CPPs.

21.  The Court has attempted to create a
separate category of licenses (apart from
licenses contemplated for transmission,
distribution and trading under the Act) to be
obtained by a CPP, such attempt conflicts with
the Doctrine of Separation of Powers under the
Constitution.
 The Act is a reform statute which should be
liberally and widely interpreted for the benefit
of electricity industry.

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