Supreme Court Interprets Provisions Of Electricity Act & Rules Towards Classifying As A Captive Generating Plant & A Captive User

A Supreme Court Bench of Justice Sanjiv Khanna and Justice MM Sundresh have interpreted relevant provisions of the Electricity Act, 2003 and Rule 3 of the Electricity Rules, 2005, for being classified as a Captive Generating Plant and a captive user.

Counsel KV Mohan appeared for the petitioner before the Court.

The Court perused the relevant provisions of the law and legal precedent, to frame three issues for specific consideration in view of the conflicting judgments of the APTEL, which were:

1) Eligibility criteria for a CGP/captive user under Rule 3(1)(a) of the Rules.

2) Interpretation of the second proviso under Rule 3(1)(a) of the Rules.

3) Whether a company set up as a Special Purpose Vehicle for generating electricity is an, “association of persons”, in terms of the second proviso to Rule 3(1)(a) of the Rules.

Regarding the first issue, the Apex Court concluded that, "the minimum ownership requirement is required to be maintained continuously, throughout the financial year, that is, from 1st April of a year to 31st March of the next year, along with the minimum electricity consumption requirement. This is also the mandate of Explanation (2) to Rule 3(1)(b) of the Rules, which casts obligation on the captive users to ensure compliance of clauses (a) and (b) to sub-rule (1) to Rule 3 of the Rules."

Observing that the proviso is ambiguous and confusing, the Court clarified that, "we do not take into consideration 100% of the electricity generated. Instead, we apply the shareholding requirement, which should not be less than 26% in aggregate, to the electricity consumed, which should not be less than 51%, and thereby compute whether the ownership criteria and the proportionate consumption criteria is satisfied. Benefit of variation by 10% either way is to be a given."

In light of the same, the Court held that weighted shareholding and proportionate consumption of electricity is the fair, equitable and the correct method to determine whether the essential requirements of the second proviso to Rule 3(1)(a) are satisfied.

Regarding the final issue, the Court analyzed a catena of Judgments and the statutory position of the law to finally hold that, "SPVs which own, operate and maintain CGPs are an “association of persons” in terms of the second proviso to Rule 3(1)(a) of the Rules. Companies, body corporates and other persons, who are shareholders and captive users of a CGP set up by a SPV, are required to comply with Rule 3(1)(a) of the Rules read with the second proviso of the Rules."

The three issues were answered accordingly.

Cause Title: M/s Dakshin Gujarat Vij Company Ltd. v. M/s Gayatri Shakti Paper & Board Ltd. & Anr., Etc.

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