Authored by Abhishek Nath Tripathi and Anura Gupta, Sarthak Advocates & Solicitors

Captive generation is the new battlefield between generators and distribution companies (DISCOM). While captive generation appeals to consumers and generators by providing a cheaper source of electricity, DISCOMs have resisted captive generation projects. This has led to many disputes between DISCOMs and generators and consumers. In the recent judgment in Tamil Nadu Power Producers Association v Tamil Nadu Electricity Regulatory Commission and Ors, the Appellate Tribunal for Electricity (APTEL) clarified the powers of the DISCOMs in implementing the regulatory regime in captive generation.

The Tamil Nadu Electricity Regulatory Commission (TNERC) issued directions empowering the Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO) to determine the status of captive users and captive generation plants (CGP). The TNERC order was challenged in APTEL on grounds such as impermissible delegation to TANGEDCO, the linking of wheeling (that is transmission) and open access with captive generation, the wrongful conflation of special purpose vehicles (SPV) with associations of persons (AOP), the wrongful application of criteria for calculating the consumption of electricity, and using wrongful methodology for the verification of changes in ownership and consumption patterns.

APTEL determined that, while the provisions of the Electricity Act, 2003 (act), empower the TNERC to delegate its powers, it cannot do so on grounds that are not transparent, unbiased and fundamentally fair. Giving TANGEDCO the authority to decide whether a power generation unit qualifies as a CGP, and the consumer as a captive user, makes the ultimate beneficiary a judge in its own cause. According to the provisions of the act, power generation units which are CGPs and seek open access are exempted from the requirement to pay cross subsidy surcharges (CSSs). If a power generation plant does not qualify as a captive power generation plant in any particular year, it must pay CSSs to the DISCOMs. APTEL held that although the DISCOMs may collect data for verification, any actions such as the imposition of CSSs can only be taken by the TNERC after initiating proper proceedings.

The APTEL also interpreted compliance with the criteria of proportionate consumption by an AOP as against an SPV, by applying rule 3 of the Electricity Rules, 2005 (rules). While acknowledging that the thresholds of shareholding and consumption of power by captive users apply uniformly to all entities, the tribunal held that rule 3(1)(a) and its two provisos are independent of rule 3(1)(b). The proviso to rule 3(1)(a) prescribes the manner of fulfilment of the twin requirement of ownership and consumption criteria by co-operative societies and AOPs. The requirements of a minimum 26% shareholding and 51% of the consumption of power, and such consumption to be in proportion to the ownership of a power plant, can only be considered as determining factors in cases of AOPs, but not SPVs.

While recognising and upholding the intelligible differentia set out in the act, the APTEL held that its judgment in Kadodara Power Private Limited v GERC and Ors, to the extent that it equated an SPV with an AOP, was decided per incuriam.

The APTEL dismissed the requirement for verification of the shareholding structures of CGPs and captive users’ status prior to granting open access permissions. It also set aside the requirement for verification of ownership at each stage of change where there had been any change in group captive structures, and confirmed that, under rule 3, any verification of the status of CGPs and captive users can be done only at the end of a financial year. The APTEL held there was no authority to support the requirement that CGPs report changes in ownership to TANGEDCO within 10 days.

The APTEL has clarified the powers of the commissions and the DISCOMs to determine captive status. Captive generators and consumers will be relieved. However, the battle is far from over. The Supreme Court is to determine if there is a distinction between group CGPs and non-group or individual CGPs, and whether the distinction is permissible for the levy of additional surcharges. These problems arise from the reluctance of DISCOMs to accept CGPs. Until the issue is settled at that level, ambiguities will remain.

Published at India Business Law Journal