Weighted Average Principle to be Used Where the Shareholding of a Captive Generating Plant Changes

The Supreme Court of India on October 9, 2023 in the case of Dakshin Gujarat Vij Co. Ltd. v. Gayatri Shakti Paper & Board Ltd., [2023 INSC 886] held that in case the shareholding of a captive user of a Captive Generating Plant with more than one user changes, the weighted average principle should be used to calculate the electricity consumption of each captive user under the second proviso to Rule 3(1)(a) of the Electricity Rules, 2005 in a fair manner.

Section 2(8) of the Electricity Act, 2003 defines a Captive Generating Plant (hereinafter referred to as “CGP”) as “a power plant set up by any person to generate electricity primarily for his own use”. This definition is inclusive of a power plant set up to generate electricity by any cooperative society or association of persons primarily for the use of its members. Rule 3 of the Electricity Rules, 2005 provides two-fold criteria for qualification as a CGP namely; percentage of ownership i.e., shareholding held by the persons claiming to be a CGP which should not be less than 26% and, proportionate consumption of electricity which should not be less than 51% of the total electricity generated by the plant. This is inclusive of a permissible variation of 10% either way.

The core issue for consideration before the Court was the interpretation of Rule 3, specifically Rule 3(1)(a) of the Electricity Rules, 2005 and the word “association of persons”. Among the issues discussed by the court, whether a Special Purpose Vehicle (hereinafter referred to as “SPV”) for generating electricity is an “association of persons” in terms of the second proviso of Rule 3(1)(a) of the Electricity Rules, 2005 was also looked into.

The court observed that a conjoint reading of Sections 2(8) and 2(49) of the Electricity Act, 2003 provides that a CGP can be an individual, a body corporate and an association or body of individuals, whether incorporated or not. Further, on a perusal of Section 9 of the Electricity Act, 2003 the court noted that “any person may construct, maintain or operate a CGP and dedicated transmission lines.”

The court also went on to state that to qualify as a CGP under Section 9 of Electricity Act, 2003 the criteria set forth under Rule 3(1)(a) should be satisfied. According to the Court, the words “not less than 26% of the ownership” and “not less than 51% of the aggregate electricity generated” indicates that it is the least required limit that a captive user must meet in order to qualify as a CGP.

With regards to the issue that arises in computing the consumption of electricity when there is more than one captive user and there is a change in the shareholding of captive users, the court held that the second proviso to Rule 3(1)(a) of the Electricity Rules, 2005 specifies a unitary qualifying ratio. The court elaborated that this unitary qualifying ratio is the consumption requirement divided by the shareholding requirement i.e., 51% divided by 26% meaning that the owner of every 1% shareholding of the CGP should have a minimum consumption of 1.96% of the total electricity generated by the CGP inclusive of the permissible variation of 10%.

Thus, when the shareholding of the captive users change, the court held that the weighted average principle should be applied wherein, the relevant average shareholding of the particular captive user or shareholder throughout the year must be calculated to derive the proportionate electricity consumption requirement which would satisfy Rule 3 (1)(a) of the Electricity Rules, 2005.

 Further, in respect of a Special Purpose Vehicle set up for generating electricity being an “association of persons” the court observed that in terms of Sections 2(8), 2(49) and Section 9 of the Electricity Act, 2003, an association of companies or body corporates are required to comply with Rule 3(1)(a) of the Electricity Rules, 2003. Therefore, an association of companies, body corporates, or other persons that set up an SPV which owns, maintains, and operates a CGP is also required to comply with Rule 3(1)(a) of the Electricity Rules, 2005. In that regard the court noted that an SPV which owns, operates or maintains a CGP may be an association of persons under the Electricity Rules, 2005.