Electricity Act | Captive Generating Plant Having More Than One User And Fluctuating Shareholding- Consumption To Be Calculated Using “Weighted Average” Principle: Supreme Court

The Supreme Court bench comprising Justice Sanjiv Khanna and Justice M.M. Sundresh, has held in cases where a Captive Generating Plant (CGP) has more than one user and fluctuating shareholding or any change in ownership, shareholding, or consumption occurs, the principle of “Weighted Average” should be applied to determine the proportional electricity consumption of each user, in terms of second proviso to Rule 3(1)(a) of Electricity Rules, 2005.

“For instance, if a captive consumer exits or drops out in the middle of the year, transferring its shareholding to another or new captive user, it would be fair to hold that the captive user who has become a shareholder in the middle of the year, is required to consume proportionately to the electricity generated. In a given case, existing captive users taking advantage of the variation, may enhance their consumption. The concept of weighted average shareholding comes in aid to calculate the relevant average shareholding of the captive user in the year and the proportionate electricity required to be consumed by him”, the Bench held.

BRIEF BACKGROUND

Section 2(8) of the Electricity Act, 2003 defines a Captive Generating Plant (“CGP”) as a power plant set up by any person to generate electricity primarily for his own use. A power plant set up by co-operative society or associations of persons for generating electricity primarily for use of the members of the co-operative society or association is also a CGP.

The Rule 3 of the Electricity Rules, 2005 provides the requirements to qualify as a CGP. In the proviso to Rule 3(1)(a) states that in case of association of persons the shareholding held by persons claiming to be CGP should not be less than 26% and the electricity consumed by them must not be less 51% of the total consumption, in proportion to their shares in ownership. Twin criteria are ownership and the proportionate consumption. Benefit of variation by 10% either way is to be a given.

The issue before the Court was regarding computation of proportional consumption of electricity in respect of a CGP in terms of Rule 3(1)(a), where there are more than one user and the shareholding of captive users fluctuates.

RELEVANT LAW

Rule 3 of Electricity Rules, 2005

“3. Requirements of Captive Generating Plant.—

(1) No power plant shall qualify as a 'captive generating plant' under Section 9 read with clause (8) of Section 2 of the Act unless— (a) in case of a power plant—

(i) not less than twenty-six per cent of the ownership is held by the captive user(s); and

(ii) not less than fifty-one per cent of the aggregate electricity generated in such plant, determined on an annual basis, is consumed for the captive use:

Provided that in case of power plant set up by registered cooperative society, the conditions mentioned under paragraphs at (i) and (ii) above shall be satisfied collectively by the members of the cooperative society:

Provided further that in case of association of persons, the captive user(s) shall hold not less than twenty-six per cent of the ownership of the plant in aggregate and such captive user(s) shall consume not less than fiftyone per cent of the electricity generated, determined on an annual basis, in proportion to their shares in ownership of the power plant within a variation not exceeding ten per cent;

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SUPREME COURT VERDICT

The Bench observed that the proportionality principle in second proviso to Rule 3(1)(a) specifies a unitary qualifying ratio, which is the consumption requirement divided by the shareholding requirement, that is, 51% divided by 26%. This means that the owner of every 1% shareholding of the CGP should have minimum consumption of 1.96% of the electricity generated by the CGP, with a variation of +10% being permissible. Therefore, the unitary qualifying ratio has to be within a range of 1.764% to 2.156%.

The complete 100% of the electricity generated need not be considered. Instead, the shareholding requirement (which should not be less than 26% in aggregate) should be applied to the electricity consumed (which should not be less than 51%), to verify whether the criteria of ownership and proportionate consumption is satisfied. Benefit of variation by 10% either way is to be a given.

The rationale behind such twin test is to avoid misuse of Rule 3(1)(a), such as a 1% or an insignificant shareholder of the CGP disproportionately uses the electricity generated, in which case he should not be treated as a group captive user and, therefore, should be denied the benefits that are given under the Electricity Act to the captive users.

Applicability of Rule 3(1)(a) in cases where a change of ownership or shareholding in CGP occurs

The issue concerned determination of ownership proportionate to consumption of electricity under the second proviso to Rule 3(1)(a) of Electricity Rules.

The Court held that in scenarios where a change occurs in ownership, shareholding, or consumption, then the weighted average should be applied. It was held as under:

“In case of change of ownership, shareholding, or consumption, the principle of weighted average should be applied to ensure compliance of the proportional electricity consumption requirement stipulated under the second proviso to Rule 3(1)(a). For instance, if a captive consumer exits or drops out in the middle of the year, transferring its shareholding to another or new captive user, it would be fair to hold that the captive user who has become a shareholder in the middle of the year, is required to consume proportionately to the electricity generated. In a given case, existing captive users taking advantage of the variation, may enhance their consumption. The concept of weighted average shareholding comes in aid to calculate the relevant average shareholding of the captive user in the year and the proportionate electricity required to be consumed by him.”

The weighted average method comes in aid in instances where the shareholding of a captive user in a CGP fluctuates, provided that the minimum ownership requirement of 26% in aggregate is not being breached. Further, a shareholder may hold 30% of shares of the CGP for 3 months, 40% of shares for 4 months, and 50% of the shares for the balance 12 months.

The weighted average shareholding method is applied by taking average shareholding held by particular shareholder for the year for the purpose of calculating proportionate electricity required to be consumed by it in terms of the second proviso of Rule 3(1)(a).

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.

Case Title: M/S. Dakshin Gujarat Vij Company Limited v. M/S. Gayatri Shakti Paper And Board Limited And Another, Etc.

Citation : 2023 LiveLaw (SC) 888

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