Captive Power Generation In India

Transcription

1 Captive Power Generation In India Structure, Requirement, Important Judicial Decisions and Proposed Draft Amendment Matrugupta Mishra & Hemant Singh, Partners Praxis Counsel Advocates and Solicitors New Delhi

2 Concept of Open Access The Electricity Act, 2003, provides for open access for private generators and bulk consumers. Open access is a mechanism that allows generators to sell power to any consumer of its choice by wheeling of power through the transmission and distribution lines of the respective transmission and distribution licensee, as the case may be.

3 Provisions of OA Section 2(47) of the EA, 2003 which says that OA is the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission ; Sections 38, 39, 40 and 42 relate to the functions of CTU/ STU and Discoms relating to grant of nondiscriminatory OA

4 Advantages of OA EA, 2003 was enacted as a reform legislation wherein one of the main objectives was to introduce competition qua the choice of sources of energy for the end-consumers; The EA, 2003 introduced the concept of OA thereby empowering consumers with an option to avail power from a source other than its area distribution licensee; Another aspect of the introduction of the concept of OA was that the Discoms have no right to compel a consumer to consume power only from the said licensee; As such, OA resulted in the liberation of consumers from the shackles of Discoms thereby enabling the said consumers to shop for the cheaper sources of power.

5 Charges for availing OA To avoid complete loss of revenue for the Discoms from the big consumers of electricity, upon such consumers availing OA, the EA, 2003 provides for imposition of certain charges; EA, 2003 under Sections 38, 39, 40 and 42 provides for imposition of a surcharge, and additional surcharge and wheeling charges to be paid by a consumer who seeks to avail the option of OA; The above charges are required to meet the asset and fixed costs of the Discom/ Transcom, as the case may be. Further, out of the above charges, there is also a surcharge, which is essentially known as Cross Subsidy Surcharge (CSS).

6 What is Cross Subsidy Surcharge (CSS) CSS is not defined anywhere in the EA, 2003; A big/ industrial/ commercial consumer gives tariff to a Discom which is much more than the said Discom's cost of service. The same enables the Discoms to cross subsidise domestic and agricultural consumers. As such, in the event the above consumers avail OA then the ability of the Discoms to avail a higher tariff from the said consumers goes; CSS is meant as a token compensation for the Discoms against the loss of cross subsidy amount, which is inbuilt in the tariff of the above consumers, when such consumers go away from the Discoms through OA.

7 Promotion of Industrial Growth- Exemption from payment of CSS In order to promote industrial growth, the EA 2003 introduced the concept of Captive Power Generation; As the cost of electricity is one of the major input costs for industry, the EA, 2003 seeks to push the industrial/ commercial consumers to develop their own captive generating stations; One of the major concessions provided under the provisions of EA, 2003 to the industrial/ commercial consumers is that they will be exempted to pay CSS, and any other surcharge including Additional Surcharge, in the event the said consumers develop their own captive power plants and avail power through them.

8 Law Governing Captive Power Generation Electricity Act, 2003 Electricity Rules, 2005

9 What is Captive Power Generation? Section 2(8) of the EA, 2003 defines Captive generating plant as a power plant set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such cooperative society or association.

10 Advantages Of Captive Power Generation & Consumption No license is required for supply of electricity from captive power plants to the captive users; As per the 4 th proviso to Section 42(2) of the EA, 2003, no Cross Subsidy Surcharge can be imposed upon consumers by the Discoms; No other surcharge, including Additional Surcharge, can be imposed upon captive users, as they are not consumers within Section 42(4).

11 Electricity Rules, 2005 Rule 3 of the ER, 2005 prescribes the following basic requirements for setting up Captive Generating Plants (CGP). 1. Rule 3(1)(a) of the ER, 2005 provides as follows: a) not less than 26% percent of the ownership is held by the captive user(s) in the CGP, b) not less than 51% of the aggregate electricity generated in the CGP, determined on an annual basis, is consumed for the captive use. 2. There are 2 provisos to Rules 3(1)(a) of the ER, 2005, which is as follows: a) in case of power plant set up by registered cooperative society, the conditions mentioned at (a) and (b) above shall be satisfied collectively by the members of the co-operative society; and b) in case of association of persons, the captive user(s) have to hold not less than 26% of the ownership of the CGP in aggregate and such captive user(s) have to consume not less than 51% of the electricity generated, determined on an annual basis, in proportion to their shares in ownership of the CGP within a variation not exceeding 10%. This is called the Proportionality test.

12 Continued. 3. Rule 3(1)(b) says that in case of a generating station owned by a company formed as SPV for such generating station, a unit or units of such generating station identified for captive use and not the entire generating station have to satisfy the conditions contained in Rule 3(1)(a)(i) and (ii). 4. There is an Explanation to Rule 3(1)(b), which provides as follows:- a) the electricity required to be consumed by captive users shall be determined with reference to such generating unit or units in aggregate identified for captive use and not with reference to generating station as a whole; and b) the equity shares to be held by the captive user(s) in the generating station shall not be less than 26% of the proportionate of the equity of the company related to the generating unit or units identified as the captive generating plant.

13 Continued. 5. Rule 3(2) of the ER, 2005 fastens the captive users to ensure that the consumption by the Captive Users at the percentages mentioned in Rule 3(1)(a) and (b) is maintained and in case the minimum percentage of captive use is not complied with in any year, the entire electricity generated shall be treated as if it is a supply of electricity by a generating company. 6. The above means that upon the failure of the captive structure, all the captive users shall be liable to pay CSS and other Surcharge, including Additional Surcharge to their area distribution licensee(s).

14 Continued. 7. Explanation to Rule 3(2) contains certain clarifications.- a) Annual Basis is to be determined based on a financial year; b) Captive User is the end user of the electricity generated in a Captive Generating Plant and the term Captive Use is to be construed accordingly; c) Ownership in relation to a CGP means the equity share capital with voting rights. In other cases ownership shall mean proprietary interest and control over the generating station or power plant; d) Special Purpose Vehicle means a legal entity owning, operating and maintaining a generating station and with no other business or activity to be engaged in by the legal entity.

15 Two Kinds Of Captive Structure Models As Per ER, Supported By Some Judicial Pronouncements 1. First Model is falling under Rule 3(1)(a) of the ER, 2005; and 2. Second Model is falling within the provisos to Rule 3(1)(a) of the ER, 2005

16 First Model - falling under Rule 3(1)(a) of the ER, 2005 Under the First Model, as per the existing Electricity Rules, there is no requirement to consume power as per the proportion of equity shares held by the Captive Users. APTEL has upheld the above in case of Malwa Industries Ltd. in a Full Bench Judgment Under this model, a company who has established a CGP and is himself a captive user, holding more than 26% shares, can give a minuscule number of shares to any company(ies); Since all the companies have a combined equity ownership of above 26%, the said companies can consume any quantum of power disproportionate to their shareholding, with the only condition that they should consume more than 51% of the electricity generated from the power plants.

17 Second Model - falling under the provisos of Rule 3(1)(a) of the ER, 2005 Under the second model, as per the existing Electricity Rules, the captive users have to consume electricity, to the extent of 51% generated by the CGP, in proportion to their equity ownership as defined in Explanation (c) of Rule 3(2) of the ER, APTEL has discussed the above model in the case of Kadodara Power Pvt. Ltd. In the said judgment various principles have been decided. In para 15 & 16, APTEL decided that an SPV is an association of person, and an SPV is also liable to follow proportionality principle. The said judgment has been challenged by us in the Supreme Court on the ground that SPV is not AOP, and as such proportionality principle is not applicable. However, till the SC decides, the law is as decided by APTEL; In para 17, APTEL has held that any computation of the generation and consumption pattern has to be conducted Annually, in line with the Explanation (a) of Rule 3(2) of the ER, 2005;

18 Continued. One of the other major questions decided by APTEL was whether ownership of the CGP be transferred after its set up? This assumes significance since one of the major objections of the Discoms is that captive users cannot change in between a financial year. After the above judgment (paras 20 & 21), it is clear that it is not necessary for a CGP to be set-up by the very same users/ persons who wish to captively consume power. Different captive users can come and take equity in the SPV, anytime in a FY, and if they comply with the shareholding and consumption criteria as per Rule 3, then they continue to enjoy the benefits of exemption from payment of CSS and any other surcharge, including Additional Surcharge. Based on the above judgment, the MERC upheld the captive structure of M/s Wardha Power Company Limited (KSK Group). We represented Wardha Power, wherein it was hotly contested by MSEDCL that Wardha has undertaken retrofitting of consumers, and that it is not allowed. MERC rejected the stand of the Discom and said that there is no restriction in introduction or going away of the captive users in a FY. The said order has now attained finality.

19 How to fulfil the Rule 3(1)(a) Conditions Rule 3(1)(a)(i) and (ii) provide that for becoming a CGP, there has to be not less than 26% ownership of the captive users in the CGP; and not less than 51% consumption of the aggregate electricity generated, has to be consumed by captive users annually; It becomes necessary to interpret not less than.

20 Continued As per Rule 3(1)(a)(i), 26% is the minimum shareholding which is required by captive user(s) in the CGP. This means that the ownership can be more than 26%, however, for certifying the captive structure, only 26% ownership is required; Similarly, as per Rule 3(1)(a)(ii), the captive consumption has to be a minimum 51% of the power generated in proportion to the shareholding of the captive users who constitute 26% of the equity. For captive consumption over and above 51%, proportionality principle is not at all applicable. This has also been held by Hon ble APTEL in Kadodara Judgment; Hence, on a combined reading of the above, suppose there are 5 captive users with a total shareholding of 30% in the CGP, out of which 3 make up 26% shareholding. Then even if the said 3 captive users, who make up 26% shareholding, are able to consume 51% of the power generated in proportion to their shareholding, then the captive structure requirements are fulfilled. Then there is no need for the rest 2 captive users to consume power in proportion to their shareholding. They can consume whatever power at whatever proportion. This is because, Rule 3(1)(a)(i) and (ii) contain the phrases not less than, which is the minimum requirement to qualify as a CGP. The same can further mean that in the above example, if 1 or 2 captive users fail to fulfill consumption in proportion to their shareholding, then their consumption may be ignored if the other 3 fulfill the criteria. Hon ble APTEL has upheld the said principle in Appeal No. 252 of 2014;

21 Proposed Amendment to Electricity Rules, 2005 An amendment has been proposed on October 6, 2016 by the Ministry of Power to Rule 3 of the Electricity Rules, 2005, thereby stating that the rule is being misused by issuing shares of small face value which actually do not represent the monetary share of the capital of the plant As per the proposed change, it requires 26% or more ownership of the paid up equity share capital. Thus, equity structures with different face value of shares will no longer be tenable, as ownership will have to be 26% or more of the total value of equity capital.

22 Continued Other than this, the Amendment also seeks to include a person, association of persons, company, Special Purpose Vehicle, Partnership Firm, Body of Individuals or Body Corporate in the 2 nd proviso to Rule 3(1)(a)(ii). After the above amendment, the First Model discussed herein (Malwa Industries) will no longer be valid. The only captive structure model which would be applicable is the one discussed in the Kadodara Judgment (Second Model as per this presentation). All captive users, be it any model, shall have to consume entire power generated by the CGP, as against only 51% presently, in proportion to their shareholding within a variation of + 10%. The entire idea is to make group captive structure difficult to implement so that Discoms are not robbed of cross subsidies, CSS and Additional Surcharge, as the case may be.

23 Points to be kept in mind while structuring a CGP The Power Delivery or Power Supply Agreement between the CGP and Captive Users should ideally not contain the word tariff. It should seek to recover all charges under Operation and Maintenance. The same should be collected per Unit. By not naming it tariff, any implications of service tax will be avoided; Instead of taking equity in the generating company, the option of ownership through a financial lease can be explored; Captive users can come in anytime in a FY, and can leave anytime. So a captive user can be part of captive structure on 01 st April of a FY, and can leave the captive setup on, say, 31 st October. The power consumed from 01 st April to 31 st October will be captive power exempt from CSS and AS;

24 Continued The Shareholding/ Share Subscription Agreement has to be linked with the Power Delivery Agreement. In the event, a captive user is not able to offtake the requisite quantum of power, the shares of the said consumer has to be immediately either transferred to the existing users or has to be allotted to a new captive user, keeping in mind the conditionalities of Rule 3 of the ER, The provisions as to Right of First Refusal, Buy Back of shares, Put Option and Call Option etc need to be built in the SPA along with Penalty clause. It is for the purpose of protecting the Captive Structure; There has to be a real time monitoring of the generation and consumption data. In the event, on account of some reason the proportionality principle and/ or 51% consumption is not being met, then it is beneficial to shut down the power plant, so as to prevent levy of CSS for the power already consumed by the captive users. Till the time the issues are sorted out, the captive users can consume through respective Discom under their CD or through trader/ energy exchange. There has to be good coordination between generator and all captive users, with the sole aim to protect the captive structure at any cost; Any accounting of the consumption and generation details of the CGP and the captive users will be done by the Discoms at the end of a FY. In between a FY, no CSS can be raised.

25 Legal Validity of the Electricity Rules The existing ER, 2005 can be challenged to the extent of the imposition of proportionality principle, as the EA, 2003 does not contemplate any such restrictions to be imposed for CGPs. A rule/ regulation is meant for implementation of the Parent Act, and not for restricting the same; The proposed Electricity Rules are completely beyond the provisions of the EA, By seeking to impose proportionality consumption rule to the entire power generated, the aim is to make group captive a difficult proposition to maintain, so that the Discom continues its levy of CSS and AS. This goes to the root of the reform envisaged under the EA, 2003 as one of the objectives was to increase generation of power so that the Discoms will have competitive power available on account of mushrooming of generating plants.

26 Thank you