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5 th NATIONAL CII CONFERENCE ON CAPTIVE POWER PLANTS Mohit Saraf Partner Luthra & Luthra Law Offices October 7, 20

5 th NATIONAL CII CONFERENCE ON CAPTIVE POWER PLANTS Mohit Saraf Partner Luthra & Luthra Law Offices October 7, 2005. Structure of Presentation. Captive Generation under Electricity Act, 2003 Electricity Rules, 2005

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5 th NATIONAL CII CONFERENCE ON CAPTIVE POWER PLANTS Mohit Saraf Partner Luthra & Luthra Law Offices October 7, 20

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  1. 5th NATIONAL CII CONFERENCE ON CAPTIVE POWER PLANTS Mohit Saraf Partner Luthra & Luthra Law Offices October 7, 2005 © Luthra & Luthra Law Offices

  2. Structure of Presentation • Captive Generation under Electricity Act, 2003 • Electricity Rules, 2005 • Sale of Power from Captive Power Plants – Analysis (including critical analysis of Judgments) • Conclusion © Luthra & Luthra Law Offices

  3. Electricity Act : Provisions Captive Generating Plant • Power Plant set up by any person to generate electricity primarily for his own use – Section 2(8) of the Act • Permitted to set up a Captive Generating Plant and dedicated transmission lines – Section 9 of the Act © Luthra & Luthra Law Offices

  4. Electricity Rules, 2005 Conditions for setting up a Captive Generating Plant • Rule 1: Plant should be set up primarily for captive consumption and a minimum of 51% of the power generated should be used for captive consumption. + At least 26% ownership must vest with captive user(s). • Rule 2: Association of Persons– In case of ‘association of persons’, in addition to the above two conditions, the captive consumption by the members should be in the proportion of their ownership in the plant (“Proportionality Test”) © Luthra & Luthra Law Offices

  5. Electricity Rules, 2005 • Not clear whether Rule 2 i.e. the “Proportionality Test” to be satisfied for SPV. However, maybe prudent to be followed for SPV. • Whether a new plant needs to be constructed or whether an existing plant may be converted into a captive power plant, to qualify as a CPP? © Luthra & Luthra Law Offices

  6. Electricity Rules, 2005 • Ownership defined in relation to equity share capital with voting rights – Are preference shares covered in the ambit of this definition? • Option available for an SPV to declare only a unit or particular units as a captive generating plant and the users (captive) of such unit(s) are required to hold not less than 26% of the proportionate ownership of the company related to such unit(s). © Luthra & Luthra Law Offices

  7. Sale of Power by Captive Power Plant (a) Supply of power to its stakeholders through the Grid Right to Open Access for carrying electricity from CPP to destination of use [Section 9 (2)] Cross subsidy surcharge not payable by CPPs for use of Open Access [Section 38, 39, 40 and 42 (2)] © Luthra & Luthra Law Offices

  8. Sale of Power by Captive Power Plant (b) Supply of power to its stakeholders through Dedicated Transmission Lines • Ministry of Power through the Fifth removal of Difficulties Order (dated June 8, 2005) - no “license is required” provided the “dedicated transmission line” is neither a “transmission line” nor a “distribution system” • Definition of “dedicated transmission lines”, “transmission lines” and “distribution system”. © Luthra & Luthra Law Offices

  9. Sale of Power by Captive Power Plant • Distribution license is in relation to an area of supply: imposes universal service obligation • Imposing “license requirement” on a Captive Power Plant supplying to its own stakeholders not intended under the Act. © Luthra & Luthra Law Offices

  10. Sale of Power by Captive Power Plant • The provisions of opening up streets, carrying out works and installing overhead lines (Sections 67, 68 &69) are only in relation to a “licensee”. • Does the Act not contemplate a captive generating plant setting up dedicated transmission lines, carrying on works, etc. or is it a “drafting” issue? © Luthra & Luthra Law Offices

  11. Sale of Power by Captive Power Plant (c) Sale of Surplus Power to third parties through the Grid • CPP in capacityofsupplying surplus power to third parties may be treated as a generating company. • Section 10(2) provides that a generating company maysubject to regulations made under Section 42(2) of the Act supply electricity to any consumer. • Surcharge (provisos to Sections 38, 39, 40 and 42(2)) and additional surcharge (Section 42(4)) payable by CPP’s • Open access subject to availability and applicable regulations - Long-term open access is favoured (25 years) © Luthra & Luthra Law Offices

  12. Sale of Power by Captive Power Plant (d) Sale of Surplus Power to Third Parties through Dedicated Transmission Lines • Ministry of Power through the Fifth removal of Difficulties Order (dated June 8, 2005) • One of the objects and reasons in the Statement of objects and reasons of the Electricity Act, 2003 stated “Where there is direct commercial relationship between a consumer and a generating company the price of power would not be regulated and only the transmission and wheeling charges with surcharge would be regulated.” © Luthra & Luthra Law Offices

  13. Sale of Power by Captive Power Plant • Section 10(2) uses “may” for supply to third parties subject to open access under Section 42(2) – the Act therefore recognizes the possibility of supply through mediums other than the Grid i.e. through dedicated transmission lines • However, the Supreme Court in a case has held that “In the interpretation of statutes the courts always presume that legislature inserted every part thereof for a purpose and the legislative intention is that every part of the statute should have effect.” © Luthra & Luthra Law Offices

  14. Sale of Power by Captive Power Plant • In sale of surplus power by CPP to third parties through dedicated transmission lines – stakeholders of the CPP are merely substituted by a third party • Does sale to third parties through dedicated transmission lines lead to establishment of a “Distribution System” requiring a distribution license ? • Distribution Licensee – Universal Service Obligation © Luthra & Luthra Law Offices

  15. Regulatory Orders and Judicial Decisions • Karnataka Electricity Regulatory Commission: Jindal Thermal Power Co. v. M/s Bhulawka Pipes and others • generating company intending to supply to consumers through dedicated transmission lines would require a distribution license under the Act. • no rationale given for decision. • In a subsequent petition KERC dismissed application for limited area supply license. However, the Supreme Court has in a case held that statutes have to be interpreted to give full effect to the whole statute not to restrict its meaning. © Luthra & Luthra Law Offices

  16. Regulatory Orders and Judicial Decisions • Maharashtra State Electricity Commission: Maharashtra State Electricity Board v. Bhushan Steel & Strips Limited(order dated August 3, 2004) • a “captive generating plant” can supply surplus energy to a third party consumer through dedicated transmission lines, without taking any particular licence. • Reverse Flip by Bombay High Court (order dated April 4, 2005) • MERC order in Bhushan Steel reversed (without a license Bhushan Steel (a captive generating plant)) cannot sell surplus power to third party consumer without a licence. © Luthra & Luthra Law Offices

  17. Regulatory Orders and Judicial Decisions • However, the Supreme Court has held in a case that “a decision not accompanied by reasons and not proceeding on conscious consideration of all issue cannot be deemed to have binding effect as is contemplated under Article 141.” • The Bombay High Court in the Bhushan Steel Case further held that “Preamble of the Act intends to ‘promote competition in generation, transmission, distribution, trading and use of electricity, and protect the interest of consumers…’. • Industrial Consumers are also consumers © Luthra & Luthra Law Offices

  18. Regulatory Orders and Judicial Decisions • The Bombay High Court also held that “If the intention of the legislature was to give complete freedom to the CPPs to sell excess power, the legislature would have said so”. • However, it is a well established principle of statutory interpretation that a legislation cannot be meant to be prohibiting an activity if such legislation does not expressly provide for the same. • The Supreme Court has held that Courts must avoid the danger of a priori determination of the meaning of a provision based on their own pre-conceived notions. © Luthra & Luthra Law Offices

  19. Supreme Court Decision • Supreme Court dismisses the Special Leave Petition of Bhushan Steel on May 12, 2005 Captive generating plant cannot sell surplus power to a consumer without a license using its own lines i.e., dedicated transmission lines. © Luthra & Luthra Law Offices

  20. Critical Analysis of the Judgment • If the Act does not contemplate payment of a surcharge for third party sales by a CPPthrough its dedicated transmission lines and if such omission is causing revenue losses to state utilities, then in the words of the SC “the duty of correcting misuse of this provision is the job of the legislature and not the judiciary”. • Though the Act does not impose licensing obligations on CPPs, the Court has attempted to impose an obligation on CPPs to obtain a license in relation to dedicated transmission lines resulting in frustrating part of the Act relating to CPPs. © Luthra & Luthra Law Offices

  21. Critical Analysis of the Judgment • The Court has attempted to create a separate category of licenses (apart from licenses contemplated for transmission, distribution and trading under the Act) to be obtained by a CPP, such attempt conflicts with the Doctrine of Separation of Powers under the Constitution. • The Act is a reform statute which should be liberally and widely interpreted for the benefit of electricity industry. © Luthra & Luthra Law Offices

  22. Conclusion In the words of the Supreme Court “Courts cannot usurp legislative function under the disguise of interpretation”. © Luthra & Luthra Law Offices

  23. Thank You Luthra & Luthra Law Offices Email: msaraf@luthra.com 103, Ashoka Estate 704-706, 7th Floor Barakhamba Road, Embassy Centre, Nariman Point New Delhi 110001 Mumbai 400021 Tel: 91 11 5121 5100 Tel: 91 22 5630 3600 Fax: 91 11 2372 3909 Fax: 91 22 5630 3700 © Luthra & Luthra Law Offices

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