Verification and determination of captive status by the distribution/transmission licensee – a scenario of a Wolf in Sheep’s Clothing

Verification and determination of captive status by the distribution/transmission licensee – a scenario of a Wolf in Sheep’s Clothing

by Pallav Mongia and Pratik Das*

1. The power sector in India has faced significant energy shortages over the years and the deficit has been growing as addition of generation capacity has been unable to match the ever increasing demand. Growth and development needs of the future are further expected to add to the demand for energy thereby exerting stress on existing energy resources. Captive generating plants (“CGPs”) have come up as an alternative to meet the energy shortage whereby industries come together and pool their resources to meet their own energy needs. CGPs have been growing at a fairly aggressive pace in India. In 2008, the total installed capacity of CGPs in India (with plants greater than 1 MW in size) was about 25 GW and these constituted around 17% of the total installed capacity in India. This total installed captive power capacity has increased at a compound annual growth rate of 5.3% and as of 2018-19, the total installed capacity of CGPs (with plants greater than 1 MW in size) was estimated at 87 GW.

2. The electricity sector in every state has a regulator in the form of the State Electricity Regulatory Commission (SERC/State Commission). Such State Commissions ordinarily exercise regulatory oversight over the CGPs within the state. However, there has been a recent trend whereby in several states, other sectoral players such as the distribution or the transmission licensee are determining the captive status of CGPs within the state.

3. This article aims to analyse whether it is legally permissible for the distribution/transmission licensee to supervise the functioning of a CGP and verify its compliances, even though the said licensee stands to gain the most if the CGP is found non-compliant.

Benefits enjoyed by CGPs

4. A captive generating plant (“CGP”) is a power plant set up by a person to generate electricity primarily for its own use. Within the ambit of CGP lies a group captive set up wherein several persons/industries come together to set up a captive power plant. The persons/industries subscribe to the equity share capital of the company or body corporate setting up the CGP and in return, energy is allocated to such persons/industries in proportion to their shareholding in the said company or body corporate. Such persons/industries are the “captive users” of a CGP. A CGP is, by nature, an exception, owing to the fact that while the norm is that power is supplied to a person by the concerned distribution utility of the area, a CGP is self-sufficient.

5. A consumer is usually supplied power by the distribution licensee of the area. However, the consumer may opt to procure power from any person other than the said distribution licensee. This is known as “open access”. Statutorily, the term “open access” implies freedom to procure power from any source other than from the distribution licensee of the area.

6. Notably, the choice of a consumer to avail power from any other source would necessarily entail a negative impact on the finances of the distribution licensee. This is because if the consumer had not availed of open access, it would have procured power from the distribution licensee which would earn the said licensee tariff. This tariff would have included the components of fixed cost and cross subsidy; cross subsidy in turn would be used by the licensee to supply power to vulnerable sections of the society at subsidized rates. In ordinary course, the distribution licensee compensates this loss by charging “surcharge”. However, CGPs are exempted by law from the payment of said surcharge; reason being that open access is a statutory right given to CGPs for the purpose of carrying electricity from the CGP to its captive users. It is further relevant to note that several states in India grant additional incentives to captive renewable energy plants in the form of reduced transmission and distribution charges as also, the facility of “banking” of power to such captive generators.

7. Consequently, it is seen that the finances of distribution/transmission licensees are invariably negatively impacted by virtue of the statutory exemptions granted to CGPs as well as by the various exemptions granted to captive generators under different state policies. Recent trends suggest that distribution/transmission licensees are opposing the grant of captive status to CGPs within the state in order to stem the depletion of their ever weakening finances.

Who can determine the status of a CGP?

8. A captive generating plant has statutorily been recognised primarily under section 9 read with section 2(8) of the Electricity Act, 2003. The Electricity Rules, 2005 provide that in order for a power plant to qualify as a CGP under the Electricity Act, 2003, it is required to satisfy the twin test of:-

a) Not less than 26% of the ownership must be held by the captive user(s); and

b) Not less than 51% of the aggregate total electricity generated in the plant, determined on an annual basis, is consumed for captive use.

The provision further envisages that this compliance be undertaken annually.

9. A bare perusal of the aforementioned stipulations shows that the determination/verification of captive status involves assessment of various aspects, such as nature of the CGP, shareholding patterns, identification of unit/s for captive generation, aggregate quantum of energy generated by the CGP in a financial year, quantum of consumption by captive users, whether proportionality test is satisfied, if applicable, sale of surplus capacity, applicability of surcharge, etc., which in turn begs the question as to who should be enjoined to undertake the assessments and grant/deny the captive status.

10. The Hon’ble Appellate Tribunal for Electricity (APTEL) answered this question in Chhattisgarh State Power Distribution Co. Ltd. v. Hira Ferro Alloys Ltd. & Anr., wherein it held that the State Electricity Regulatory Commission has the jurisdiction to determine the CGP status and it is the duty of the State Commission to take on the responsibility of declaring a generating plant as a captive one and monitoring on an annual basis if it satisfies the criteria laid down in Rule 3 of the Electricity Rules, 2005. It was also held that assessment to determine whether the plant is a CGP cannot be done by the state transmission utility or a distribution licensee.

Assessment of captive status ought to be fair and without any bias

11. It is trite law that any investigation/ assessment which takes place in any branch of law ought to be fair and unbiased. “Bias” in common parlance means and implies – predisposition or prejudice. Courts in both India and England have considered that the test is whether a reasonable man would in the circumstances infer that there is real likelihood of bias. This follows from the principle that justice must not only be done but seen to be done. Taking cue from the jurisprudence on administrative law and service law, in cases involving departmental enquiries, the inquiring officer must not conduct the inquiry if right-minded persons would think that there is real likelihood of bias on the part of the inquiring officer.

12. In Parthasarthi vs. State of Andhra Pradesh reported as (1974) 3 SCC 459, the Hon’ble Supreme Court, while deciding whether the disciplinary proceeding conducted by the inquiring officer had a real likelihood of bias, held that there must exist circumstances from which reasonable men would think it probable or likely that the inquiring officer will be prejudiced against the delinquent. The court will not inquire whether he was really prejudiced. If a reasonable man thinks on the basis of the existing circumstances that he is likely to be prejudiced, that is sufficient to quash the decision.

13. Similarly, in Kumaon Mandal Vikas Nigam Ltd. vs. Girja Shankar Pant and Ors. reported as (2001) 1 SCC 182, the Hon’ble Supreme Court while considering the test for presuming bias held that the test is as to whether a mere apprehension of bias exists or there being a real danger of bias, and it is on this score that the surrounding circumstances must and ought to be collated and necessary conclusion drawn therefrom — in the event however the conclusion is otherwise inescapable that there is existing a real danger of bias, the action cannot be sustained.

14. In the same vein, there exists an inherent, strong and reasonable likelihood or apprehension of bias against the CGP in instances where the distribution/transmission licensee conducts the verification and assessment of captive status. As discussed above, this is because the distribution licensee stands to lose if the CGP status is confirmed and similarly, stands to benefit from the negative outcome of the compliance process. As a result, such verification/assessment cannot be said to be fair and without prejudice because when a distribution/transmission licensee conducts the verification and assessment, statutory rights of a CGP and their captive users run the risk of being vitiated.

15. It can be argued by the State Commissions and the distribution/transmission licensees that the State Commissions are empowered to delegate their duties and powers within the statutory framework. Notably, section 97 of the Electricity Act, 2003 permits the State Commission to delegate some of its powers and functions. The said section reads as under:-

“97. Delegation – The Appropriate Commission may, by general or special order in writing, delegate to any Member, Secretary, officer of the Appropriate Commission or any other person subject to such conditions, if any, as may be specified in the order, such of its powers and functions under this Act (except the powers to adjudicate disputes under section 79 and section 86 and the powers to make regulations under section 178 or section 181) as it may deem necessary.”

16. A plain reading of the provision shows that the State Commission is empowered to delegate some of its powers and functions which may include the power to determine captive status of a CGP. Further, such power may be delegated to any member, secretary, officer of the State Commission or “any other person”.

17. However, it is relevant to note that the words “any other person” are required to be understood by applying the rule of noscitor a sociise. the general and specific words are associated and take colour from each other so that the general words are restricted to senses that are analogous to the more specific words. Thus, the general words “any other person” would take colour from the more specific words appearing before it and would therefore mean a person associated and/or from the State Commission. The words “any other person” is to be interpreted in such a manner that the delegation envisaged in section 97 is restricted to mean a person or entity at par or akin to an officer of a State Commission keeping in mind the nature of the power or function delegated. The delegation of power cannot be such that the main provision itself is defeated. Admittedly, when a distribution/transmission licensee is delegated the task of assessing the captive status, the intent of delegation under section 97 is defeated.

18. This is also in confirmity with the argument preferred by the authors that the law makers never intended the delegation of the Commission’s powers to a person who does not maintain as neutral a position as the regulator itself. It is noteworthy that the intent of “any other person” would necessarily mean a person or entity with the necessary qualifications/nature to conduct the affairs of the Commission on behalf of the Commission in a fair manner including assessment of captive status. It goes without saying that such person or entity needs to be such that there is no possibility of any bias on its part whatsoever. In light of the above, the distribution/transmission licensee in no way qualifies as “any other person” as intended by the above provision.

19. Further, it may be relevant to take guidance from the Hon’ble Supreme Court’s decision in Union of India v. Madras Bar Assn. reported as (2010) 11 SCC 1 wherein the Hon’ble Supreme Court, in the context of tribunalization of adjudication under company law, embarked on the discussion on gradual dilution of the standards and qualifications prescribed for persons to decide cases which were earlier being decided by the High Courts. Notably, the Hon’ble Supreme Court observed that when a member of the civil services is appointed as the member of the tribunal and permitted to retain his lien over his earlier post, such person would continue to think, act and function as a member of the civil services. In such a scenario, a litigant may legitimately think that such a member will not be independent and impartial. In this regard, the perception of the litigants and the public about the independence or conduct of the members of the tribunal is detrimentally affected. Independence of a discharge of a particular function cannot be diluted. Similarly, it is the authors’ view that when a distribution/transmission licensee conducts assessment of captive status, it can be said that the licensee retains its inherent nature as that of a licensee while carrying out a regulatory function. It is then not possible to separate out the licensee’s inherent nature which is biased, as discussed above, from the execution of a function which requires impartial oversight.

20. Further leaning on the Hon’ble Supreme Court’s wisdom on impartiality, reference may be made to Supreme Court Advocates-on-Record Assn. v. Union of India reported as (2016) 5 SCC 1 wherein the Hon’ble Supreme Court observed that bias, prejudice, favour and conflict of interest are issues which may repeatedly emerge in situations which require a decision and in such scenarios, it is imperative that the person against whom such issue emerges, recuses himself from the making of the decision. Needless to say, in the scenario being discussed in this article, there is evident conflict of interest apart from bias and prejudice. Being thus, it is the authors’ view that recusal of the distribution/transmission licensee from the assessment of captive status becomes essential in the interest of fair administration of regulatory oversight of the captive regime.

21. It is also relevant to highlight that the Hon’ble Supreme Court in the case of Board of Control for Cricket in India v. Cricket Association of Bihar reported as (2015) 3 SCC 251, while dealing with allegations of match fixing and betting against administrators of the Board of Cricket Control in India in relation to the Indian Premier League, held that while dealing with conflict of duty and interest and the test applicable when examining whether a given process is vitiated by bias, the real question is not whether a person was biased. It is difficult to prove the state of mind of a person. Therefore, what is to be seen is whether there was reasonable ground for believing that a person was likely to have been biased and that there must be reasonable likelihood of bias. Further, in deciding the question of bias, what is to be taken into consideration is human probabilities and the ordinary course of human conduct.

22. In the same vein, it is the authors’ opinion that in states where distribution licensee is permitted to conduct verification of captive status, the same by its very nature is a situation enabling conflict of interest. As highlighted above, as to how distribution licensee directly benefits from the rejection/denial of captive status, a direct conflict of interest situation is created when a distribution licensee is charged with the duty of verifying the captive status, the grant of which would lead to exemptions availed by CGPs at the cost of the distribution licensee. Further, the real question is not whether the distribution licensee is actually biased, but rather, when the positioning of the distribution licensee qua captive verification leads to a situation where there is reasonable likelihood of bias.

States in which verification/determination of captive status is being done by the distribution/transmission licensee

23. Astonishingly, it is seen that contrary to the above and the settled law, in some states, the distribution or transmission licensee is conducting the verification and/or determination of captive status. In this regard, it would be apposite to note some of the states in which this is happening.

Tamil Nadu – The Tamil Nadu Electricity Regulatory Commission (TNERC) vide its order dated 28.01.2020 delineated the procedure to be followed for verification of status of CGP in which the distribution licensee, i.e., Tamil Nadu Generation and Distribution Company Ltd. (TANGEDCO) has been entrusted to conduct the verification of CGP status. The TNERC in its order has further stated that the verification process is a preliminary work which can be done by the licensee and the CGPs have recourse to approach the TNERC in the event of disputes arising out of the verification.

Madhya Pradesh – Madhya Pradesh Madhya Kshetra Vidyut Vitaran Co. Ltd. (MPMKVVCL), a distribution licensee in the state of Madhya Pradesh, by way of its guidelines dated 14.12.2018 delineated the procedure for assessing the captive status of a CGP. Notably, a CGP seeking captive status is required to submit application to the CGM (Commercial) of MPMKVVCL who would then either grant or reject the said application. Further, a CGP is required to obtain in-principle consent from the distribution licensee before commencing delivery of power through the captive route as well as submit necessary documents at the end of every financial year for verification of captive status by the distribution licensee.

Maharashtra – The Maharashtra Electricity Regulatory Commission (MERC) in its order dated 17.01.2018 set out the modalities for the process of determining captive status. The MERC inter alia entrusted the distribution licensee, i.e., Maharashtra State Electricity Distribution Company Ltd. (MSEDCL) to confirm and decide the captive status of captive power plants. If the CGP is not satisfied with the status as determined by MSEDCL, it may approach the MERC.

Rajasthan – In Petition No. RERC-1327/2018 before the Rajasthan Electricity Regulatory Commission (RERC), the dispute was between a CGP and Rajasthan Vidyut Prasaran Nigam Ltd. (RVPN), the transmission licensee in the state of Rajasthan. Notably, RVPN is also the State Transmission Utility in the state of Rajasthan which is a statutory authority under the Electricity Act, 2005. In this case, RVPN had withheld power evacuation permission under group captive scheme on the ground that according to RVPN, the arrangement did not qualify as CGP. Further, RVPN vide its letter dated 26.03.2018 to Rajasthan Renewable Energy Corporation Ltd. had stated that they are examining legally as to whether projects with a certain equity structure qualify as CGP as per the Electricity Act, 2003.

Conclusion

24. It may be noted that CGPs have been promoted under the policy and statutory framework primarily as they provide an avenue for securing reliable and cost effective power. Our country has often faced energy shortages throughout the course of its history. The population has grown at an alarmingly rate coupled with industrialization as a rapidly developing country. The gestation period for large power projects is long and many projects are often not completed due to variety of reasons including regulatory hurdles. This further entrenches the energy shortage. As a result, the concept of CGPs was floated as an alternative wherein industries themselves would be interested to meet their own power demand by pooling resources together. This would further add to the generation capacity of the country. CGPs enable small and medium industries or other consumers that may not individually be in a position to set up plant of optimal size in a cost effective manner. Further, CGPs facilitate creation of employment opportunities through speedy and efficient growth of industry. Therefore, in view of the sheer magnitude of importance which CGPs have, fair and impartial assessment of their status becomes paramount.

25. The authors are conscious of the fact that for administrative exigencies, the SERCs may look elsewhere to seek assistance. However, the same should not be a reason for the SERC to appoint whosoever for the task of assessing captive status of CGPs. It is trite law that delegation has to be done within the four corners of the law. In light of the above, the SERC may look at more neutral authorities/bodies which are capable of undertaking an impartial assessment free from bias. While doing so, SERCs should not take any step which defeats the noble endeavours of policy and statute and further, which may end up significantly harming the entire sector.

26. It is also noteworthy that often CGPs are set up with the basis that such project would avail of the statutory exemptions and thus, the financing of the project is done accordingly. The financing for such projects is usually arranged at the time of conceptualization and initiation of these projects and thus, in view of the huge investment commitment made for such a project, it is necessary that there is long term clarity regarding the impartial assessment of such projects. A perception of bias in the assessment of captive status would in turn lead to high perceived risk qua the projects becoming unviable. This would result in difficulty in long term financing at reasonable rates and hamper the investment scenario in our country. Therefore, it is crucial that an impartial perception of assessment is required so that there is cash flow visibility for the various lenders financing these projects. This in turn would lead to easier and enhanced financing for such projects thereby facilitating the growth of the captive sector and ultimately, help in reducing energy shortages across the country.

27. To conclude, the need for vigilance in zealously guarding the idea of impartial assessment finds an echo in the advice given by Justice William O. Douglas to young lawyers (The Douglas Letters: Selections from the Private Papers of William Douglas, edited by Melvin L. Urofsky, 1987 Edn., p. 162, Adler and Adler):

“… As nightfall does not come all at once, neither does oppression. In both instances, there is a twilight when everything remains seemingly unchanged. And it is in such twilight that we all must be most aware of change in the air—however slight—lest we become unwitting victims of the darkness.”

* Authors are Advocates specialising in electricity laws and regularly appear before APTEL and various state commissions and CERC. They can be reached at pallav.mongia@pmlc.in and pratik.das@pmlc.in