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Captive Power Clarity and Concerns: Understanding the Supreme Court

A very erudite and well written judgment on many counts. The order clears multiple issues such as what or who is an 'Association of Persons' with respect to the Electricity Act and for whom does the Group Captive or Captive option apply and many other contentious issues. The gist of the judgment could be stated, as they have done at the end, in three pieces:

1. You are eligible to become a captive consumer only if you are either a cooperative or an Association of Persons. Every one else, if you claim to be someone else, is disqualified at step 1 itself. But then, everyone is covered by the Association of Persons, literally! By this definition, Cooperatives are also an Association of Persons, who are treated differently says the Order in its interpretation of law. Throws clarity to many questions.

2. The second rule of all captive consumers together, should hold not less than 26% equity in the Power Plant and should consume 51% of the total generation. The order says this is applicable to all including cooperatives. The proportionality rule, whereas is not applicable to Cooperative. Whereas it is applicable to all others.

Only issue is the order goes in line with the APTEL order earlier which had taken a number, 1.96% rule as the new mantra and sanctifies a number that is neither in the Act nor in the Rules! The new mantra says that the ratio of consumption% to share% of any captive consumer should not be less than 1.96! If you don't satisfy this norm, you are no more a captive consumer!

Applicability of the rule is fair enough and that is a legal point. There can never be any contentions on what and how the #supremecourtofindia interprets it! But #Mathematics is a different game! How did they get this number 1.96? and whether it is true, mathematically or even logically?

To put this mathematically, what the court says is:

if A < X and B<Y, then A/B < X/Y. That is, if 4 < 10 and 8 < 20, then 4/8 < 10/20! It appears correct! Provided the numbers follow the ratio. But such numbers are not as many as those that do NOT follow the rule. Inequalities don't work this way. If it is an equation, then it would. But not an in-equation.

Take these numbers for instance. 4<12, 8<36 is 4/8 < 12/36 (0.5<0.33)? Obviously, no! This is just proving by example. I am sure math professionals will come out with a rigorous mathematical proof to the statement that there are infinite numbers that do not satisfy this proposition and maybe, that there are another set of infinite numbers albeit lesser in volume, that do satisfy this.

Coming back to the law in question, it says the consumers should hold not less than 26% of the shares together and consume not less than 51% of power generated. That is, if Total Share holding is less than 26% or if total power consumed by captive consumers is less than 51%, then they do not satisfy the norm for becoming a captive power plant. It is not even an AND, it is an OR between the inequalities! By dividing 51/26, they arrived at the number 1.96 and said therefore whoever has a consumption percentage to share percentage ratio that is less than 1.96, do not satisfy this rule!

The inequalities will look like these:

1) Total Consumption percentage TC < 51

2) Total Share percentage. TS < 26

And there are two unwritten rules:

3) Max Consumption percentage TCMax = 100 or TC<=100

4) Max Share Percentage TSMax = 100 and TS <=100

One simple test is always the edge condition. If someone holds 100% of the shares and consumes 100% of the power, do they fall under this rule of being more than 1.96 to qualify. This possibly is the best condition of captive user who invests 100% of shares and consumes 100% of power. 100 / 100, the value is 1 which is less than the norm dictated 1.96. Obviously, the best case captive does not obey this rule. Therefore, the #supremecourtofindia has specified them separately and says they are captive. Only this condition where it is 100% owned and used by the owner is mentioned separately.

But then, between 1 and 1.96 there are infinite number of combinations that are possible which do not obey this 1.96 rule. What about those?

Let us look at one to understand the situation better.

A is a captive generator in whom A holds 75% of the shares and B joins A to promote this plant and invests 20% of the shares. Together they hold 95% of the shares. 5% shares they request their friend to invest who does not consume power. Let us say, A consumes 75% of the power and B consumes the balance 25% of the power. Now take a look at the ratios. A's ratio is 75/75 or 1 and B's ratio is 25/20 or 1.25! Both do not satisfy the norm of being more than 1.96. And they do not qualify as a captive power plant as per this Order. But this is possibly the form of captive power plant, the Act seeks to encourage.

There are numerous, to be exact infinite combinations, that the order is oblivious to. It is a grave error that would confuse all concerned.

3. The order is reasonably clear on the proportional consumption in case consumers change in the middle of the year! Yes, that is possibly the only sane solution to the problem of changing the consumers. Changing cannot be avoided and yes, it has to be proportionally consumed. The only ambiguity which could easily be interpreted in different ways by stakeholders to their advantage is, proportionality applies on what and which proportionality? Should we take share ratio of all the parties at the end of the year as a weighted average and then apply it on the annual generated quantum? Well this is what the order suggests clearly.

But the ambiguity arises with say, wind power which could be seasonal. All generation of power happens in specific months and at that time Party A might be in the captive consumers list. Party B might not have been there. Now, Party B joins after the season is over. How can party B consume his share of that power, when he was not there at all? There is no power to give to Party B. With banking it is a different story. Another complication!

Captive is a very confusing piece of legislation and the #supremecourtofindia has tried to clear the ambiguity as much as possible. Three cheers to them. However as in all legal, it opens new questions while clearing some. But then, what is the best solution? Scrap the Cross Subsidy! Law on captives will not be required. And Electricity Regulatory bodies will be out of job!


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