A Division Bench of the Supreme Court ("Court”) in the case of Maharashtra State Electricity Distribution Company Limited (“MSEDCL”) v. Messrs JSW Steel Limited, [Civil Appeal Nos. 5074-5075 of 2019, decided on December 10, 2021], has held that captive power consumers are not liable to pay additional surcharge under the Electricity Act, 2003 (“Act”).

Background to the proceedings:

The matter before the Court had come by way of an appeal against the decision of the Appellate Tribunal for Electricity (“APTEL”). APTEL had through its order dated March 27, 2019 ("Impugned Order”), set aside the order of the Maharashtra Electricity Regulatory Commission (“MERC”) dated September 12, 2018 (“MERC Order”).

The MERC Order stipulated that as per Section 42(4) of the Act, captive power consumers, who have availed open access and receive supply from sources other than the distribution licensee ("DISCOM”) in whose area they are located, are liable to pay additional surcharge. On appeal against the MERC Order, APTEL set aside the MERC Order and held that there is no requirement for captive consumers to pay any additional surcharge to the DISCOM i.e., MSEDCL, under Section 42(4) of the Act. Aggrieved by the Impugned Order, MSEDCL had filed an appeal before the Court.

Decision of the Court:

While analysing the issue of payment of additional surcharge by a captive consumer, the Court held as follows:

1. Captive Consumer requires no express permission from MERC

The Court while analyzing the matter, scrutinized the provisions pertaining to a ‘Captive Consumer’ under Section 9 of the Act, and ‘Duties of Distribution Licensees and Open Access’ under Section 42(4) of the Act. Based on perusal of such provisions, the Court evaluated the issue of requirement of any permission from MERC for setting up a generation plant for captive use. The Court opined that the right of a captive consumer to set up a captive generation plant for captive use, is a statutory right provided by the Act and requires no separate permission from the State Commission i.e., MERC. Further, placing reliance on Section 9 of the Act, the Court observed that, only because supply of power through the grid is regulated in a similar manner for a generating company and a captive generation plant, or the fact that grant of open access is subject to the availability of the transmission facility as determined by the central transmission utility or the state transmission utility, it cannot be deemed that prior approval of MERC is required for captive generation. The Court remarked that the right to open access is also a statutory right afforded by the Act and is not subject to MERC’s approval. MERC’s authority in such cases is only limited to disputes arising out of the allocation of transmission facilities for grant of open access.

2. Captive Consumer in distinct from Ordinary Consumer

While analyzing the applicability of Section 42(4) of the Act, the Court held that, the application of Section 42(4) is limited to cases where prior permission has been granted by the State Commission, to procure power from any person other than the DISCOM, in whose area of supply such consumer is located. In such cases, the consumer is liable to pay additional surcharge as approved by the State Commission (MERC in the instant case). However, as discussed above, the captive consumer cannot be grouped under this category, as captive generation does not require prior approval of the MERC.

To further evaluate this issue, the Court considered the definition of a ‘Consumer’ under Section 2(15) of the Act. The Court divided the consumers under 2 (two) classes i.e., ordinary consumer and captive consumer. In its analysis, the Court held that an ordinary consumer, under the ambit of Section 42(4), who has been permitted by the State Commission to procure power from a third party, is required to pay additional surcharge to DISCOM, to compensate for the fixed cost and expenses of the DISCOM. The Court has succinctly differentiated the category of captive consumers from ordinary consumers, by virtue of such captive consumers sustaining a large expenditure and investing heavily on the set-up, operation and maintenance of a captive generation plant and transmission lines. Accordingly, taking into consideration the contrast in financial investment undertaken and on the principle of equity, whereby unequals cannot be treated equally, and the fact that the right of captive use is provided under the Act, the Court observed it would be inequitable to subject captive consumers to the levy of the additional surcharge under Section 42(4) of the Act.

Therefore, the Court directed MSEDCL to refund the additional surcharge collected from the captive consumer during the operation of the MERC Order. However, the Court also noted that, distribution companies like MSEDCL shall incur a significant liability if they were to reimburse the additional surcharge procured from captive consumers in one tranche and resultantly, such additional surcharge would now be adjusted against the future bills raised for recovering wheeling charges.

Please find a copy of the judgment, here.

This update has been contributed by Rachika Sahay (Partner) and Siddhant Satapathy (Associate).

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