The Karnataka High Court has quashed the Karnataka Electricity Regulatory Commission’s (KERC) procedure for verifying the captive status of power projects and users in the state.

The Court held that KERC’s methodology for determining the proportional electricity consumption of group captive users was inconsistent with Rule 3 of the Electricity Rules, 2005, and an earlier judgment of the Supreme Court in the case of Dakshin Gujarat Vij Company v. Gayatri Shakti Paper and Board.

The Court directed KERC to reconsider the matter and frame an appropriate verification procedure, consistent with the Electricity Rules and the Supreme Court’s ruling, after following the due consultative process and the principles of natural justice.

It also directed that no coercive action be taken against the petitioners until such reconsideration is completed.

Background

KERC introduced a procedure for data collection, scrutiny, and verification of captive status for captive generating projects and captive users within Karnataka.

The procedure was challenged by the Distributed Solar Power Association, JSW Energy, JSW Steel, Sembcorp Green Infra, and other captive power stakeholders. The petitioners argued that the framework imposed additional qualification requirements beyond those prescribed under the Electricity Act, 2003, and the Electricity Rules, 2005.

They contended that the procedure was contrary to Rule 3 of the Electricity Rules under which a power plant qualifies as a captive generating plant if captive users collectively hold at least 26% ownership in the project and consume at least 51% of the electricity generated annually.

For group captive projects, captive users must consume electricity in proportion to their ownership share, with a permissible variation of up to 10%.

The dispute centered on Clause 6.7 of KERC’s verification procedure, which introduced a “Unitary Qualifying Ratio” (UQR) for determining proportional consumption by group captive users.

Under KERC’s methodology, the UQR was calculated as the ratio of captive users’ share of total electricity consumption to their share of total ownership. The proportional consumption requirement of each captive user was then determined using this ratio.

The petitioners argued that the Supreme Court had already established a fixed proportionality benchmark based on the statutory thresholds of 51% consumption and 26% ownership. According to the judgment, the qualifying ratio is 1.96% consumption per 1% ownership, subject to a 10% variation.

They contended that KERC’s methodology replaced this benchmark with a dynamic ratio linked to actual total consumption and ownership levels, thereby introducing a new qualification mechanism not contemplated under Rule 3.

Court’s Analysis

The High Court observed that the Supreme Court had interpreted Rule 3 in the context of the minimum qualifying requirements of 26% ownership and 51% captive consumption.

Referring to the Dakshin Gujarat Vij Company judgment, the High Court noted that the Supreme Court derived the proportionality requirement by dividing 51% by 26%, resulting in a fixed ratio of 1.96%.

It said that the Supreme Court’s illustrations examined proportionality with reference to the qualifying captive consumption requirement under Rule 3, not to total actual electricity consumption.

It found that KERC’s methodology recalculated the UQR based on total actual captive consumption and total ownership, resulting in a fluctuating ratio that was neither contemplated under Rule 3 nor recognized by the Supreme Court.

According to the High Court, the impugned procedure effectively introduced a new verification mechanism and altered the basis of proportionality established under the existing legal framework.

It noted that KERC had earlier issued draft regulations in 2023 and revised draft regulations in 2024 for stakeholder consultation. However, the final methodology adopted under the impugned order materially differed from the draft framework and was introduced without fresh consultation or hearing.

The Court held that the methodology directly affected the determination of captive status and the consequent liability to pay cross-subsidy surcharge and additional surcharge, making it more than a purely procedural exercise.

Setting aside KERC’s order, the Commission was directed to frame a fresh procedure consistent with the Electricity Rules and the Supreme Court’s ruling.

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