Freedom of Choice

But need to remove ambiguities in the new Electricity Act

The Electricity Act, 2003 has made it much easier for industrial consumers to set up a captive plant or source their power needs from a third party, bypassing the often expensive and unreliable electricity from the grid.

The choices have widened. Consumers can buy power from the generating companies directly or, under the new open access framework, from intermediaries such as traders or distribution companies. Or they can set up their own captive power plants. The definition of “captive power” has been enlarged with producers allowed to sell surplus power. A cluster of industrial units, for example, can set up a captive plant and reduce power costs.

But if the spirit of the act is to percolate to ground level, certain issues need to be clarified. Let’s take open access first. The act says it will be provided “only on introduction by State Commission subject to payment of surcharge”. The surcharge itself could be around 15 to 20 per cent and will increase the cost of power. Besides this, the regulator will decide when open access will be allowed.

Another rider is that the provision of open access is subject to the “availability of adequate transmission facility”. This in turn will be determined by the central transmission utility or the state transmission utility or the state transmission utility, as the case may be, and any dispute regarding the availability of transmission facility will be decided by the appropriate commission.

There lies the rub. The independence of the regulator is critical. Yet certain provisions that allow for the regulator to be eligible for reappointment, or that specify that he should work under the supervision of a retired judge or that he can be removed by the state or union government, place a question mark over the regulator’s independence.

How will availability be decided? On a daily, monthly or six-monthly basis? Obviously, the industrial user needs to know far ahead of time in order to decide whether to produce or buy electricity. Under thee act there will not be a surcharge on captive power and open access will be provided.

On captive power too, there are ambiguities over the definition of a captive power plant and its ownership. It has been defined under the act as “a power plant set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such cooperative society or association”.

Can a society qualify as an entity formed by an association of persons? A strict interpretation of association of persons could imply no profit motive. However, in the case of cooperatives, the profit motive is prevalent. And what does “primarily for its own use” mean? Does it mean 100 per cent or 51 per cent and less?

Various options are open to industrial consumers. First is the option of leasing. By definition, the generating company is one which owns or operates or maintains a generating station. Therefore the association need not set up a generating station itself.

Two companies, one SPV and the other a society or cooperative, can be set up. The SPV can install the power plant. The society or cooperative can take up the plant on lease from the SPV. The SPV can get the financing for the project. The SPV leases the power plant to the cooperative which then operates it. The money that the cooperative recovers from the consumer gets passed to the SPV so that it has a cash flow or revenue stream. The SPV thus becomes bankable.

The second option is the setting up of a cooperative for sourcing power. The third option is forming an “unincorporated” association. In this case, banks do not have recourse to any legal entity so they will insist on joint and several liabilities of the promoters. The difficulty with this option may be raising finances.

The fourth option is forming an “incorporated” association. This could be a society operating on a “non-profit basis”. In such a situation raising of funds on a limited recourse basis could be difficult.

It is arguable that a company too is a legal entity formed by a group of persons. Some judicial dictum, especially relating to the Income Tax Act, has stated that a company is nothing but an association of individuals. Further, Section 11(2) of the Companies Act prohibits any association with more than 20 persons from being formed for acquisition of gain, unless registered as a company. Therefore, it is arguable that consumers of power can establish a power plant, and that such an SPV may qualify as a captive power plant and can supply power to its members.

On paper, the act certainly offers opportunities for industrial consumers to make the switch. But the ambiguities and grey areas need to be removed because there are sufficient provisions that may permit the SEBs to keep their monopolies intact. For industrial consumers to enjoy real freedom of choice, the government needs to issue a notification that lends greater clarity to the act.

(Based on the presentation made by Mohit Saraf, Senior Partner, Luthra and Luthra Law Offices)