Maharashtra State Electricity Distribution Company Ltd., the state-owned discom in Maharashtra, attempted to impose an additional surcharge on captive power producers. The case went all the way to the Supreme Court of India and MSEDCL lost. Legally, this was the appropriate outcome. A quick look at the financial situation of MSEDCL shows that its motivations are embedded in the political economy of the power sector in Maharashtra.
Captive Power And Open Access
A captive power plant generates electricity primarily for self-consumption. It can be set up by individuals, companies, cooperative associations and can supply multiple consumers through what is called a group captive arrangement. Here, 51% of the electricity generated must be consumed by the owner(s) and these ‘captive’ consumers must own a minimum of 26% of the power plant.
Section 9 of the Electricity Act, 2003, permits the establishment of captive power plants, without a license. Such plants also have the statutory right of open access (non-discriminatory use of the network of the discom) to carry electricity through the grid. A proviso to Section 9 states that the supply of electricity from a captive plant will be regulated in the same manner as other power generation plants.
Under Section 42(2) of the Act, captive power plants are exempt from paying the cross-subsidy surcharge that is otherwise payable by a generator who is granted open access. Finally, Section 42(4) provides that an additional surcharge on wheeling charges is payable when the state commission permits a consumer, or class of consumers, to receive electricity from a person other than the incumbent discom.
This was the source of the dispute between MSEDCL and the captive power producers.
MSEDCL Versus JSW And Others
MSEDCL attempted to impose an additional surcharge on certain captive power producers in Maharashtra. The Maharashtra Electricity Regulatory Commission held the additional surcharge would not apply to captive users to the extent of their self-consumption from such plants but would apply to all consumers who used open access to receive supply from anyone other than the discom to which they are connected.
The Appellate Tribunal for Electricity, in a well-reasoned order, set aside the MERC order and held that the group of captive consumers in question were not liable to pay an additional surcharge. In doing so, it took a liberal interpretation of the relevant provisions of the Act, stating that the scheme of the Act (and rules and policies relating to it) indicated that captive generation was to be encouraged.
The Supreme Court upheld the APTEL order, mainly on the basis of a technical view that Section 42(4) applied only where the State Commission permitted a consumer or class of consumer to receive electricity supply from a person other than the discom. The legal right of captive consumers to receive electricity through open access did not require any such permission as it arose as a matter of the operation of statute, as the Act itself enabled this.
Why Build Captive Plants?
Captive plants are attractive because the discom electricity tariffs for commercial and industrial or C&I consumers are high.
For larger captive power plants, the cost of a unit of electricity can be under Rs 5/KWh: buying a unit from the discom can be 50% more expensive.
In addition, for renewable energy captive generation, certain states provide incentives such as discounted wheeling and banking charges, net metering, etc. Also, in many states, grid-supplied electricity is unreliable, and industrial customers prefer to depend on their own plants for the supply of 24x7 power.
The Maharashtra Discom Is Suffering
MSEDCL’s cost of supply was almost Rs 8, making their tariffs non-competitive for C&I customers. Even on power exchanges, power was available on a day-ahead basis for Rs. 3.5 a unit. Even after paying cross-subsidy and fixed charges, it is rational for consumers to procure power through open access.
As a consequence, the discom’s sale of electricity to C&I customers, who account for a third of overall electricity consumption in Maharashtra, has declined steadily since FY12. Many C&I customers have migrated out of the discom’s network and instead sourced supply through open access and captive options.
The cumulative revenue gap of MSEDCL, to be recovered from consumers is about Rs 15,750 crore. Further, its FY19 report showed MSEDCL’s short-term borrowings at Rs 23,000 crore, about 30% of its aggregate revenue requirement, higher than the 25% required by the government of India’s UDAY bailout package. Despite receiving state government subsidies, MSEDCL is unable to recover revenue to take care of its costs.
It is therefore unsurprising that, despite being subject to a law that prima facie was quite clear that additional surcharge was not payable by captive consumers, MSEDCL tried to impose it and, when challenged, was willing to take the matter all the way to the Supreme Court. Apart from the fear of vigilance authorities coming after them in the event that they did not pursue every appeal to its legally allowed conclusion, this is a matter of protecting crucial revenue for the discom. This also goes a way to explaining why between 2015 and 2020, about 15% of the cases at APTEL were appeals against orders of MERC, which tend to favour MSEDCL.
Only Way Out
The long-term solution, as Ajay Shah and I have pointed out, lies in privatisation and allowing discoms to charge prices that reflect the cost of power while improving efficiency without the burden of cross-subsidies. In the meanwhile, we can expect more situations in which beleaguered discoms attempt to protect their bottom lines with ill-advised, at times unenforceable policies and expensive, unwinnable litigation.
Akshay Jaitly is President, 262 Advisors; and co-founder of Trilegal.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.
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