Karnataka High Court quashes KERC order on captive power verification
The Karnataka High Court has set aside a Karnataka Electricity Regulatory Commission (KERC) order that introduced a new method for verifying the captive status of group captive power projects.
The Court held that KERC’s approach was not in line with Rule 3 of the Electricity Rules, 2005 and the Supreme Court’s judgment in the Dakshin Gujarat case. It directed KERC to reconsider the matter and frame a fresh procedure after stakeholder consultation.
The case centred on Clause 6.7 of KERC’s order dated March 28, 2025, which prescribed the methodology for verifying captive status in group captive power projects. The petitions were filed by captive generators, captive consumers, renewable energy generators and associations of captive users in Karnataka.
Under Rule 3 of the Electricity Rules, 2005, a group captive project must satisfy two key conditions to qualify as a captive generating plant. Captive users must collectively hold at least 26% ownership in the project and consume at least 51% of the electricity generated. Compliance with these requirements allows consumers to claim captive status and avail exemptions from Cross Subsidy Surcharge (CSS) and Additional Surcharge (ASC).
KERC’s methodology
KERC introduced a verification mechanism based on a Unitary Qualifying Ratio (UQR), calculated using the actual electricity consumption and actual ownership share of captive users.
The regulator argued that the methodology was intended to prevent misuse of captive status by shareholders with relatively small ownership stakes consuming disproportionately large quantities of electricity while continuing to claim surcharge exemptions.
Court’s observations
The Court noted that the Supreme Court, in the Dakshin Gujarat Vij Co. Ltd. v. Gayatri Shakti Paper and Board Ltd. judgment, explained proportionality using the qualifying thresholds prescribed under Rule 3, namely 51% captive consumption and 26% ownership.
However, KERC’s formula relied on actual consumption and actual ownership figures, creating a dynamic UQR that could vary based on consumption patterns. According to the Court, neither Rule 3 nor the Supreme Court’s judgment contemplated such a fluctuating mechanism.
The Court held that KERC’s methodology effectively introduced a new condition for determining captive status and altered the basis of proportionality recognised by the Supreme Court.
Consultation concerns
The Court also observed that the revised methodology was introduced without a fresh consultation process, despite representing a material departure from earlier proposals. It held that stakeholders should have been allowed to present their views before the framework was finalised.
Court’s directions
The High Court quashed the impugned order and directed KERC to reconsider the issue. It asked the regulator to frame a fresh captive verification procedure that is consistent with Rule 3 of the Electricity Rules, 2005 and the Supreme Court’s ruling in the Dakshin Gujarat case, while following the principles of natural justice and due consultation.
