Karnataka High Court Quashes KERC's Captive Verification Procedure
The Karnataka High Court has set aside the Karnataka Electricity Regulatory Commission's captive verification procedure, holding that the regulator's methodology for determining proportional consumption by group captive users was inconsistent with the Electricity Rules, 2005 and the Supreme Court's ruling in the Dakshin Gujarat case.
June 20, 2026. By Mrinmoy Dey
The recent order, passed by Justice K.S. Hemalekha, came in response to a batch of writ petitions filed by the Distributed Solar Power Association (DSPA), JSW Energy, JSW Steel and companies under the Sembcorp Green Infra group, among others. The petitioners had challenged KERC's captive verification framework, particularly Clause 6.7 dealing with the proportionality test and the concept of ‘Unitary Qualifying Ratio’ (UQR) applicable to group captive users.
The petitioners argued that KERC's methodology was contrary to Section 9 of the Electricity Act, 2003, Rule 3 of the Electricity Rules, 2005 and the ruling by the Supreme Court in the Dakshin Gujarat Vij Company Ltd. vs Gayatri Shakti Paper and Board Ltd. case. They contended that the regulator had introduced a new substantive condition by prescribing a dynamic UQR formula based on total actual consumption and total ownership, which effectively rewrote Rule 3 of the Electricity Rules.
Rule 3 of the Electricity Rules stipulates that a captive generating plant must have at least 26 percent ownership by captive users and at least 51 percent of the aggregate electricity generated should be consumed for captive use on an annual basis. In the case of group captive arrangements or associations of persons, captive users are required to consume electricity in proportion to their ownership share, with a permissible variation of up to 10 percent.
The Supreme Court, in its Dakshin Gujarat judgment, had interpreted this proportionality requirement and held that the UQR should be derived from the ratio of the minimum consumption requirement to the minimum ownership requirement, i.e., 51 percent divided by 26 percent, which equals 1.96 percent. The Court observed that for every 1 percent ownership, there should be corresponding captive consumption of 1.96 percent, with a permissible variation of ±10 percent. It also clarified that the proportionality test should be applied with reference to the qualifying consumption requirement under Rule 3 and not to 100 percent of the electricity generated.
However, KERC's Clause 6.7 prescribed a different methodology. The regulator defined UQR as the ratio of the percentage of total consumption by captive users (Y) to the percentage of total ownership of captive users in the captive generating plant (X), with UQR equal to Y divided by X. Based on this dynamic ratio, the proportional consumption requirement for each captive user was to be calculated.
The High Court noted that under KERC's framework, proportionality was determined with reference to total actual captive consumption and total ownership rather than the qualifying threshold of 51 percent captive consumption recognised by the Supreme Court. According to the Court, this effectively introduced a fluctuating or dynamic UQR not envisaged under Rule 3 or the Supreme Court judgment.
KERC defended its position by arguing that the dynamic UQR merely operationalised the proportionality requirement embedded in Rule 3 and was necessary to prevent ‘gaming’ of the captive power framework, wherein shareholders with insignificant equity stakes could disproportionately consume electricity while availing exemptions from cross-subsidy surcharge and additional surcharge. The regulator relied on the Supreme Court's observations regarding prevention of misuse and the need for continuous compliance with ownership and consumption norms.
The Court, however, held that these anti-gaming observations could not be interpreted in isolation to justify a methodology that departs from the qualifying ratio expressly explained by the Supreme Court. It observed that the illustrations provided by the apex court examined proportionality with reference to the qualifying captive consumption requirement under Rule 3 and not with reference to total actual consumption.
The High Court further noted that KERC had earlier issued draft regulations in 2023 and revised draft regulations in 2024 inviting stakeholder objections. However, the final order introduced a materially different methodology without fresh consultation or hearing, which the Court found inconsistent with principles of natural justice.
Holding that the methodology directly impacts the determination of captive status and consequent liability towards cross-subsidy surcharge and additional surcharge, the Court concluded that the impugned order could not be treated as merely procedural. It ruled that the dynamic UQR based on actual captive consumption was contrary to the qualifying benchmark explained by the Supreme Court and therefore could not be sustained.
Accordingly, the Court allowed all the writ petitions, quashed KERC's March 28, 2025 order and directed the regulator to reconsider the matter and frame an appropriate procedure consistent with Rule 3 of the Electricity Rules, 2005 and the Supreme Court's Dakshin Gujarat judgment after following due consultative process and principles of natural justice. The Court also directed that no coercive action be taken against the petitioners until such reconsideration is completed.
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