CASE NO. 3 of 1998

Present:
Shri S.C. Mahalik, Chairman
Shri A.R. Mohanty, Member
Shri D.K. Roy, Member

For Petitioner:
Dr. Subrat Ray, Director-in-Charge &
Mr. S. Praharaj, Consultant of M/s Konark Met Coke Ltd.

For Affected Party:
Shri B.P. Rekhani, General Manager (RAU), GRIDCO.

M/s Konark Met Coke Limited (for short, M/s. KMCL), the petitioner of this case has applied for permission under Section 44 of the Electricity (Supply) Act, 1948 (hereafter, for short, Act, 1948) read with Section 21(3) of the Orissa Electricity Reform Act, 1995 (hereafter, for short, Act, 1995) to set up a Captive Power Plant of 55 MW capacity which consists of two steam turbo generators (STG) of 17.5 MW each and one gas turbine generator of 20 MW.

2. The background facts of this case are as follows:

M/s KMCL, a company incorporated under the Indian Companies Act, 1956 and promoted by Minerals and Metals Trading Corporation Ltd. (MMTC), has been launched to produce 8.11 lakh tonnes of blast furnace coke per annum besides coke breeze and some other by-products for M/s Nilachal Ispat Nigam Ltd. (M/s NINL), an integrated iron and steel plant for production of 1.1 million tonnes per annum and promoted by the same promoter, M/s MMTC. The surplus coke oven gas from M/s KMCL along with the blast furnace and converter gas available from M/s NINL were proposed to be utilized for generating power of 55 MW at M/s KMCL's captive power plant for its own use as well as for M/s NINL. It was explained that M/s NlNL needed a captive power plant to maintain and sustain continuous operation of its integrated steel plant. Due to compulsions of financing arrangement, it was decided that a separate sister company namely M/s KMCL would set up and run the captive power plant. An added reasoning for the captive power plant was since the technology adopted for production of iron and steel involves release of large quantities of by-product fuel in the form of blast furnace gas, converter gas and nitrogen gas the same have to be not only used gainfully but also to obviate environmental hazards.

3. The captive power plant is proposed to be set up within the plant boundaries of M/s NINL at Duburi (near Daitari) in the district of Jajpur, Orissa with a capital investment of Rs.480 crores and expected to be ready for operation within 30 months.

4. GRIDCO filed a counter on 04.10.97 indicating that M/s KMCL and M/s NlNL are two separate legal entities incorporated for two different put poses. It further averred that though the blast furnace gas of M/s NINL would be utilized by M/s KMCL and the power and coke produced by the latter would be utilized by M/s NINL, it cannot be denied that M/s KMCL can produce power from its coke oven gas even if blast furnace gas is not made available from M/s NINL and M/s NINL can also produce steel by arranging power and coke from other sources.

5. After hearing the parties at length, the Commission in its Order dated 6^th November, 1997 (Case No.16/97) held as follows :

6. In the light of the above order, M/s. KMCL filed a fresh application on 26.11.97 which is registered as Case No.3/98. The petitioner filed an Agreement of Association between M/s. NINL and M/s. KMCL and also a detailed project report indicating the arrangements of commercial transaction between the two companies and also details of power requirement and cost of generation. Later, the petitioner by a communication dt.15.01.98 also supplied supplementary information with regard to cost of generation mentioned against Item No.14 of the Detailed Project Report.

7. GRIDCO, the Affected Party, objected to the prayer for permission u/s 44 of the Act, 1948 more or less on the same grounds as it did earlier (in Case No.16/97). However, the objections as contained in the letter dt.14.01.98 of the GRIDCO may be mentioned below for the purpose of clarity :

1. M/s. KMCL and M/s. NINL being two separate and distinct legal entities and transaction between them being purely commercial in nature, the supply of power by the former to the latter can not be deemed to be Captive use within the meaning of Section 44 of the Act, 1948 read with Section 21(3) of the Act, 1995.

2. Even though, the capital cost has increased to Rs.208.88 crores from Rs.158 crores as per Detailed Project Report (pages 42 & 43), the cost of generation of power per unit has remained unaltered at Rs.2.03 which is prima facie, incorrect.

3. GRIDCO is in a position to meet the entire power requirement of M/s. KMCL and M/s. NINL.

8. Responding to these objections, the petitioner furnished another report on 20.02.98 clarifying its position.

9. An interesting legal issue came up in course of hearing which was vital regarding locus stand) of the applicant. M/s. KMCL appeared to be a generating company within the definition of the said term under the Act, 1948 and hence it would need consent of Government of Orissa under Section 43-A of the Act, 1948 for sale of electricity. While the authority for granting consent under Section 44 to set up a generating station was vested in the OERC, the consent for sale of power by a generating company continued to be vested in the Government under Section 43-A. The applicant was asked to clear the ambivalence as to whether it would be treated as a generating company and apply for consent to Govt. of Orissa or would it consider itself an industrial company seeking permission from OERC under Section 44 of the Act, 1948 for setting up a new generating station to serve the power needs of itself and its sister company of the same group. The applicant clarified during the hearing 23.02.98 that it had no intention of operating as a generating company to produce power for sale and that the sole purpose of setting up power plant was to meet the needs of itself and of M/s. NINL. It prayed to be treated as an industrial company who had applied for consent under Section 44 of the Act, 1948 to set up a generating station. An undertaking was given to the effect that the Memorandum of Association would be amended at the earliest in the meeting of Board of Directors and endorsed in the shareholders' meeting. Further clarification and evidence was produced during the hearing on 04.03.98. The Commission considered all aspects and decided to consider the application as a valid application under Section 44 of the Act, 1948.

10. Upon hearing the parties at length, and taking the objections raised by the Affected Party and the clarificatory reports (dt.15.01.98 and 20.02.98) of the petitioner into consideration, the following issues emerge for decision:

1. Whether the sale of power by M/s. KMCL to M/s. NINL can be deemed to be for captive use ?

2. Is the cost of generation of power by M/s. KMCL higher than the rate of GRIDCO?

3. Is GRIDCO in a position to supply economically alternative pow e power to M/s. KMCL and M/s. NINL inadequate measure?

4. Whether consent should be granted under Section 44 of the Act, 1948 to M/s. KMCL to set up a generating station?

10.1 For the sake of ready reference, the relevant provision of law, namely, Section 44 of the Act, 1948 may be quoted at length:

1. gives to the applicant being a licensee an undertaking that it is competent to, and will, within twenty-four months from the said date, afford to him a supply of electricity sufficient for his requirements pursuant to his application; or

2. shows to the applicant that the electricity required by him pursuant to his application could be more economically obtained within a reasonable time from another appropriate source;

(2-A) - The Board shall before giving consent under subsection (1), to establishment or acquisition of a new generating station or to the extension or replacement of any major unit of plant or works, consult the Authority, in cases where the capacity of the new generating station or, as the case may be, the additional capacity proposed to be created by the extension or replacement exceeds twenty-five thousand kilowatts.

(3) - Any difference or dispute arising out of the provisions of this section shall be referred to the arbitration of the Authority.

10.2 The relevant provision of OER Act namely, Section 21(3) and Section 14(1) read as under:

1. transmitting; or

2. supplying electricity.

11. The petitioner's case. so far as it relates to the first issue, is that M/s MMTC which initially promoted M/s NINL along with the State Govt. of Orissa for setting up an integrated iron & steel plant at Duburi, subsequently decided for reasons of meeting institutional norms pertaining to promoters contribution and for arranging adequate and suitable finance to set up another company M/s KMCL) with the main objective of manufacturing blast furnace coke for M/s NINL and also to set up a Captive Power Plant by way of using blast furnace gas, converter gas generated by the steel plant of M/s. NINL for its own use as well as for selling the surplus to M/s. NINL. The main objectives for setting up of M/s. KMCL by way of carving it out of the parent body (M/s. NINL) have not been disputed or challenged by the Affected Party in its counter (dt.14.01.98). It is also not disputed that the motivation for making M/s. KMCL as a separate company was to acquire better financial management and thereby facilitating easy flow of finances including foreign equity. It is clear from facts that incorporation of M/s. KMCL by way of carving it out of the parent body (M/s. NINL) appears to be a legal contrivance to attain the main objectives outlined above.

12. Further, the proposed generation of 55 MW of power by M/s. KMCL is fully dedicated to the parent body (M/s. NINL), of course, after meeting its own requirement. It may not be out of place to mention here that generation of 55 MW power by M/s. KMCL is proposed by way of using blast furnace gas and converter gas generated in the process of production of iron and steel by the parent body. Therefore, there is a great deal of substance in the submission that these two separate companies are not only technically and operationally complementary but also they are fully dedicated to each other so far as their input and end use of output of the generating station is concerned. Hence, we hold that the proposed power plant is basically a captive power plant dedicated to the two sister companies only.

13. M/s GRIDCO contended that sale of power by M/s KMCL to M/s NINL would constitute "supply" which is not allowed unless the Commission issues a licence under Section 14(1) of the Act, 1995. On an appreciation of all the facts and circumstances relating to the setting up of the two companies and the nature of transactions we hold that M/s KMCL does not intend to engage in the business of supplying electricity. The transaction is a reciprocal arrangement between two sister companies. The arrangement for supply of electricity to a sister company can not be construed as "engage in the business of supplying electricity". M/s KMCL did not plan to sell electricity to any third party and the transaction between the two companies was "sale" only in terms of accounting and commercial arrangement.

14. With regard to the second issue, it may be stated that even though the Affected Party has pointed that the cost of calculation for generation of power at Rs.2.03/unit is incorrect in view of increase of capital cost from Rs.158 crores to Rs.208.88 crores it has not asserted that it can supply power to the petitioner at a lesser price i.e. in an economical manner. Admittedly the unit cost of power to be generated by M/s KMCL will be cheaper than GRIDCO's sale rate as at present to an industrial consumer such as M/s NINL.

15. As would appear, the CPP designed to generate 55 MW of power using surplus coke oven gas, blast furnace gas, converter gas is not only intended to cater to the in-house need of M/s KMCL for production of 8.11 lakh tonnes of blast furnace coke but also the requirement of M/s NINL which is in the process of being set up to produce 1.1 million tonnes of iron and steel. It is, noted that the relevant industries are highly power intensive and they need uninterrupted power supply to their essential loads for the safety of critical equipments and to avoid loss of production in the event of power failure.

16. The petitioner has further clarified that apart from the power to be generated from the proposed CPP it would require 25 to 35 MW of more power from the GRIDCO and that, in fact, it has already applied to the Affected Party for a contract demand of 25 to 35 MW of power at 220 kV.

17. The representative of GRIDCO pleaded that GRIDCO was in a position to supply the power required by M/s KMCL and M/s NINL. But the commission has to note that this assurance was half-hearted and would not be relied upon due to the fact that there was no affidavit or even a statement showing to the applicant that electricity required by him pursuant to his application could be economically obtained within a reasonable time from any other appropriate source. Accordingly, we conclude that neither GRIDCO was in a position to supply nor was it able to identify an appropriate alternate source of supply of power economically within a reasonable time.

18. Having regard to the finding on the first three issues, the Commission is of the opinion that consent to the establishment of a CPP by the Petitioner as applied for, cannot be withheld. The Commission, therefore, orders that subject to usual terms and conditions imposed on industrial companies in similar cases the Commission is inclined to grant consent under Section 44 of the Act, 1948 after consultation with the Central Electricity Authority as envisaged under Section 44(2-A) of the Act, 1948.

19. Hence it is ordered that subject to consultation with the CEA under Section 44 (2-A) of the Act, 1948, consent u/s 44 of the Act, 1948 be granted to the petitioner for the establishment of a generating station in the nature of a captive Power Plant with following stipulations:

1. Commissioning of the CPP in all respect shall be completed within 5 years from the date of this order, failing which fresh consent of the Commission has to be sought.

2. The petitioner shall make adequate arrangements to prevent the flow of power to GRIDCO's system and in case, it flows inadvertently when run in parallel, no charges/fees/duties will be payable by the concerned transmission licensee in absence of a contract to the contrary.

3. Any sale of power by the applicant to GRIDCO or any party other than M/s NINL shall need prior approval of this Commission through separate filing.

4. GRIDCO shall not incur any financial liability whatsoever due to loss of load or generation or damage to the plant on account of system disturbance and system conditions while running in parallel with integrated GRIDCO's system.

5. The cost of any upgradation of equipments on GRIDCO's system due to increase in fault level arising out of such parallel operation of the CPP shall be borne by the petitioner. Petitioner shall conduct a system study taking into account their proposed parallel operation of CPP and apprise the same to GRIDCO regarding its compatibility with GRIDCO system and as the proposed power plant will be made to run in parallel with the 220 kV transmission system.

6. The petitioner shall follow the Grid Code disciplines while running in parallel with GRIDCO system.

7. Petitioner shall furnish the full technical details of its equipments of the CPP to GRIDCO before procurement and obtain GRIDCO's "no objection" to ensure safety of the Grid.

Given under the hand and seal of the Commission, this day, the 18^th April, 1998.

(D.K. ROY)
MEMBER

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