IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 5380-5389 OF 2005
Punjab State Electricity Board ..Appellant
Versus
M/s SIEL Ltd. and Ors. ..Respondents
WITH
(Civil Appeal Nos. 5394, 5395, 5392, 5397, 5390, 5391, 5393,
5396, 5379 and 5398 of 2005)
JUDGMENT
Dr. ARIJIT PASAYAT, J.
1. Challenge in these appeals is to the judgment of the
Division Bench of the Punjab and Haryana High Court
allowing the statutory appeals filed by the respondents in
these appeals questioning the order of the Punjab State
Electricity Regulatory Commission (in short the `Commission’).
The determination of tariff by the Commission was the subject
matter of challenge.
2. The High Court held that the Commission had not
addressed itself to the relevant parameters and, therefore, the
order suffers from infirmities. The matter was remitted to the
Commission to decide the issues afresh keeping in view the
observations made and after eliciting the appropriate
information from the appellant-Punjab State Electricity Board
(in short the `Board’) wherever it has been found the deficient
on the part of the Board. Stress in these appeals, essentially is
focused on various conclusions on specific issues.
3. The dispute relates to the period from 1.8.2002 to
31.7.2003. The annual cost requirement as per the Board was
Rs.7,437.78 crores while the Commission allowed Rs.6,341.14
crores. The challenge was essentially by industrial consumers
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before the High Court. The dispute as noted above relate to (i)
estimation of agricultural consumption and transmission and
distribution loss (in short `T&D Loss’), (ii) energy input and
coal transportation, (iii) manpower requirement, (iv)
investment and rate of return.
4. So far as the last head is concerned, the rate claimed is
3% of net fixed assets and 14% of equity.
5. The basic premises on which the Commission proceeds
is to find out whether existing tariff generates surplus revenue
or not. If it is more, then there is scope for reduction in tariff
and if it is less it leads to increase in tariff. One of the basic
issues relates to cross subsidization. In other words,
industrial consumers pay more than actual average cost of
supply and subsidize the consumers in the agricultural and
domestic sectors.
6. According to learned counsel for the appellant-Board
cross subsidization is a tariff design issue. The Government
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has no role to play in cross subsidy. It is not an element of
cost and essentially is redesigning of tariff. Hypothetically,
High Court is not correct in saying it is a loss of revenue
measure.
7. Learned counsel for the respondents submitted that the
High Court has rightly stressed on certain aspects like cross
subsidy, inadequacy of materials produced, and rational and
down to earth approach has been adopted. The Government
has really no role to play. It is a legacy of the past and
principally aims at progressively reducing the element of cross
subsidy. The cost of supply is different to different classes of
consumers. The average cost of supply can be categorized into
(i) the average cost to every consumer and (ii) the average cost
to a class of consumers. It is pointed out and in fact there is
no dispute that cost of supply varies depending upon the
consumption i.e. in case of lower voltage relatable to domestic
consumers, the cost of supply is higher vis-`-vis the cost and
at higher voltage by industrial consumers it is less. The
technical and commercial losses are lower because of high
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voltage and it becomes higher if it is a case of low voltage. Till
now, there appears to be no authoritative determination on a
particular class of consumers. Thus, one of the methods can
be by adoption of average cost principle. The basic issues
which the High Court tried to address related to cross
subsidy. But it introduced a concept of ideal situation which
in our opinion is not the correct approach. Subsidy in essence
is a privilege which can either be given or not to be given.
8. The Commission which has been appointed under the
Electricity Regulatory Commissions Act, 1998 (in short the
`1998 Act’) or the Electricity Regulatory Commissions Act,
2003 (in short the `2003 Act’) exercises the statutory powers
for determination of tariff. The guidelines and parameters have
been provided under Section 9 of 1998 Act and Sections 29,
61 and 82 of 2003 Act.
9. The Commission is primarily concerned with determining
the annual revenue requirement (in short `ARR’). The
Commission designs the tariff and by rationalizing the same is
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sent to the Government which takes a decision annually as to
the quantum of subsidy and the class of beneficiaries.
Thereafter, the Commission finalises the tariff.
10. One of the basic issues raised in these appeals was
whether the interest on borrowing because of non receipt of
subsidies can be taken as a part of ARR. The Commission is
required to work out the details. It was stated that being the
first year of fixation of tariff, the Commission was faced with
various problems. If it is established that the borrowings are
general in nature it certainly forms parts of the ARR, but
where it is apparently made because of non receipt of subsidy
amount from the Government, the question may arise whether
it can be taken into account by fixing the ARR. If the Board by
cogent material established that the interest is relatable to
general borrowing, it would definitely form part of the ARR. If
on the other hand the consumer is able to establish that the
interest is relatable to borrowing on account of non receipt of
subsidy, the details have to be worked out by the Commission.
The commercial expediency test has to be applied by the
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Commission. Difficulties arise when it relates to determination
for the first year. At the beginning of the year the question of
delay in receipt cannot be gone into. This is a matter for the
subsequent period.
11. In relation to agricultural meter and T&D losses it is to
be noted that in the past agricultural consumers were not
having meters. Therefore, per force estimate had to be done.
The Commission fixed 25.52% to be T& D losses. The High
Court proceeded on the basis that meters should have been
there. In the absence of meters, the consumers should not
suffer. This is what is normally known as ideal situation test.
Such test as indicated above has no place in the case of
commercial evaluation.
12. In the case of industrial and domestic consumers, the
exact figures are known because meters are there. It is
pointed out that the technical loss is fixed at 15% whereas at
the distribution level it is 10 to 11% and 4 to 5% loss on
account of transmission.
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13. So far as the commercial losses and un-metered
agricultural consumers are concerned, the same cannot be
precisely quantified for the losses.
14. It is to be noted that when the Board’s stand was that
the loss is less than the national level load factor and the
energy input is best in the country, the High Court again
proceeded to apply the ideal situation test to say that there
was scope for improvement and found no defect in the
conclusions of the Commission by stating that the production
should be optimum.
15. The cross subsidy is an accepted principle. In
Hindustan Zinc Ltd. etc.etc. v. Andhra Pradesh State
Electricity Board and Ors. (1991 (4) SCC 299) in para 33 it
was observed as follows:
“33. Shri Kapil Sibal appearing on behalf of
some of the appellants confined the challenge
to the mode of exercise of power by the Board.
He laid great emphasis on the effect of absence
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of consultation with the Consultative
Committee under Section 16 of the Electricity.
(Supply) Act, 1948. He also claimed that the
quantum of increase could at best be justified
only to the extent of one-half and no more.
Shri Sibal claimed that certain extraneous
factors had been taken into account for the
purpose of revising the tariffs. The irrelevant
considerations, according to Shri Sibal, taken
into account are the capital sums owed by the
Board and the overall losses incurred by the
Board which according to him is impermissible
under Section 59 of the Electricity (Supply)
Act. He also argued that the upward revision
of HT tariffs is intended to subsidies another
class of consumers which is not permissible.
His arguments are already covered by our
earlier discussion. Similarly, the arguments of
Shri K.N. Bhat, for the appellant in C.A. No.
5379 of 1985 to the same effect need no
further discussion. The details of the several
factors taken into account for the revision in
tariffs, to the limited extent they can be gone
into within the permissible scope of judicial
review in such a manner also do not require
any further consideration.”
16. The observations of this Court in West Bengal Electricity
Regulatory Commission v. CESC Ltd. (2002 (8) SCC 715) need
to be noted:
“91. A perusal of Sections 29(2)(d), 29(3) and
29(5) of the 1998 Act shows that the
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consumers should be charged only for the
electricity consumed by them on the basis of
average cost of supply of energy, and the tariff
should be determined by the State
Commission without showing any undue
preference to any consumer. The statute also
obligates the State Government to bear the
subsidy which if it requires to be given to any
consumer or any class of consumers, should
be only on such conditions that the
Commission may fix and such burden should
be borne by the Government. However, the
High Court in its judgment has directed the
Company to maintain its tariff structure in
regard to different types of supplies as it was
prevailing before the Commission fixed the
new tariff. It also directed the increase in the
average rate of tariff which it had permitted to
be distributed pro rata by the Company
amongst different consumers, so that the
percentage of increase of each rate is the
same. In effect, therefore, the High Court has
directed the continuance of cross-subsidy.
One of the reasons given by the High Court in
this regard is that Calcutta Tramways which is
otherwise running a cheap transportation
system might have to increase its fare and the
same cannot be permitted since Calcutta
Tramways were not heard in the matter of
fixation of tariff and there is, therefore, a
likelihood of wide discontentment if the fares
are to be increased. We have noticed that the
object of the 1998 Act is to prevent
discrimination in fixation of tariff by imposing
cross-subsidy, but at the same time under
Section 29(5) of the 1998 Act, if the State
Government so chooses to subsidise the
supply of energy to any particular class of
consumers, the same can be done provided of
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course the burden of loss suffered by the
Company is borne by the State Government
and not imposed on any other class of
consumers. In this view of the matter, we are
of the opinion that while the Commission was
justified in its view as to the non-applicability
of cross-subsidy, the High Court was in error
in issuing a direction to the Commission,
contrary to the object and provisions of the
1998 Act to maintain a tariff structure which
was prevailing prior to the Commission’s
report. It is still open to the State Government
if it so chooses to direct the Commission to fix
the tariff of supply of electricity to any class of
consumers at a reduced rate provided the
State Government itself subsidises the same”.
17. In Association of Industrial Electricity Users v. State of
A.P. and Ors. (2002 (3) SCC 711) also the position was
examined in detail.
18. We make it clear that actual expenditure has to be the
basis and not the hypothetical ideal situation. Ideal situation
is essentially contemplation of the future. Additionally, the
computation of input is the actual cost on the basis of per
unit.
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19. Since the High Court’s approach is not correct and
analysis was not done in the correct prospective, we set aside
the order of the High Court and remit the matter to the
Commission to examine the matter afresh keeping in view the
parameters of 2003 Act in the light of what has been stated
above on specific issues.
20. The appeals are allowed to the aforesaid extent.
…………………………….J.
(Dr. ARIJIT PASAYAT)
…………………………….J.
(S.H. KAPADIA)
New Delhi,
August 18, 2008
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