Supreme Court clarifies FERV Apportionment in Power Tariffs: Power Grid Corporation vs. Tamil Nadu Generation and Distribution Co. (2019)

Introduction

Date of the Judgment: May 9, 2019

Citation: 2019 INSC 464

Judges: N.V. Ramana, J., Mohan M. Shantanagoudar, J., and Indira Banerjee, J.

Should changes in foreign exchange rates impact a power company’s profits or be passed on to consumers? The Supreme Court of India addressed this question in a case concerning the apportionment of Foreign Exchange Rate Variation (FERV) in power tariffs. The core issue was whether FERV, after being calculated and added to the capital cost, should be divided between debt and equity, or solely attributed to debt. This judgment clarifies the process for recovering FERV, ensuring a fair balance between the interests of power companies and consumers. The judgment was authored by Justice N.V. Ramana, with Justices Mohan M. Shantanagoudar and Indira Banerjee concurring.

Case Background

The dispute arose from decisions of the Central Electricity Regulatory Commission (CERC) regarding the capitalization of Foreign Exchange Rate Variation (FERV). The Power Grid Corporation of India, a transmission company, challenged the CERC’s methodology for apportioning FERV. The company argued that FERV should be apportioned between both debt and equity, while the CERC contended it should only be applied to debt. This dispute reached the Supreme Court after an appeal to the Appellate Tribunal for Electricity, which partially sided with the CERC. The core issue revolved around how the gains or losses from fluctuating foreign exchange rates should be allocated in the calculation of power tariffs.

Timeline:

Legal Framework

The court considered the following legal framework:

• The Electricity Regulatory Commissions Act, 1998: This Act was enacted to reform the power sector, addressing issues such as irrational retail tariffs and the absence of an independent regulatory authority. The Act aimed to protect the financial health of State Electricity Boards.
• Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2001: Specifically, Regulation 1.13(a) was cited, which deals with the methodology for calculating FERV, but does not explicitly provide for its apportionment.
• Regulations 1.3 and 1.7 of the Tariff Regulations, 2001: These regulations stipulate that the regulations apply where the capital cost-based tariff is determined by the Commission and that the recovery of Income Tax and Foreign Exchange Rate Variation shall be done directly by the utilities from the beneficiaries without filing a petition before the Commission.
  
  The regulations state:
  
  “1.3 These Regulations shall apply where the capital cost­based tariff is determined by the Commission.
  …
  1.7 Recovery of Income Tax and Foreign Exchange Rate Variation shall be done directly by the utilities from the beneficiaries without filing a petition before the Commission. In case of any objections by the beneficiaries to the amounts claimed on these counts, they may file an appropriate petition before the Commission.”

Arguments

Appellant’s (Power Grid Corporation) Arguments:

• The appellant contended that any foreign exchange variation gets added to the capital cost and not individually to debt or equity.
• The capital cost is divided into debt and equity based on a normative debt-equity ratio, and therefore, FERV should also be apportioned between debt and equity.
• The appellant argued that FERV has been apportioned as such as a matter of practice.

Respondent’s (Tamil Nadu Generation and Distribution Co.) Arguments:

• The respondent disputed the existence of the practice of apportioning FERV between debt and equity.
• The respondent contended that the Electricity Regulatory Commissions Act, 1998 was enacted to do away with such practices.
• The respondent referred to Regulations 1.3 and 1.7 of Tariff Regulations, 2001, arguing that liability accrued on account of FERV can be recovered directly from the beneficiaries, and the question of capitalization of FERV does not arise.

Innovativeness of the argument: The appellant’s argument was based on the existing practice of apportioning FERV, while the respondent argued against this practice based on the Electricity Regulatory Commissions Act, 1998.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether FERV should be apportioned between debt and equity after being calculated and added to the capital cost.

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Regulation 1.13(a) of Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2001: The Court held that this regulation only deals with the methodology of calculation of FERV and not its apportionment.
• Regulations 1.3 and 1.7 of the Tariff Regulations, 2001: The Court relied on these regulations to conclude that FERV can be recovered directly from the beneficiaries without the need for capitalization.
• U.P. Power Corpn. Ltd. v. NTPC Ltd., (2009) 6 SCC 235: The Court cited this case to support the view that any variation in the apportionment of FERV would be unfair to consumers who were not consumers during the relevant period.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Lack of Legal Basis: The court found no rule, regulation, statute, or precedent to support the argument that FERV needs to be apportioned in a debt-equity ratio.
• Direct Recovery Mechanism: The court emphasized that Regulations 1.3 and 1.7 of the Tariff Regulations, 2001, allow for direct recovery of FERV from beneficiaries without needing to file a petition before the CERC.
• Consumer Interest: The court noted that any change in the apportionment of FERV would unfairly affect current consumers for transactions that occurred 15-18 years ago.
• Reformative Purpose of the Act: The court highlighted that the Electricity Regulatory Commissions Act, 1998, was enacted to address issues like irrational tariffs, and the court was not inclined to interfere in matters that go against the purpose of the Act.

Fact:Law Ratio

The court’s decision was heavily influenced by legal considerations (80%), particularly the interpretation of the Tariff Regulations and the Electricity Regulatory Commissions Act, with a lesser emphasis on the factual aspects of the case (20%).

Logical Reasoning

Key Takeaways

• No Apportionment of FERV: The Supreme Court held that Foreign Exchange Rate Variation (FERV) should not be apportioned between debt and equity after being added to the capital cost.
• Direct Recovery: FERV can be recovered directly from the beneficiaries by the utilities without filing a petition before the Central Electricity Regulatory Commission (CERC), as per Regulations 1.3 and 1.7 of the Tariff Regulations, 2001.
• Consumer Protection: The judgment protects consumers from bearing the burden of past FERV fluctuations.
• Regulatory Compliance: The judgment reinforces the importance of adhering to the regulatory framework established by the Electricity Regulatory Commissions Act, 1998.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

There was no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that the Foreign Exchange Rate Variation (FERV) should not be apportioned between debt and equity after being added to the capital cost. The court clarified that FERV should be recovered directly from the beneficiaries as per the Tariff Regulations, 2001. This judgment reinforces the existing legal position that FERV is a pass-through item to be recovered directly from the beneficiaries and not to be capitalized and apportioned.

Conclusion

The Supreme Court dismissed the appeals, holding that the Foreign Exchange Rate Variation (FERV) should not be apportioned between debt and equity. The court emphasized that FERV should be recovered directly from the beneficiaries as per the Tariff Regulations, 2001. This decision clarifies the process for recovering FERV and protects consumers from bearing the burden of past FERV fluctuations. The judgment reinforces the regulatory framework established by the Electricity Regulatory Commissions Act, 1998.