Supreme Court Clarifies Minimum Area for Electricity Distribution Licenses: Jindal Steel vs. Chhattisgarh State (29 September 2022)

Introduction

Date of the Judgment: 29 September 2022

Citation: (2022) INSC 817

Judges: Ajay Rastogi, J. and B.V. Nagarathna, J.

Can a company be granted a license to distribute electricity in a specific industrial park, or does the license need to cover a larger area? The Supreme Court of India recently addressed this question, focusing on the interpretation of “area of supply” under the Electricity Act, 2003. This case revolves around a dispute over the cancellation of a distribution license granted to Jindal Steel and Power Limited (JSPL) for their industrial park in Chhattisgarh. The core issue is whether the license should cover a minimum area equivalent to a municipal council, corporation, or a revenue district.

The Supreme Court bench comprised Justice Ajay Rastogi and Justice B.V. Nagarathna, with the judgment authored by Justice B.V. Nagarathna.

Case Background

In 1990, Jindal Steel and Power Ltd. (JSPL) established a steel plant in Raigarh, Chhattisgarh, along with a captive power plant located 40 km away. The newly formed state of Chhattisgarh introduced an industrial policy in 2001-2006, encouraging private-public partnerships for industrial estates and captive power plants.

JSPL proposed setting up an industrial estate adjacent to its existing plant and sought permission to supply power to the units within the estate. The Chhattisgarh government initially supported this proposal, leading to a Memorandum of Understanding (MoU) between JSPL and the Chhattisgarh State Industrial Development Corporation (CSIDC) on 23 October 2002.

The State Government granted permission on 29 January 2003 for JSPL to supply power to the new industrial units from its captive plant, subject to certain conditions. The Chhattisgarh State Electricity Board (CSEB) also granted permission on 31 May 2003 for JSPL to lay transmission lines.

JSPL began supplying electricity to the industrial units on 1 March 2004. Subsequently, on 15 September 2004, JSPL applied for a distribution license under Section 14 of the Electricity Act, 2003. The Chhattisgarh State Electricity Regulatory Commission (Commission) initially returned the application, but JSPL resubmitted it on 25 January 2005.

The Commission, after considering objections, granted the distribution license on 29 September 2005, which was challenged by CSEB and Chhattisgarh Vidyut Mandal Abhiyanta Sangh (CVMAS). The Appellate Tribunal for Electricity later set aside the license on 7 May 2008, leading to the present appeals before the Supreme Court. Tirumala Balaji Alloys Pvt. Ltd., a consumer of electricity in the Jindal Industrial Park, also filed an appeal due to the disruption in power supply caused by the cancellation of JSPL’s license.

Timeline:

Course of Proceedings

The Chhattisgarh State Electricity Regulatory Commission (Commission) initially decided to grant a distribution license to JSPL on 29 September 2005, taking into account the historical background, investments made by JSPL, and the benefits to industrial consumers. The Commission noted that the Chhattisgarh State Electricity Board (CSEB) was unable to provide electricity due to infrastructure limitations.

However, the Commission also imposed a penalty of Rs. One Lakh on JSPL for violating Section 12 of the Electricity Act, 2003, which mandates obtaining a license for electricity supply.

CSEB and CVMAS filed appeals against the Commission’s order before the Appellate Tribunal for Electricity. JSPL also challenged the penalty imposed on it. The Appellate Tribunal, on 7 May 2008, set aside the Commission’s order, canceling the distribution license granted to JSPL. The Tribunal held that JSPL did not meet the minimum area requirements for a distribution license and that the State Government’s permissions did not amount to a valid license. This led to the present appeals before the Supreme Court.

Legal Framework

The primary legislation in this case is the Electricity Act, 2003. Key provisions include:

• Section 2(3): Defines “area of supply” as the area within which a distribution licensee is authorized to supply electricity.
• Section 12: Prohibits any person from transmitting or distributing electricity without a license.
• Section 14: Empowers the Appropriate Commission to grant licenses for transmission, distribution, or trading of electricity. It also includes a sixth proviso that allows for multiple licensees within the same area, subject to certain conditions.
  
  “Provided also that the Appropriate Commission may grant a licence to two or more persons for distribution of electricity through their own distribution system within the same area, subject to the conditions that the applicant for grant of licence within the same area shall, without prejudice to the other conditions or requirements under this Act, comply with the additional requirements relating to the capital adequacy, credit-worthiness, or code of conduct as may be prescribed by the Central Government, and no such applicant, who complies with all the requirements for grant of licence, shall be refused grant of licence on the ground that there already exists a licensee in the same area for the same purpose:”
• Section 43: Mandates a distribution licensee to supply electricity to any person requiring it within their area of operation.

The Distribution of Electricity (Additional Requirements of Capital Adequacy and Creditworthiness and Code of Conduct) Rules, 2005 (2005 Rules) were framed by the Central Government under Section 176 of the Electricity Act, 2003.

• Rule 3: Sets out the requirements for capital adequacy and creditworthiness for distribution licensees. It includes an explanation that defines the minimum area of supply for a second licensee as an area within a Municipal Council, Municipal Corporation, or a revenue district.
  
  “Explanation—For the grant of a licence for distribution of electricity within the same area in terms of sixth proviso to Section 14 of the Act, the area falling within a Municipal Council or a Municipal Corporation as defined in the article 243(Q) of the Constitution of India or a revenue district shall be the minimum area of supply.”

The National Electricity Policy, notified by the Central Government under Section 3 of the Electricity Act, 2003, also emphasizes the need for a minimum area of supply for multiple distribution licensees.

Arguments

Arguments by JSPL (Appellant in CA Nos. 3607-3610 of 2008):

• JSPL argued that the Commission had rightly granted the license considering the historical context, investments made, and the benefits to industrial consumers.
• JSPL contended that the State Government and CSEB had acted under the repealed Indian Electricity Act, 1910, and the State’s industrial and energy policies, and that the permissions granted were akin to a sanction under Section 28 of the 1910 Act.
• JSPL claimed that the 2005 Rules were not in existence when it made the application for a license, and thus, the explanation to Rule 3 should not be applied retrospectively.
• JSPL argued that the explanation to Rule 3 is merely a guideline and not a substantive rule, and that the Central Government lacks the jurisdiction to define the area of supply.
  
  JSPL relied on cases like S. Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC 591 and Global Energy Ltd. v. Central Electricity Regulatory Commission (2009) 15 SCC 570 to support its argument that an explanation cannot be treated as a substantive provision.
• JSPL further argued that the word “including” in the sixth proviso to Section 14 was replaced with “relating to” to curtail the power of the Central Government, and that a restrictive meaning must be given to the sixth proviso.
  
  JSPL relied on DAV College Trust and Management Society & Ors. v. Director of Public Instructions & Ors. 2019 (9) SCC 185 and C.I.T Andhra Pradesh v. M/s. Taj Mahal Hotel, Secunderabad 1971 (3) SCC 550 to argue that the word ‘including’ makes the provision expansive.
• JSPL contended that the denial of the distribution license would impair vested rights of JSPL and the consumers of Jindal Industrial Park.
• JSPL also argued that the State Government’s permissions were akin to a sanction under Section 28 of the 1910 Act and were saved under Section 6 of the General Clauses Act, 1897 and Section 185 of the 2003 Act.
  
  JSPL relied on Hindustan Unilever Ltd. v. State of Madhya Pradesh (2020) 10 SCC 751 and Gujarat Electricity Board v. Shantilal R. Desai (1969) 1 SCR 580 to argue that the permissions are saved under the repealed law.
• JSPL relied on Ramana Dayaram Shetty v. International Airport Authority of India (1979) 3 SCC 489 to argue that the decision to deny the distribution license is detrimental to the interest of JSPL and its consumers.

Arguments by Tirumala Balaji Alloys Pvt. Ltd. (Appellant in CA Nos. 4104-4107 of 2008):

• Tirumala Balaji Alloys, a consumer in Jindal Industrial Park, argued that the cancellation of JSPL’s license without an alternative distributor is ultra vires the Electricity Act, 2003.
• They contended that the Appellate Tribunal failed to appreciate the purpose of the 2003 Act, which aims to liberalize the electricity sector and prevent monopolies.
• They argued that the area of supply is not restricted to an entire district or municipality under the Act.
• They argued that the Explanation to Rule 3 does not mandate that the second licensee must have a minimum area of supply.
• They argued that the Central Government has restricted the concept of “same area” in terms of the sixth proviso to Section 14 of the 2003 Act to the area of a municipal council or a municipal corporation, which goes against the spirit of the Act.
• They argued that the Appellate Tribunal had no jurisdiction to interfere with the administrative function of the Commission to grant licenses.
• They argued that the cancellation of the license is against public policy, as it affects numerous industries and employees in the industrial park.

Arguments by Chhattisgarh State Electricity Regulatory Commission (Respondent No. 1 in CA Nos. 3607-3610 of 2008):

• The Commission argued that the term “within the same area” in the Explanation to Rule 3 must be read as an area comprising a Municipal Council, Corporation, or a revenue district.
• The Commission argued that the minimum area condition is necessary for a second distribution license to ensure a mix of all categories of consumers and prevent cherry-picking of high-paying consumers.
• The Commission contended that the cancellation of the license was not proper, as it had already directed JSPL to supply electricity to the villages of Tumdih and Punjipathra.

Arguments by Chhattisgarh State Power Distribution Company (Respondent No. 2 in CA Nos. 3607-3610 of 2008):

• Respondent No. 2 argued that the National Electricity Policy stipulates that the area of supply must be a minimum area comprising a revenue district or a municipal council/corporation.
  
  Respondent No. 2 relied on Energy Watchdog v. Central Electricity Regulatory Commission and Others (2017) 14 SCC 80 to argue that the National Electricity Policy has the force of law.
• Respondent No. 2 contended that the minimum area of supply is integral to fair competition and a level playing field, and it prevents cherry-picking of consumers.
• Respondent No. 2 relied on Peerless General Finance & Investment Co. Ltd. v. Reserve Bank of India (1992) 2 SCC 343 and Chief Forest Conservator (Wildlife) & Ors. v. Nisar Khan (2003) 4 SCC 595 to argue that the Explanation to Rule 3 was enacted to effectuate the working of the 2003 Act.
• Respondent No. 2 argued that JSPL did not satisfy the condition of minimum area of supply and failed to fulfill its obligation to supply power to the villages of Tumdih and Punjigraha.
• Respondent No. 2 relied on Howrah Municipal Corporation and Ors. v. Ganges Rope Co. Ltd. and Ors. (2004) 1 SCC 663, Union of India and Ors. v. Indian Charge Chrome and Anr. (1999) 7 SCC 314, M/s. Hiralal Rattanlal etc. etc. v. State of U.P. and Anr. etc. etc. (1973) 1 SCC 216 and Dattatraya Govind Mahajan v. State of Maharashtra (1977) 2 SCC 548 to argue that the Authority is required to apply the Rules in force on the date the application is considered.
• Respondent No. 2 argued that the Explanation to Rule 3 of the 2005 Rules has the authority of law and that JSPL is estopped from challenging the same as it has not challenged the vires of the 2005 Rules.
• Respondent No. 2 argued that the substitution of “relating to” for “including” in the sixth proviso to Section 14 does not restrict the rule-making power.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the following issue can be discerned from the judgment:

1. What is the correct interpretation of the term ‘area of supply’ under the Electricity Act, 2003, and the Explanation to Rule 3 of the Distribution of Electricity (Additional Requirements of Capital Adequacy and Creditworthiness and Code of Conduct) Rules, 2005, particularly in the context of granting a distribution license to two or more persons within the same area?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

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

Reasoning of the Court:

The Supreme Court analyzed the provisions of the Electricity Act, 2003, and the 2005 Rules. The Court focused on the interpretation of the phrase “area of supply” and the explanation to Rule 3 of the 2005 Rules. The Court noted that the sixth proviso to Section 14 of the Electricity Act, 2003, permits the grant of multiple licenses within the same area. The Court held that the explanation to Rule 3 of the 2005 Rules specifies that the minimum area of supply for a second licensee must fall within a Municipal Council, Municipal Corporation, or a revenue district. However, the court clarified that the area of supply need not be co-extensive with the entire area of the local authority, but it must fall within the jurisdiction of the local authority. This interpretation allows for a more flexible approach to licensing while still maintaining a minimum area requirement.

The Court observed that the Appellate Tribunal had erred in setting aside the license granted to JSPL. The Court held that the Commission had considered all the relevant factors, including the fact that JSPL had invested heavily in the infrastructure and that the consumers of the industrial park were dependent on JSPL for electricity supply. The Court noted that the Appellate Tribunal had not considered the historical context of the case and the fact that JSPL had been supplying electricity to the industrial park for a long time.

The Supreme Court also considered the impact of the cancellation of the license on the consumers of the industrial park. The Court noted that the cancellation of the license had disrupted the electricity supply to the industrial park and that this had caused hardship to the consumers. The Court held that the cancellation of the license was not in the public interest.

The Court emphasized that the purpose of the Electricity Act, 2003, is to promote competition in the electricity sector and to ensure that consumers have access to reliable and affordable electricity. The Court held that the Appellate Tribunal’s decision to cancel the license was not in line with this objective.

Implications of the Judgment:

This judgment clarifies the interpretation of “area of supply” for electricity distribution licenses. It establishes that while a minimum area of supply is required, it does not need to be co-extensive with the entire area of a Municipal Council, Municipal Corporation, or a revenue district. The judgment also upholds the importance of considering the historical context and the impact on consumers when granting or canceling electricity distribution licenses. The judgment has implications for the electricity sector, as it provides guidance on the interpretation of the Electricity Act, 2003, and the 2005 Rules. It will also have implications for companies seeking to obtain distribution licenses, as it clarifies the minimum area requirements.

Final Order

The Supreme Court allowed the appeals and set aside the judgment of the Appellate Tribunal. The Court restored the order of the Chhattisgarh State Electricity Regulatory Commission, which had granted the distribution license to JSPL. The Court also directed that the license granted to JSPL be restored and that the electricity supply to the industrial park be resumed.

Flowchart of the Case