Supreme Court clarifies tariff determination in electricity sector: GRIDCO vs. WESCO & Ors. (2023)

Introduction

Date of the Judgment: October 5, 2023
Citation: 2023 INSC 872
Judges: Sanjay Kishan Kaul, J., Abhay S. Oka, J.

Can electricity distribution companies challenge the tariffs set for bulk power supply, and should the principal amount of loans be included in these tariffs? The Supreme Court of India recently addressed these critical questions in a series of appeals concerning the electricity sector in Orissa. The core issue was about the legality and methodology of tariff determination by the Orissa Electricity Regulatory Commission (OERC) and the subsequent appeals before the Appellate Tribunal for Electricity (APTEL). The Supreme Court examined the appeals filed by GRIDCO Ltd., various distribution companies (DISCOMS), and the OERC itself. The bench was composed of Justice Sanjay Kishan Kaul and Justice Abhay S. Oka.

Case Background

The case involves multiple appeals arising from tariff orders issued by the Orissa Electricity Regulatory Commission (OERC) and subsequent decisions by the Appellate Tribunal for Electricity (APTEL). The main entities involved are:

• GRIDCO Ltd.: A state government undertaking, initially involved in transmission and bulk supply of electricity, later transitioning to bulk supply only.
• Orissa Power Transmission Corporation Ltd. (OPTCL): A state government company responsible for electricity transmission within Orissa.
• DISCOMS: Distribution companies including WESCO, NESCO, SESCO, and CESCO, responsible for retail electricity distribution in Orissa.

The disputes arose from orders fixing tariffs for the supply of electricity, transmission, and retail sale by OERC. GRIDCO, initially a bulk supplier and transmitter, was restructured, with its transmission business transferred to OPTCL. GRIDCO then became a deemed distribution licensee, while OPTCL became a deemed transmission licensee. The DISCOMS challenged the tariff orders, leading to multiple appeals before APTEL and subsequently the Supreme Court.

The appeals primarily concerned the Annual Revenue Requirement (ARR) and Bulk Supply Tariff (BST) of GRIDCO, the Transmission Tariff (TT) of OPTCL, and the Retail Supply Tariff (RST) of DISCOMS. The DISCOMS sought reductions in BST and TT, while GRIDCO and OPTCL aimed to have their costs fully covered in the tariffs. The OERC also filed appeals, challenging decisions that went against its tariff determinations.

Timeline:

Legal Framework

The judgment refers to several key legal provisions:

• Section 62 of the Electricity Act, 2003: This section mandates the State Electricity Regulatory Commission to determine tariffs for the supply, transmission, and sale of electricity. It also requires the determination of the Annual Revenue Requirement (ARR) of various licensees.
  
  “Under sub -section (1) of Section 62 of the Electricity Act, the Commission is under an obligation to determine the tariff for the supply of electricity by a generating company to a distribution licensee, tariff for transmission of electricity, tariff for wheeling of electricity and tariff for retail sale of electricity.”
• Section 61 of the Electricity Act, 2003: This section provides the principles that guide the Commission in determining tariffs.
  
  “While deciding the tariff, the Commission has to seek guidance from the principles incorporated in Section 61 of the Electricity Act.”
• Section 14 of the Electricity Act, 2003: This section specifies that no person can transmit, distribute, or trade in electricity without a license. It also defines the categories of licensees, such as transmission licensees, distribution licensees, and electricity traders.
  
  “As per Section 12 of the Electricity Act, no person is entitled to transmit, distribute or undertake trading in electricity unless he is authorized to do so in accordance with a license issued under Section 14.”
• Section 39 of the Electricity Act, 2003: This section empowers the State Government to notify the State Electricity Board or a Government Company as the State Transmission Utility. It also specifies that the State Transmission Utility shall not engage in the business of trading in electricity.
  
  “Under sub -section (1) of Section 39 of the Electricity Act, the State Government is empowered to notify the State Electricity Board constituted under sub -section (1) of Section 5 of the Electricity (Supply) Act, 1948 or a Government Company as the State Transmission Utility.”
• Section 110 of the Electricity Act, 2003: This section provides for the constitution of the Appellate Tribunal for Electricity (APTEL).
  
  “These appeals arise out of the decisions of the Appellate Tribunal for Electricity (for short, ‘the Appellate Tribunal ’) constituted under Section 110 of the Electricity Act, 2003”
• Section 82 of the Electricity Act, 2003: This section provides for the constitution of the State Electricity Regulatory Commission.
  
  “The appeals before the Appellate Tribunal arose out of the orders fixing tariffs passed by the Orissa Electricity Regulatory Commission (for short, ‘ the Commission’ ), which is constituted in accordance with Section 82 of the Electricity Act.”
• Section 26(4) of the Orissa State Electricity Reforms Act, 1995: This section requires every licensee to provide the Commission with full details of calculations of aggregate revenue likely to be earned during the ensuing financial year.
  
  “In fact , under Section 26(4) of the Orissa State Electricity Reforms Act, 1995, every licensee is required to provide to the Commission , full details of calculations of aggregate revenue likely to be earned during the ensuing financial year.”
• Section 125 of the Electricity Act, 2003: This section provides for an appeal to the Supreme Court from a decision or order of the Appellate Tribunal.
  
  “These appeals are preferred invoking Section 125 of the Electricity Act, which provides for an appeal to this Court from a decision or order of the Appellate Tribunal.”
• Section 100 of the Code of Civil Procedure, 1908: This section specifies the grounds on which an appeal can be made to the Supreme Court.
  
  “Section 125 expressly provides that an appeal to this Court will lie on the grounds set out under Section 100 of the Code of Civil Procedure, 1908 (for short, ‘CPC’).”

Arguments

The arguments presented by the various parties can be summarized as follows:

GRIDCO’s Submissions

• GRIDCO argued that DISCOMS lack the locus standi to challenge BST and TT orders because these costs are fully passed through in RST. Any reduction in BST or TT would require a corresponding reduction in RST, thus not affecting DISCOMS financially.
  
  “The submission is that there is no locus standi for DISCOMS to challenge the BST and TT orders.”

• GRIDCO contended that the Appellate Tribunal erroneously directed the inclusion of Rs. 943 crores as revenue from trading, as this figure was only mentioned in written submissions and not supported by a statement or oath.
  
  “The submission of the learned counsel is that the Appellate Tribunal has erroneously held that the Commission had taken the cost of power into consideration. He submitted that the mandatory direction issued for taking Rs.943 crores as revenue earning of GRIDCO from trading is completely illegal as the figure of Rs.943 crores was given only in the written submission and not by way of any statement or oath.”

• GRIDCO argued that the principal loan amount should be included in the tariff as a special appropriation because it has no fixed assets and therefore no depreciation. Repayment of the principal would reduce the interest burden, benefiting consumers in the long run.
  
  “It is the case made out that GRIDCO has no fixed assets, and therefore, there is no depreciation. Therefore, unless the amount is passed on in the tariff as a special appropriation, no amount will be available to GRIDCO to make repayment of the principal loan amount.”

• GRIDCO stated that the issues for the financial years 2006-2007 and 2007-2008 have become academic due to truing-up exercises conducted up to 2010-11.

OERC’s Submissions

• The Commission argued that distribution losses are controllable and DISCOMS should not be allowed to pass on their inefficiencies to consumers by increasing RST.
  
  “The submission of the learned counsel relating to Civil Appeal No.759 of 2007 is that the distribution loss is controllable in nature. His submission is that DISCOMS cannot be allowed to pass on their inefficiency to the consumers by increasing RST.”

• The Commission contended that the Appellate Tribunal’s order dated December 13, 2006, did not address the issue of DISCOMS’ failure to conduct energy audits.
  
  “He submitted that the order of the Appellate Tribunal dated 13th December 2006 does not deal with the issue of the failure of DISCOMS to do an energy audit.”

• The Commission submitted that the appeals should be allowed due to the decision of the Supreme Court in Civil Appeal No. 18500 of 2017, which confirmed the revocation of licenses of three DISCOMS.
  
  “According to the submissions of the learned counsel appearing for the Commission, these appeals deserve to be allowed in view of the decision of this Court in Civil Appeal No.18500 of 2017.”

DISCOMS’ Submissions

• DISCOMS argued that they have the locus standi to challenge the BST order because the increasing BST is not matched by a corresponding increase in RST, leading to revenue gaps.
  
  “The argument accepted by the Appellate Tribunal is that DISCOMS have the right to get the BST reduced by challenging the BST order.”

• DISCOMS contended that high distribution losses are due to errors in tariff determination by the Commission, which failed to reset loss targets as directed by the Appellate Tribunal.
  
  “He submitted that high distribution losses suffered by DISCOMS are due to the errors committed in tariff determination by the Commission. He submitted that the Commission failed to reset the loss targets as mandated by the Appellate Tribunal.”

• DISCOMS argued that the Commission never based the ARR on their proposals and did not quantify the revenue gap.
  
  “He submitted that the ARR of DISCOMS was never based on the proposals submitted by DISCOMS. He submitted that the target of loss reduction must be realistic. While proposing the targets, DISCOMS expected that the order of the Appellate Tribunal would be implemented.”

• DISCOMS submitted that they could not conduct energy audits due to a lack of funds, as the Commission never allowed the expenses for this in the ARR until 2014-2015.
  
  “He submitted that for creating infrastructure for the energy audit, large capital is required. Though the expenses for this exercise were incorporated in the ARR of DISCOMS, the Commission never allowed the said expenses till the financial year 2014 -2015.”

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in this judgment. However, the key issues addressed by the court, based on the questions framed by the Appellate Tribunal, can be summarized as:

1. Whether the OERC acted illegally in allowing the principal loan amount to pass through in the BST of GRIDCO?
2. Whether the export earnings of power by GRIDCO were rightly assessed, and whether the exclusion of export earnings from GRIDCO’s revenue was illegal?
3. Whether the failure to undertake truing-up exercises by the OERC for previous years was illegal?
4. Whether the quantum of power procurement estimated by GRIDCO and approved by the OERC was liable to be interfered with?
5. Whether the cost of procurement approved by the OERC was excessive?
6. Whether passing a higher interest burden to the DISCOMS was sustainable?
7. Whether the determination of Simultaneous Maximum Demand (SMD) in MVA and the consequence of the demand and energy charged by OERC was sustainable?
8. Whether GRIDCO had a surplus of Rs. 618 crores and whether this amount should be used to reduce BST?
9. Whether DISCOMS have the locus standi to challenge the BST order?
10. Whether the interest on the loan should be included in the ARR?
11. Whether the advance against depreciation is permissible?
12. Whether the repair and maintenance cost was rightly determined?
13. Whether the contingency reserves were rightly determined?
14. Whether the interest on wheeling income was rightly determined?
15. Whether the transmission loss was rightly determined?
16. Whether the interest on NTPC bonds was rightly determined?
17. Whether the distribution losses were rightly determined?
18. Whether the revenue computation was rightly determined?
19. Whether the miscellaneous income was rightly determined?

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

The Supreme Court analyzed the submissions of all parties and the authorities cited. The table below summarizes how each submission was treated by the Court:

The Court also analyzed how each authority was viewed:

• DSR Steel (Private) Limited v. State of Rajasthan & Ors. [ (2012) 6 SCC 782 ]*: The Supreme Court followed this authority to emphasize that the scope of appeal under Section 125 of the Electricity Act is limited to substantial questions of law.
• PTC India Ltd. v. Central Electricity Regulatory Commission [(2010) 4 SCC 603]*: The Supreme Court relied on this authority to clarify that tariff fixation under Section 62 of the Electricity Act is a quasi-judicial function.
• Maharashtra State Electricity Distribution Company Limited v. Maharashtra Electricity Regulatory Commission & Ors. [2022 (4) SCC 657]*: The Supreme Court acknowledged the reliance of DISCOMS on this authority, but did not find it persuasive in the context of the present case.
• National Tariff Policy: The Supreme Court held that the Commission has to be guided by the National Tariff Policy.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure a fair and balanced approach to tariff determination, protecting the interests of both consumers and licensees. The Court emphasized the following points:

• Avoiding Double Recovery: The Court was keen to prevent the principal loan amount from being passed through the tariff twice, which would unfairly burden consumers.
• Fair Revenue Recognition: The Court emphasized that all revenue, including that from trading of surplus power, should be included in the ARR of GRIDCO.
• Realistic Loss Targets: The Court recognized that loss reduction targets should be realistic and based on ground realities, not just assumptions.
• Prudent Financial Management: The Court noted that the Appellate Tribunal was correct in directing the Commission to undertake truing-up exercises to ensure that actual costs and revenues were properly accounted for.
• Adherence to National Tariff Policy: The Court emphasized that the Commission must be guided by the National Tariff Policy.

The sentiment analysis of the reasons given by the Supreme Court is as follows:

The ratio of fact to law that influenced the court is as follows:

The Court’s reasoning for the issue of the principal loan amount can be represented as follows:

Final Order

The Supreme Court disposed of the appeals with the following orders:

• The Court upheld the Appellate Tribunal’s order that the principal loan amount cannot be passed through in the BST.
• The Court upheld the Appellate Tribunal’s order that the revenue earned by GRIDCO from trading of surplus power cannot be excluded.
• The Court directed the Commission to undertake truing-up exercises for the previous years and to assess the estimated sales at each slab of the tariff.
• The Court directed that the SMD should be increased in proportion to the increase in the quantum of energy purchased by DISCOMS.
• The Court upheld the Appellate Tribunal’s decision allowing the expenses for the energy audit.
• The Court directed the Commission to take a practical view of the ground realities while doing truing-up exercise.
• The Court clarified that the meter rent and commission from the State Government for collection of electricity duty cannot form part of the miscellaneous income.

The Court’s final order emphasized the need for a fair, transparent, and balanced approach to tariff determination. It also highlighted the importance of truing-up exercises to ensure that actual costs and revenues are properly accounted for.

Key Takeaways

The key takeaways from the judgment are:

• Locus Standi of DISCOMS: Distribution companies have the right to challenge bulk supply tariffs because these tariffs directly impact their revenue.
• No Double Recovery: Principal loan amounts should not be included in tariffs if they have already been factored into the cost of energy.
• Inclusion of Trading Revenue: Revenue from power trading must be included in the overall revenue calculations of the bulk supplier.
• Truing-Up is Essential: Regulatory commissions must conduct truing-up exercises to reconcile actual costs and revenues with estimated figures.
• Realistic Loss Targets: Loss targets must be realistic and based on practical assessments of distribution networks.
• Practical Approach: Regulatory commissions must take a practical view of the ground realities while determining tariffs.
• Adherence to National Tariff Policy: The Commission has to be guided by the National Tariff Policy.