Supreme Court Upholds 23:77 Standby Charge Ratio Between Tata Power and Adani Electricity: Civil Appeal (2 May 2019)

Date of the Judgment: 2 May 2019
The Supreme Court of India addressed a long-standing dispute regarding the sharing of standby charges between Tata Power Company Ltd. (TPC) and Adani Electricity Mumbai Ltd. (formerly Reliance Energy Limited). The core issue revolved around the appropriate ratio for sharing the costs of maintaining a standby power supply, a crucial backup for ensuring uninterrupted electricity in Mumbai. This case highlights the complexities of tariff determination and the role of regulatory bodies in resolving disputes between power distribution companies.
The judgment was delivered by a bench of Justices Arun Mishra and S. Abdul Nazeer.

Case Background

Prior to 1998, TPC was the primary electricity generator and supplier in Mumbai, including to BSES (later Reliance Energy Limited, and now Adani Electricity Mumbai Ltd.). TPC also purchased electricity from the Maharashtra State Electricity Board (MSEB) to meet the city’s demand. A key part of the arrangement between TPC and MSEB involved standby charges, which TPC passed on to its customers, including BSES. In 1985, TPC and MSEB agreed that TPC would pay MSEB for a standby facility, initially 300 MVA, increasing by 50 MVA annually. This was to compensate MSEB as TPC increased its own generation capacity and reduced its dependence on MSEB. By 1990, the standby capacity was 550 MVA.

BSES also set up its own generating plant at Dahanu. As a result, an interconnection was established with TPC at Borivali. This allowed BSES to draw power from TPC in case of outages at its Dahanu plant. The charges for this interconnection became a point of contention. In 1998, the Government of Maharashtra ordered that BSES should pay TPC ₹3.5 crores per month for a 275 MVA standby supply. This order was meant to ensure that electricity generated at Dahanu was used within the BSES supply area. However, disputes continued regarding the sharing of standby charges, particularly after MSEB increased its charges to TPC.

Timeline

Course of Proceedings

The dispute initially went to the Maharashtra Electricity Regulatory Commission (MERC). MERC ordered BSES/REL to bear 25% of the standby charges. Both parties appealed this decision in the High Court, which remitted the matter back to MERC. The High Court also directed BSES/REL to deposit 50% of the standby amount as an interim arrangement. The matter further traveled to the Supreme Court, which upheld the High Court’s decision to remit the matter back to MERC. After the matter was remitted, MERC directed BSES/REL to bear approximately 23% of the total standby charges. Both parties appealed this order before the Appellate Tribunal for Electricity (APTEL).

APTEL’s bench had a divergence of opinion. The Chairman of APTEL opined that standby charges should be shared in a 2:1 ratio (TPC paying 2/3rd and BSES/REL paying 1/3rd). However, the Technical Member held that BSES/REL should bear 23%, while TPC should bear approximately 77%. The matter was then referred to a third member, the Judicial Member, who agreed with the Technical Member. Consequently, APTEL passed an order directing that 23% of the standby charges be borne by BSES/REL.

Legal Framework

The key legal framework for this case is the Electricity Regulatory Commissions Act, 1998, which established the Maharashtra Electricity Regulatory Commission (MERC). This Act conferred jurisdiction on MERC to determine tariffs for the supply of electricity and to adjudicate disputes between parties. Section 29(3) of the Act states:

“29. Determination of Tariff by State Commission. (3) The State Commission, while determining the tariff under this Act, shall not show undue preference to any consumer of electricity, but may differentiate according to the consumer’s load factor, power factor, total consumption of energy during any specified period or the time at which the supply is required or the geographical position of any area, the nature of supply and the purpose for which the supply is required.”

This section mandates that the State Commission must not show undue preference to any consumer but can differentiate based on various factors. The Act also overrides any inconsistent provisions of the Electricity (Supply) Act, 1948.

Arguments

Arguments by TPC:

• TPC argued that it had not recovered standby charges from its customers for the facility in excess of 275 MVA out of the 550 MVA standby facility provided by MSEB.
• It contended that the amount of ₹3.5 crores per month was only for the year 1997-1998, and the actual liability was ₹8.25 crores per month.
• TPC argued that the standby charges cannot be apportioned based on the total installed capacity of TPC and REL, as the obligation to pay MSEB is independent.
• It was submitted that the liability of BSES/REL to pay for standby charges in a 50:50 ratio is absolute and cannot be linked with the means of recovery.
• TPC relied on the decision in Binani Zinc Ltd. v. Kerala State Electricity Board, (2009) 11 SCC 244, to contend that the notice dated 30.9.1998 was legal and valid.
• TPC argued that the actual supply of electricity and charges are different from the guarantee and charges payable for providing such a guarantee.
• TPC contended that the Technical Member wrongly assigned zero cost for the generating capacity.

Arguments by BSES/REL:

• BSES/REL argued that the agreement between TPC and BSES/REL was independent of the agreement between TPC and MSEB.
• It contended that TPC was bound to supply BSES/REL from its own generation, regardless of whether TPC was drawing from MSEB.
• BSES/REL argued that it had utilized standby power of TPC on approximately 90% of occasions.
• It stated that the Government order of 19.1.1998, which fixed ₹3.5 crores per month as standby charges, was based on various factors.
• BSES/REL argued that the basis of 50:50 sharing had been rightly rejected by MERC and APTEL.
• It contended that the decision of the Technical and Judicial Members to assign zero cost to the spinning reserve was justified.
• BSES/REL submitted that TPC had recovered standby charges through its tariff and an additional amount of ₹3.5 crores per month.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issue was:

1. What is the appropriate ratio for sharing the standby charges between TPC and BSES/REL?

A sub-issue that the court dealt with was:

1. Whether the tariff notice issued by TPC on 30.9.1998 was valid.

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 upheld the decision of the Appellate Tribunal for Electricity (APTEL), which had directed that 23% of the standby charges should be borne by Adani Electricity Mumbai Ltd. (formerly BSES/REL) and the remaining 77% by Tata Power Company Ltd. (TPC).

How each authority was viewed by the Court:

• BSES Ltd. v. Tata Power Co. Ltd., (2004) 1 SCC 195: The Court relied on this authority to reiterate that the tariff notice issued by TPC was illegal and that the determination of standby charges falls within the jurisdiction of the State Commission.
• Binani Zinc Ltd. v. Kerala State Electricity Board, (2009) 11 SCC 244: The Court distinguished this authority, stating that it pertained to a period before the constitution of the Regulatory Commission, and thus it was not applicable in the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors, primarily focusing on the equitable distribution of costs and the regulatory framework governing electricity tariffs. The Court emphasized that TPC had already recovered a significant portion of the standby charges through its tariff, which was passed on to consumers. The Court also recognized that BSES/REL had primarily utilized standby power from TPC’s own generation capacity, rather than drawing from MSEB. The Court’s reasoning also focused on the need to maintain a level playing field and avoid undue preference to any consumer, as mandated by Section 29(3) of the Electricity Regulatory Commissions Act, 1998.

The Court’s reasoning was a mix of factual considerations and legal principles. The factual aspects included the existing arrangements between TPC and MSEB, the actual supply of standby power, and the recovery of charges through tariffs. The legal considerations focused on the interpretation of the Electricity Regulatory Commissions Act, 1998, and the need to avoid undue preference to any consumer.

Logical Reasoning:

The Court considered the arguments made by TPC for a 50:50 sharing of standby charges but found them unconvincing. The Court emphasized that TPC had already recovered a significant portion of the charges through its tariff, and BSES/REL had primarily utilized TPC’s own generation capacity. The Court also rejected the argument that the liability to pay MSEB was independent of the recovery from customers, stating that the standby charges were a component of the price that TPC would be charging from its consumers.

The Court’s decision was based on the following reasons:

• The 23:77 ratio was equitable and based on various factors.
• TPC had already recovered a significant portion of the standby charges through its tariff.
• BSES/REL primarily utilized standby power from TPC’s own generation.
• The decision of the Technical and Judicial Members of APTEL was reasonable.

The Court quoted from its earlier decision in BSES Ltd. v. Tata Power Co. Ltd., stating:

“The charges paid for this kind of an arrangement whereby a fixed quantity of electrical energy was guaranteed to TPC and BSES at their desire, is bound to constitute a component of the price which they (BSES and TPC) would be charging from their consumers towards the cost of the electrical energy actually consumed by them.”

The Court also emphasized that the tariff notice issued by TPC on 30.9.1998 was illegal, as it was issued after the enforcement of the Electricity Regulatory Commissions Act, 1998. The Court quoted:

“In view of Section 29 of the Act, the tariff for intra-State transmission of electricity and tariff for supply of electricity in wholesale, bulk or retail has to be determined by the Electricity Regulatory Commission of the State and a licensee cannot by its unilateral action enhance the charges.”

The Court further noted:

“The effect of Section 29 and the Regulations framed thereunder is that it is no longer open to a licensee or utility to unilaterally increase the tariff. The tariff can be enhanced only after approval of the Commission…”

There were no minority opinions in this case. The bench unanimously agreed with the decision.

Key Takeaways

• The Supreme Court upheld the 23:77 ratio for sharing standby charges between TPC and Adani Electricity Mumbai Ltd.
• Tariff notices issued unilaterally by licensees after the enforcement of the Electricity Regulatory Commissions Act, 1998, are illegal.
• The determination of tariffs and standby charges falls within the jurisdiction of the State Electricity Regulatory Commission.
• The Court emphasized the need for equitable distribution of costs and the importance of a level playing field in the electricity sector.
• This case highlights the complexities of tariff determination and the role of regulatory bodies in resolving disputes between power distribution companies.

Directions

The Supreme Court directed that the amount payable to Reliance Energy Limited (now Adani Electricity Mumbai Limited), which was deposited or secured by TPC, along with the interest, should be paid to Adani Electricity Mumbai Limited.

Development of Law

The ratio decidendi of the case is that the determination of standby charges falls within the jurisdiction of the State Electricity Regulatory Commission, and a licensee cannot unilaterally enhance the charges. This case reinforces the principle that electricity tariffs must be determined by regulatory bodies to ensure fairness and equity. This judgment also clarifies that the principles of business equilibrium and other relevant factors must be considered while determining the sharing of standby charges.

Conclusion

The Supreme Court’s judgment in this case brings a long-standing dispute to a close, affirming the 23:77 ratio for sharing standby charges between TPC and Adani Electricity Mumbai Ltd. The Court’s decision underscores the importance of regulatory oversight in the electricity sector and the need for equitable distribution of costs. The judgment also clarifies that the State Electricity Regulatory Commission has the sole authority to determine tariffs, and licensees cannot unilaterally enhance charges. This case serves as a key precedent for future disputes related to tariff determination and standby charges in the electricity sector.