Supreme Court Upholds Tariff Calculation Methodology under Electricity Act: Damodar Valley Corporation vs. Central Electricity Regulatory Commission (2018)

Date of the Judgment: December 3, 2018
Citation: 2018 INSC 1053
Judges: Ranjan Gogoi, CJI, Sanjay Kishan Kaul, J., K.M. Joseph, J.
Can a power generating company claim interest on its entire capital, in addition to returns on equity and interest on loans, when calculating tariffs? The Supreme Court of India addressed this question in a case involving the Damodar Valley Corporation (DVC), a statutory body involved in power generation and other functions, and the Central Electricity Regulatory Commission (CERC). The Court examined whether DVC was entitled to claim interest on its entire capital under Section 38 of the Damodar Valley Corporation Act, 1948, and whether cumulative depreciation should be considered as loan repayment. The three-judge bench, consisting of Chief Justice Ranjan Gogoi, Justice Sanjay Kishan Kaul, and Justice K.M. Joseph, delivered the judgment, with Justice Joseph authoring the opinion.

Case Background

The Damodar Valley Corporation (DVC), established under the Damodar Valley Corporation Act, 1948, is responsible for generating, transmitting, and distributing electricity, as well as managing irrigation, water supply, drainage, and flood control in the Damodar River basin. Initially, DVC set its tariffs under Section 20 of the DVC Act. Following the enactment of the Electricity Act, 2003, the Central Electricity Regulatory Commission (CERC) initiated a suo motu proceeding to determine DVC’s tariffs. DVC filed a petition seeking tariff determination for 2004-2009. CERC issued an order on October 3, 2006, determining the tariff, which was to apply from 2005-2006 and operate from April 1, 2006. This order was challenged by both DVC and its consumers before the Appellate Tribunal for Electricity. The Appellate Tribunal remanded the matter back to CERC for reconsideration. CERC then passed a revised tariff order on August 6, 2009, which was again challenged by DVC before the Appellate Tribunal. The Appellate Tribunal dismissed DVC’s appeal, leading to the current appeal before the Supreme Court.

Timeline

Course of Proceedings

The Central Electricity Regulatory Commission (CERC) initially determined DVC’s tariff on October 3, 2006. DVC appealed this order to the Appellate Tribunal for Electricity, which allowed DVC’s appeal on November 23, 2007, and remanded the matter back to CERC for fresh consideration. The Appellate Tribunal directed CERC to reconsider the tariff order in light of its findings. Following the remand, CERC issued a revised tariff order on August 6, 2009. DVC then appealed this revised order to the Appellate Tribunal, which dismissed the appeal. Certain consumers of DVC had also appealed the initial order of the Appellate Tribunal before the Supreme Court, which were dismissed. The present appeal before the Supreme Court is against the Appellate Tribunal’s dismissal of DVC’s appeal against the revised tariff order.

Legal Framework

The case primarily revolves around the interpretation of Section 38 of the Damodar Valley Corporation Act, 1948, and its interaction with the Electricity Act, 2003, and the tariff regulations framed under it. Section 38 of the DVC Act states:

“38. Payment of interest – The Corporation shall pay interest on the amount of capital provided by each participating Government at such rate as may, from time to time, be fixed, by the Central Government and such interest shall be deemed to be part of the expenditure of the Corporation.”

The Supreme Court had to determine whether this provision entitles DVC to claim interest on its entire capital, in addition to the returns on equity and interest on loans, while calculating tariffs. The Court also considered the impact of the Electricity Act, 2003, and its regulations on the DVC Act. The court also considered Section 14 of the DVC Act which states that the provisions of the DVC Act which were not inconsistent with the 2003 Act would continue to hold good even after the enactment of the 2003 Act . Even if there was inconsistency between the DVC Act and the regulation made under the 2003 Act, the DVC Act would continue to operate .

Arguments

Appellant (Damodar Valley Corporation) Arguments:

• Interest on Capital: DVC argued that Section 38 of the DVC Act entitles it to interest on the entire capital provided by the participating governments, which is separate from interest on loans and return on equity. They contended that this interest on capital should be allowed in addition to other tariff elements under the tariff regulations. DVC pointed out that the Supreme Court had previously affirmed the applicability of Section 38 in the case of Bhaskar Shrachi Alloys Limited & Ors. Vs. Damodar Valley Corporation & Ors 2018 (8) SCC 281.
• Cumulative Depreciation: DVC argued that cumulative depreciation should not be treated as repayment of the loan. They contended that the tariff recovers interest on the loan, not the loan itself. DVC claimed that until the implementation of the Electricity Act, 2003, and the transition period ending on April 1, 2006, the entire capital cost should be treated as equity. They argued that the loan component should not be reduced by past cumulative depreciation. DVC relied on the judgment of the Supreme Court in the case of Delhi Electricity Regulatory Commission Vs. BSES Yamuna Power Limited & Others 2007 (3) SCC 33, which held that depreciation is not repayment of loan.

Respondents (Central Electricity Regulatory Commission and Others) Arguments:

• Interest on Capital: The respondents argued that DVC had already received the benefit of interest on capital. They contended that DVC was seeking a double benefit, as the return on equity and interest on loan components already accounted for the capital. They argued that DVC had been granted return on the loan component based on a 50:50 debt-equity ratio, along with a return on equity. Granting additional interest on the entire capital under Section 38 would be impermissible.
• Cumulative Depreciation: The respondents contended that DVC did not raise the issue of cumulative depreciation in the first round of litigation before the Appellate Tribunal. They argued that the first order of the Appellate Tribunal, which did not address this issue, had become final after the dismissal of appeals by the Supreme Court. They also argued that the CERC had already used cumulative depreciation to reduce the loan in its initial order, and DVC had not objected to it then.

Issues Framed by the Supreme Court

The Supreme Court framed the following substantial questions of law:

1. Whether the Appellate Tribunal has correctly interpreted and applied the provisions of Section 38 of the DVC Act in regard to the claim of the Appellant on interest on capital despite the same had been considered and directed to be allowed in the earlier Order dated 23.11.2007 passed in Appeal No.273 of 2006?
2. Whether the decision of the Appellate Tribunal in approving the Order of the Central Commission equating cumulative depreciation recovered as adjustment towards loan repayment during the period till 31.3.2006 is not contrary to the decision of this Hon’ble Court in the case of Delhi Electricity Regulatory Commission v. BYPL Limited, (2007) 3 SCC 33 and also the decision of the Appellate Tribunal itself in the case of judgment and orders dated 16.3.2009 passed in Appeals No. 133/08, 135/08, 136/08 & 148/08 and order dated 13.6.2007 passed in Appeals No.139 to 142 etc. of 2006 ?

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?

How each authority was viewed by the Court?

• Bhaskar Shrachi Alloys Limited & Ors. Vs. Damodar Valley Corporation & Ors [2018 (8) SCC 281]*: The Supreme Court affirmed that Section 38 of the DVC Act continues to apply but clarified that the benefit of interest on capital under Section 38 had to be viewed in light of the tariff regulations and the debt-equity ratio.
• Delhi Electricity Regulatory Commission Vs. BSES Yamuna Power Limited & Others [2007 (3) SCC 33]*: The Supreme Court noted that this judgment primarily dealt with the rate of depreciation for power companies and did not directly support DVC’s contention that cumulative depreciation should not be treated as repayment of loan.

What weighed in the mind of the Court?

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

• No Double Benefit: The Court was of the view that DVC had already received the benefit of return on equity and interest on the loan component of its capital. Granting additional interest on the entire capital under Section 38 of the DVC Act would result in a double benefit, which is not permissible under the tariff regulations.
• Finality of Proceedings: The Court emphasized that the issue of cumulative depreciation had not been raised by DVC in the first round of litigation before the Appellate Tribunal, and that the matter had attained finality. Therefore, it was not open for DVC to raise the same issue in the second round of litigation.
• Interpretation of Section 38: The Court interpreted Section 38 of the DVC Act to mean that the capital includes both loan and equity, and that DVC had been provided with returns on both. The Court noted that the Appellate Tribunal had correctly understood this aspect.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio

Logical Reasoning:

The Supreme Court considered the arguments and the orders of the lower tribunals and concluded that the Appellate Tribunal had correctly interpreted Section 38 of the DVC Act and that the DVC was not entitled to claim interest on its entire capital, in addition to the returns on equity and interest on loans. The Court also held that the issue of cumulative depreciation could not be raised by DVC in the second round of litigation, as it had not been raised in the first round and had attained finality. The Court noted that the Appellate Tribunal had directed the Central Commission to ensure that the capital deployed in financing operating assets is getting fully serviced either through Return on Equity or interest on loan (including on the equity portion not covered as part of equity eligible for Return of Equity). The Court also observed that the Appellate Tribunal had correctly interpreted that the capital under Section 38 of the DVC Act includes both loan and equity.

The Court emphasized that the recovery as contemplated under the Regulations was found to be in two forms, namely, either as return on equity in respect of the equity portion and as interest on the loan component. The Court also noted that the Appellate Tribunal had correctly directed that the equity component would remain static and would earn the rate of return as provided in the tariff Regulation, while the loan component would get reduced on account of repayments.

The Court stated that the appellant had not made out a case for interference and dismissed the appeal. The Court also stated that the parties would bear their respective costs.

The Supreme Court quoted the following from the judgment:

• “The Corporation shall pay interest on the amount of capital provided by each participating Government at such rate as may, from time to time, be fixed, by the Central Government and such interest shall be deemed to be part of the expenditure of the Corporation.”
• “As regards the liability arising under section 38 of the DVC Act on account of interest on capital provided by each of the participating Governments, we have to keep in mind that the total capital to be serviced has to be equal to the value of operating assets when they are first put to commercial use. Subsequently, the loan component gets reduced on account of repayments while equity amount remain static.”
• “We direct the Central Commission to ensure that capital deployed in financing operating assets is getting fully serviced either through Return on Equity or interest on loan (including on the equity portion not covered as part of equity eligible for Return of Equity).”

Key Takeaways

• A power generating company cannot claim interest on its entire capital under Section 38 of the DVC Act if it has already received returns on equity and interest on the loan component of the capital.
• Cumulative depreciation can be treated as loan repayment when calculating tariffs if the issue has not been raised in previous rounds of litigation and has attained finality.
• The capital under Section 38 of the DVC Act includes both loan and equity, and returns must be calculated accordingly.
• The Supreme Court emphasized the importance of finality of proceedings and that matters that have attained finality in earlier rounds of litigation cannot be reopened.

Directions

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

Development of Law

The ratio decidendi of this case is that a power generating company cannot claim interest on its entire capital under Section 38 of the DVC Act if it has already received returns on equity and interest on the loan component of the capital. The Supreme Court also clarified that cumulative depreciation can be treated as loan repayment when calculating tariffs, and that the capital under Section 38 of the DVC Act includes both loan and equity. This ruling reinforces the principle that tariff calculations must be based on actual costs and that double benefits should not be granted. This case also reaffirms the principle of finality of proceedings and that matters that have attained finality in earlier rounds of litigation cannot be reopened.

Conclusion

The Supreme Court dismissed the appeal of Damodar Valley Corporation, upholding the Appellate Tribunal’s decision. The Court clarified that DVC was not entitled to claim interest on its entire capital under Section 38 of the DVC Act, as it had already received returns on equity and interest on loans. The Court also held that DVC could not raise the issue of cumulative depreciation as loan repayment in this round of litigation. This judgment reinforces the principles of fair tariff calculation and finality of proceedings.

Category

• Electricity Law
  • Electricity Act, 2003
  • Tariff Regulations
• Damodar Valley Corporation Act, 1948
  • Section 38, Damodar Valley Corporation Act, 1948
  • Section 14, Damodar Valley Corporation Act, 1948
• Regulatory Law
  • Central Electricity Regulatory Commission (CERC)
  • Appellate Tribunal for Electricity
• Tariff Calculation
  • Interest on Capital
  • Return on Equity
  • Interest on Loan
  • Cumulative Depreciation
• Judicial Review
  • Finality of Proceedings

FAQ

Q: What was the main issue in the Damodar Valley Corporation vs. Central Electricity Regulatory Commission case?

A: The main issue was whether Damodar Valley Corporation (DVC) could claim interest on its entire capital under Section 38 of the Damodar Valley Corporation Act, 1948, in addition to returns on equity and interest on loans, when calculating tariffs.

Q: What did the Supreme Court decide about the interest on capital?

A: The Supreme Court decided that DVC could not claim interest on its entire capital because it had already received returns on equity and interest on the loan component of the capital. Granting additional interest would be a double benefit.

Q: What was the court’s view on cumulative depreciation?

A: The court held that cumulative depreciation could be treated as loan repayment because DVC had not raised this issue in the first round of litigation, and the matter had attained finality.

Q: What is Section 38 of the Damodar Valley Corporation Act, 1948?

A: Section 38 of the Damodar Valley Corporation Act, 1948, states that the Corporation shall pay interest on the amount of capital provided by each participating Government at such rate as may be fixed by the Central Government, and such interest shall be deemed to be part of the expenditure of the Corporation.

Q: What is the significance of this ruling for other power companies?

A: This ruling clarifies that power companies cannot claim a double benefit by seeking interest on the entire capital when they have already received returns on equity and interest on loans. It also emphasizes the importance of raising all issues in the initial rounds of litigation.