Pre-commencement tariff contract protected; tariff revisions struck down for arbitrariness, computation errors and unfair deviation from agreed terms.

A pre-commencement tariff arrangement, once conclusively settled by correspondence, approvals and conduct, was held protected under the statutory proviso for prior contracts, without requiring a formal written power purchase agreement. The project was treated as an independent power producer rather than a captive plant because the record showed approval for sale to the grid and consistent regulatory recognition. The tariff orders were found arbitrary and perverse due to computational errors, reliance on unsuitable tariff norms, and inadequate reasons. Promissory estoppel and legitimate expectation also applied because the project proponent had relied on governmental and utility assurances.

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Issues: (i) Whether the regulatory commission was a necessary party to the appeal and entitled to defend the impugned tariff order on merits; (ii) Whether there was a concluded contract on tariff before commencement of the Karnataka Electricity Reforms Act, 1999, so as to attract the proviso to Section 27(2); (iii) Whether the appellant was an independent power producer or a captive power plant; (iv) Whether the tariff orders were arbitrary, perverse and vitiated by non-application of mind; (v) Whether the doctrines of promissory estoppel and legitimate expectation were attracted.

Issue (i): Whether the regulatory commission was a necessary party to the appeal and entitled to defend the impugned tariff order on merits.

Analysis: The appeal challenged an order passed by a statutory authority required to act judiciously while determining tariff. The statutory scheme did not require the commission to be impleaded as a party respondent in an appeal against its own order. The fact that tariff fixation may have regulatory features did not convert the commission into a necessary party. The Court also distinguished the Supreme Court decision relied upon by the commission, holding that it did not decide the issue of impleadment or locus in a tariff appeal.

Conclusion: The commission was not a necessary and proper party to the appeal and was struck off from the array of parties.

Issue (ii): Whether there was a concluded contract on tariff before commencement of the Karnataka Electricity Reforms Act, 1999, so as to attract the proviso to Section 27(2).

Analysis: The correspondence, negotiations, government orders, and conduct of the parties showed that the essential terms of tariff, escalation, quantity, and tenure had been settled before 01.06.1999. The Court held that a concluded contract need not be in writing, need not be a formal agreement, and need not be embodied in a power purchase agreement. The proviso to Section 27(2) was construed as confined to tariff determination and as protecting pre-commencement tariff contracts without requiring a PPA. The parties had already acted upon the agreed tariff, and the later PPA merely reflected the earlier concluded arrangement.

Conclusion: A binding concluded contract on tariff existed before commencement of the Act, and the tariff was protected by the proviso to Section 27(2).

Issue (iii): Whether the appellant was an independent power producer or a captive power plant.

Analysis: The documentary record showed approval and treatment of the project as an independent power project, including regulatory clearances, wheeling and banking arrangements, consent for sale of electricity, and consistent contemporaneous recognition by the government and utility. The plant was conceived with supply to the state grid and not merely for captive consumption. Shared infrastructure and supply to the steel unit did not alter the character of the project where the wider project design, approvals, and commercial arrangements pointed to independent generation.

Conclusion: The appellant was an independent power producer and not a captive power plant.

Issue (iv): Whether the tariff orders were arbitrary, perverse and vitiated by non-application of mind.

Analysis: The Court found patent computational mistakes, including errors in fixed charges and incentive payment charges. It also held that the commission had applied norms suited to a two-part tariff while reducing a negotiated single-part tariff, ignored relevant factors such as the agreed basis of tariff, heat rate, plant load factor, and grid support charges, and gave inadequate reasons for rejecting objections. These defects amounted to arbitrariness, perversity, and failure to consider relevant materials.

Conclusion: The impugned tariff orders were arbitrary, perverse, and vitiated by non-application of mind.

Issue (v): Whether the doctrines of promissory estoppel and legitimate expectation were attracted.

Analysis: The appellant altered its position acting on government and utility assurances regarding tariff, project approval, and power purchase arrangements. In public law, the State and its instrumentalities are bound by promises and representations where the promisee has relied upon them. The Court held that the commission failed to appreciate the appellant's rights in the backdrop of these doctrines and the requirement of fairness under Article 14.

Conclusion: The doctrines of promissory estoppel and legitimate expectation applied in favour of the appellant.

Final Conclusion: The tariff reduction made by the commission could not stand, the earlier agreed tariff was restored, and the appellant was entitled to consequential monetary relief.

Ratio Decidendi: A pre-commencement tariff arrangement, if conclusively settled by the parties and acted upon, is protected by the statutory proviso governing prior contracts, and a regulatory tariff order affecting vested commercial rights must be supported by relevant material, correct computation, and fair reasoning.

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