TaxTMI 
TaxTMI 
2009 (5) TMI 906
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....- Reliance Energy Ltd. now named as Reliance Infrastructure Ltd. (RInfra) is a generating as well as a distributing company within the meaning and provisions of the 2003 Act. All of them have been operating in the city of Mumbai including Suburban Mumbai of having approximately 384 sq. Km in area and the city of Mumbai having approximately 60 sq. Km in area. We may place on record that the aggregate capacity to generate electricity of TPC is 1777 MW of power. The generation capacity of the respondent RInfra is 500 MW, but it uses its power, as per its license, only to serve its own consumers. BACKGROUND FACTS The following factual matrix relevant for proper appreciation of the legal issues arising in the present case may be noticed. Indisputably TPC has been generating and supplying electricity to distribution licensees like RInfra and BEST for over a century. On or about 5th March, 1907 ; 3rd April, 1919 ; 15th November, 1921 and 19th November, 1953, the Bombay (Hydro-Electric) Licence ; the Andhra Valley (Hydro- Electric) Licence, the Nila Mula Valley (Hydro-Electric) Licence and Trombay Thermal Power Electric Licence respectively were granted to TPC to gener....
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.... to supply to its existing consumers with the power generation from its own proposed project instead of providing power from TPC. The committee submitted its report on or about 26th May, 1998. In its report it recommended for grant of approval for both the said projects. It was furthermore recommended that the additional power generated from RInfra's project be used only to meet the future growth in demand arising from the consumers of Mumbai. The Kukde Committee also recommended that first the then existing generation facility of TPC be fully utilized to meet the requirements of the current consumers of RInfra so as not to disturb the existing technical and commercial arrangement between TPC and RInfra. Subsequent thereto a `Principles of Agreement' (POA) was executed between TPC and RInfra on or about 31st January, 1998 inter alia providing that there be a minimum power purchase (`off-take') on the basis of `pay or take' in each financial year by RInfra on the basis of its consumer demand forecast. The POA also envisaged execution of a detailed Power Purchase Agreement by the parties. However, no such agreement ever fructified. Thereafter in 2000 the Maharas....
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....Distribution Licensees to be approved by MERC. The regulation also provided that any amendment to such an agreement or arrangement would require prior permission of the MERC irrespective of whether such an agreement or arrangement was approved by the commission or not. MERC, on an application, filed by RInfra for direction to TPC to provide additional outlets, agreed to the position that distribution licensees, such as RInfra, can procure their power from any generating company in India and because of the said flexibility in the 2003 Act also directed it to enter into a PPA with TPC. On or about 18th January, 2006, BEST executed a PPA with TPC for purchase of 800 MW of power for a period of 10 years which was subsequently revised in terms of the MERC's order dated 7th July, 2006. The said PPA was submitted for approval of MERC on 27th December, 2006 which was registered as Petition No.87 of 2006. On or about 12th July, 2006 a Minutes of the Meeting (MoM) was signed between TPC (G) and TPC (D) for allocation of power to TPC (D). TPC (D) indicated requirement of 500 MW power from TPC (G) in the said MoM. A minor modification in the MoM was directed by MERC, pursuant wher....
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....ent between TPC (G) and TPC (D) for supply of 800 MW and 477 MW of power respectively with effect from 1st April, 2008. In relation to its own jurisdiction it was, however, opined that it can issue direction upon the generating companies in terms of Section 23 of 2003 Act. RInfra preferred an appeal thereagainst which was marked as Appeal No.143 of 2007. Two separate appeals were preferred by BEST and TPC questioning the interpretation of Section 23 of 2003 Act by the Commission which were marked as Appeal No.159 of 2007 and Appeal No. 14 of 2008 respectively. MERC while dealing with the application filed by RInfra for continuing the tariff for financial year 2007-2008 even beyond 31st March, 2008 till the tariff year 2008-2009, by an order dated 1 st April, 2008 clearly indicated that for the purpose of fixing the distribution tariff of all the three distribution licensees namely, BEST, TPC (D) and RInfra, based on the share of generation capacity of TPC (G), it will be proceeding in the manner as directed by the Commission in its order dated 6th November, 2007 approving the PPA entered into by and between TPC (G) and BEST and TPC (G) and TPC (D). Appellate Tribunal t....
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....bsp;Submissions of learned counsel appearing for the parties were noticed. Part IV of its judgment contains `the decision with reasons'. It took into consideration the relevant provisions of law. It noticed its functions under Section 86 of the 2003 Act as also various Regulations framed thereunder. It placed on record that it had issued certain directives to the distribution licensees from time to time. It opined that submission of Power Purchase Agreements (PPA) for approval are imperative as the objective thereof is to remove any uncertainty that may be faced by the consumers of a distribution licensee who does not have any written terms and conditions. It opined that RInfra's recalcitrant attitude in seeking approval of the terms and conditions of its power procurement deserved to be deprecated, whereupon a warning was administered. Submissions of BEST before the Commission were :- (i) Ambit of approval process under Section 81(1)(b) of 2003 Act was required to be restricted to the price and the Commission had no power to reduce the quantum agreed by distribution licensee and the generating company under the PPA submitted for approval. (ii) Insertion of the wor....
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....PA of BEST and TPC (D). It was directed :- "(C) REL-D is directed to file long-term Power Purchase Agreements for procurement of power from generating Companies and other sources at the earliest. Also, REL-D should submit Power Purchase Arrangement for procurement of power from its own generating unit REL-G, for the Commission's approval, within one month of the issue of this Order. (D) In the past, in view of the prevailing supply shortage situation, the Commission has invoked its powers under Section 23 of the EA 2003, and has directed the distribution licensees to share the available generation capacity in a particular ratio, based on the share of non-coincident peak demand for FY 2006-07, and subsequently based on the share of the coincident peak demand for FY 2007- 08, since the coincident peak demand data was available by then. The situation in the previous years was compounded by the fact that there were no approved PPAs between the parties, and an important aspect like power procurement cannot operate in a vacuum. However, the Commission's powers to issue directions under Section 23 of the EA 2003 are wide and if necessary and found expedient, the Commissio....
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....60 as also Section 23 of the 2003 Act. It, however, held that having regard to the purpose and object of the Act, the Commission should have taken into consideration the need of the first respondent in regard to the allocation of quantity of supply Upon considering the provisions of the Act and the Regulations, the Tribunal held : "102. We note from the above regulations that the Commission itself recognizes an agreement or an arrangement for long-term power procurement by a Distribution Licensee. Regulations require prior approval of the Commission for any change to an existing arrangement or agreement for long term procurement. When an arrangement for power procurement between TPC and BEST as also between TPC and REL does exist, how the Commission failed to consider the claim of REL. 103. We conclude from the aforementioned that the Commission has wide powers to regulate the quantity of energy that may be supplied by a generating company to a distribution licensee when both are under the jurisdiction of the same Commission. 104. It is not in dispute that the claims of REL have not been considered by the Commission while approving the PPA between the TPC(G) and ....
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....nd BEST and TPC (G) and TPC (D) was found by it. ii) RInfra also filed an application and the same having been considered in great details, it has incorrectly been held by the Appellate Tribunal that the principle of natural justice had not been complied with. iii) Direction of the Tribunal to the Commission to take into consideration contribution towards depreciation and interest on loan elements of fixed costs of TPC generation capacity while considering the claim of RInfra is without any basis inasmuch as :- (a) Such direction of the Appellate Tribunal has the effect of recognizing ownership of consumers over the generation assets. The Act does not recognize any such right of ownership of consumers over the generating assets. (b) RInfra consumers have only paid towards costs of the generation of the power consumed by them, which the developer is entitled to recover as reasonable cost of electricity and return of his investment. If this argument is taken to its logical conclusion, every consumer of electricity, whether domestic, industrial or commercial, would claim ownership of generation plants for the purpose of supply of power to their respective areas. ....
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....alleged ground that the Commission did not have any other jurisdiction over the generating companies. (v) The principle of `purposive interpretation' should be resorted to for interpreting a statute regulating generation, distribution and supply of electrical energy which is in short supply in the country wherefor endeavour should be made to ascertain the object and purport not only by reading one of the provisions of the Act but the preamble thereof as also the other important provisions, namely Sections 2(70) ; 7 ; 10 ; 11 ; 23 ; 60 ; 86(1)(b) and 86(1)(f) of the 2003 Act. (vi) Only because the generation of electricity was taken outside the purview of the licensing regime, the same would not mean that a generator of an electrical energy would be entitled to free wheel its entire supply to any person it likes and in any quantity it likes. (vii) The chapter heading and the marginal note of Section 23 of 2003 Act cannot be resorted to for its interpretation as it is well settled that marginal notes do not control the meaning of the section. (viii) Chapter heading should not be treated to be containing provisions dealing with a particular subject matter as rig....
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.... end consumers. ISSUES ARISING HEREIN Although before us a large number of contentions had been raised, the core questions, which arise for our consideration, are :- (A) Whether recourse to Section 23 of the Act can be taken for issuance of any direction to the generating company? (B) Whether the Commission while applying the provisions of Section 86(1)(b) of the Act could also take recourse to Sections 23 and 60 thereof? (C) Whether equitable allocation of power generated by a generating company is permissible? LEGISLATIVE HISTORY 1910 ACT The earliest statute relating to control of generation of supply, distribution of electrical energy which governed the field was Indian Electricity Act, 1910 (1910 Act). Part-II of the said Act provided for supply of energy. Section 3 thereof provided for grant of licence to any person to supply energy in any specified area and also to lay down or place electric supply-lines for the conveyance and transmission of energy. However, after coming into force the 1948 Act, such licences could be granted only upon consulting the State Electricity Boards constituted and incorporated under Sections 5 and 12 thereof. Section 22-B in the....
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....on and State Electricity Regulatory Commissions, rationalization of electricity tariff, transparent policies regarding subsidies, promotion of efficient and environmentally benign policies and for matters connected therewith and incidental thereto. In terms of the 1998 Act, the Regulatory Commission was conferred with the power to determine tariff for all sales by a generating company in terms of Section 22(1)(c) thereof. It further required in line with the provisions of the 1910 Act as also the 1948 Act, for the State Commission constituted thereunder to regulate investment approval for generation, transmission, distribution and supply of electricity to require the licensees to formulate prospective plans and schemes for the promotion of generation, transmission, distribution and supply of electricity and to devise proper power purchase and procurement process, and to regulate the assets and properties related to the electricity industry, etc. The 1998 Act did not envisage de-licensing of generating companies as in terms thereof the following requirements were to be complied with on the establishment and operations of a generating station: (a) Setting up a generating st....
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....t of each State Government to pass its own Reforms Act. The Bill has progressive features and endeavours to strike the right balance given the current realities of the power sector in India. It gives the State enough flexibility to develop their power sector in the manner they consider appropriate. The Electricity Bill, 2001 has been finalized after extensive discussions and consultations with the States and all other stake holders and experts. 4. The main features of the Bill are as follows:- (i) Generation is being delicensed and captive generation is being freely permitted. Hydro projects would, however, need approval of the State Government and clearance from the Central Electricity Authority which would go into the issues of dam safety and optimal utilization of water resources. (ii) There would be a Transmission Utility at the Central as well as State level, which would be a Government company and have the responsibility of ensuring that the transmission network is developed in a planned and coordinated manner to meet the requirements of the sector. The load dispatch function could be kept with the Transmission Utility or separated. In the case of separation the l....
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....epare the National Electrcity Policy and tariff policy, in consultation with the State Government and the Authority for development of the power system based on optimal utilization of resources such as coal, natural gas, nuclear substances or materials, hydro and renewable sources of energy. Part III of the Act provides for generation of electricity. Section 7 enables a generating company to establish, operate and maintain a generating station without obtaining a licence if it complies with the technical standards relating to connectivity with the grid referred to in clause (b) of Section 73. Section 8, however, provides that a generating company intending to set up a hydro-generating station shall prepare and submit to the Authority for its concurrence, a scheme estimated to involve a capital expenditure exceeding such sum, as may be fixed by the Central Government from time to time by Notification. Section 9 provides for captive generation. Section 10 lays down duties of generating companies, sub-sections (1) and 2 whereof reads as under :- "10 - Duties of generating companies (1) Subject to the provisions of this Act, the duties of generating company shall be to e....
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....do for maintaining the efficient supply, securing the equitable distribution of electricity and promoting competition, it may, by order, provide for regulating supply, distribution, consumption or use thereof." Section 24 provides for suspension of distribution licence and sale of utility. Part V deals with transmission of electricity. Section 60 provides for market domination. It reads :- "The Appropriate Commission may issue such directions as it considers appropriate to a licensee or a generating company if such licensee or generating company enters into any agreement or abuses its dominant position or enters into a combination which is likely to cause or causes an adverse effect on competition in electricity industry." Section 86 provides for functions of State Commission, clauses (a), (b) and (f) of sub-section (1) whereof, read as under :- "Section 86 - Functions of State Commission (1) The State Commission shall discharge the following functions, namely:-- (a) determine the tariff for generation, supply, transmission and wheeling of electricity, wholesale, bulk or retail, as the case may be, within the State: PROVIDED that where open access has....
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....berations and all its contentions had been considered. On what basis the Tribunal opined that the decision of the Commission is in violation of the principle of natural justice is beyond anybody's comprehension. It furthermore took into consideration an irrelevant fact, namely that the Commission in determining the issue between the parties should have regard to the fact that the consumers of respective areas have been bearing the `depreciation' and interest on loan elements of the Fixed Cost of tariff. It furthermore without assigning any reason dismissed the appeals being Nos. 159 of 2007 and 14 of 2008. INTERPRETATION OF THE STATUTORY PROVISIONS A statute, as is well known, must be construed having regard to Parliamentary intent. For the said purpose it is open to a court not only to take into consideration the history of the legislation including the mischief sought to be remedied but also the objects and purpose it seeks to achieve. The 1910 Act provided for licensing of all the operators who were engaged not only in transmission and distribution of electricity but also generation thereof. Indisputably `electricity' comes within the purview of the public utilit....
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....ple gas, naptha etc. The 1998 Act, as notice hereinbefore, did not envisage delicensing of generating companies. It provided for approval by the Board therefor. It provided for imposition of other conditions for generation of electricity. The Parliament by making 2003 Act clearly acknowledged the necessity of providing a greater room for generation of electrical energy so as to enable the country to meet its requirements. It is only in that view of the matter, the liberalization policy of the State provided for de-licensing of the generating companies. In terms of the said provision, the activities of the erstwhile licensees of power generation on the one hand and those of transmission and distribution in electricity on the other were separated. The concept of trading was brought thereunder for the first time. Trading activities are permitted subject to grant of licenses. Distribution of electricity was defined as licensed activity in terms whereof a holder of a license can supply power to a person for his own use. A licensee for the activity of transmission could own the wires/transmission lines constituting the part of their grid but it could not engage itself in the activ....
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....of. One of the principal purposes which had been taken note of for enactment of 2003 Act by the Parliament is the poor performance of the State Electricity Boards. The Government intended to have an independent body for determining the tariff which was required to be carried on in a professional and independent manner. It was felt that cross-subsidies have reached to unsustainable levels. The enactment provides for establishment of the Electricity Regulatory Commissions. Encouraging private sector participation, generation, transmission and the distribution of electricity became the statutory policy. The Parliament felt the need of harmonizing and rationalizing the provisions of the Act. De- licensing of generation as also grant of free permission of captive generation is one of the main features of the 2003 Act. It is clearly provided that only hydro-generating projects would need the approval of the State Commission and the Central Electricity Regulatory Authority. It recognized the need of prohibiting transmission licensees. It also for the first time provided for open access in transmission from the outset. It even provides where the distribution licensee proposes to underta....
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....ned to the said term but the same must be held to be `subject to the context'. The word "supply" used in Section 23 of 2003 Act for bringing in efficient supply would mean regulate and consequentially licensing in respect of the generating company. For the aforementioned purpose it cannot be given a general or popular meaning denoting supplier and receiver. Once it is held that by reason thereof the Parliament aimed at ensuring the supply, the purported object it sought to achieve by enacting Section 7 would lose its purpose. It, however, does not mean that Section 23 itself becomes unworkable as it would not be possible to secure equitable distribution and supply. The agreement of distribution (PPA) being subject to approval, indisputably the Commission would have the public interest in mind. It has power to approve a MOU which subserves the public interest. It, while granting such approval may also take into consideration the question as to whether the terms to be agreed are fair and just. SECTION 23 - DIRECTION BY THE COMMISSION Could a generating company, despite Section 11 be subjected to any direction by the Commission in terms of Section 23 of the 2003 Act? Whe....
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....ef at which the section was aimed. Upjohn LJ gave a precisely accurate indication of the role of the sidenote when he said : `While the marginal note to a section cannot control the language used in the section , it is at least permissible to approach a consideration of its general purpose and the mischief at which it is aimed with the note in mind.' The italicised words accurately show the relationship of this component to the informed interpretation rule. Earlier inconsistent dicta, a selection of which are now considered, must be treated as erroneous." In Interpretation of Statutes, Fourth Edition, by Vepa P. Sarathi at page 347 it is stated :- `The heading of a chapter may be referred to in order to determine the sense of any doubtful expression in a section ranged under it. But it cannot control unambiguous expressions. It is true that a heading cannot control the interpretation of a clause if its meaning is otherwise plain and unambiguous, but it can certainly be referred to as indicating the general drift of the clause and affording a key to a better understanding of its meaning." Similarly in Principles of Statutory Interpretation by Justice G.P. ....
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.... entered upon a roll, which it may be again if Parliament should be pleased so to order; in which case it would be without these appendages...'" It is, however, evident from the decision of this Court in Indian Aluminium Company v. Kerala State Electricity Board, [ AIR 1975 SC 1967 ], that the modern trend is to take into consideration the marginal note. It could be used, as has been held, in R.S. Joshi, Sales Tax Officer, Gujarat and Ors. v. Ajit Mills Limited and Anr., [ (1977) 4 SCC 98 ]. Relevance of marginal note was also taken note of in Ramesh Chand and Ors. v. State of U.P. and Ors., [ (1979) 4 SCC 776 ]. In Bombay Dyeing and Mfg. Co. Ltd. v. Bombay Environmental Action Group and Ors., [ (2006) 3 SCC 434 ], marginal note has been taken into consideration as an intrinsic part of the Section. In Deewan Singh and Ors. v. Rajendra Pd. Ardevi and Ors., [ 2007 (1) SCALE 32 ] it has been held that the marginal note may be taken into consideration for the purpose of proper construction of the provision although there is no ambiguity. Sarabjit Rick Singh v. Union of India (UOI), [ (2008) 2 SCC 417 ] follows Deewan Singh (supra). SUPPLY - CONTEXTUAL MEANING It was submi....
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....erpretation of Section indisputably must be premised on the scheme of the statute. For the purpose of construction of a statute and in particular for ascertaining the purpose thereof, the entire Act has to be read as a whole and then chapter by chapter, section by section and word by word. {See Reserve Bank of India, v. Peerless General Finance and Investment Co. Ltd, [ (1987) 1 SCC 424 ] ; Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, [ (1992) 2 SCC 343 ] and National Insurance Co. Ltd. v. Swaran Singh, [ (2004) 3 SCC 297 ]. } Thus, in a case where interpretation of a Section vis-`-vis the scheme of the Act, the purport and object of the legislation, particularly having regard o the mischief it seeks to remedy; the chapter heading as also the marginal note, in our opinion, are relevant. PURPOSIVE CONSTRUCTION Legislation has an aim, it seeks to obviate some mischief, to supply an inadequacy, to effect a change of policy, to formulate a plan of government. That aim, that policy is not drawn like nitrogen, out of air ; it is evidenced in the language of the statute, as read in the light of other external manifestations of purpose. [See Justice Fra....
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....ter dealing with licensing. There was also no necessity to bring out transmission of electricity from the purview thereof as the same would also come within the purview of supply of electricity. If transmission of electricity can be kept outside the purview of direction by the Commission, there is no reason why generation thereof would not be. We, therefore, of the opinion that Section 23 of the 2003 Act does not contemplate issuance of any direction by the Commission. SECTION 86 - FUNCTION OF THE COMMISSION Section 86 provides for the functions of the State Commission, clause (a) of sub-section (1) whereof empowers it to determine the tariff for generation, supply, transmission and wheeling of electricity. Clause (b) empowers it to regulate electricity purchase and procurement process of distribution licensees. Inevitably it speaks of PPA. PPA may provide for short term plan, a mid term plan or a long term plan. Depending upon the tenure of the plan, the requirement of the distribution licensee vis-`-vis its consumers ; the nature of supply and all other relevant considerations, approval thereof can be granted or refused. While exercising the said function necessarily....
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....n making investment. The business in regard to allocation of electricity at the hands of the generating company was the subject matter of the licensing regime. While interpreting the statute it must be borne in mind that such a mechanism should not come back. That, however, would not mean that the generating company is absolutely free from all regulations. Such regulations are permissible under the 2003 Act ; , one of them being fair dealing with the distributor. Thus, other types of regulations should not be brought in which were not contemplated under the statutory scheme. If he is exercising his dominant position, Section 60 would come into play. It is only in a situation where a generator may abuse or misuse his position the Commission would be entitled to issue a direction. The regulatory regime of the Commission, thus, can be enforced against a generating company if the condition precedent therefor becomes applicable. INTERRETATION OF SECTION 86 Section 86(1)(b) provides for regulation of electricity purchase and procurement process of distribution licensees. In respect of generation its function is to determine, the tariff for generation as also in relation to supply; ....
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....the State; and supply in the State; A critical comparison of the said provisions would show that the agreements for purchase of power referred to therein is directly linked with the procurement process of distribution license either from the generating companies or licensees or from other sources. Regulation of transmission has been taken out of the regulatory provision. The words `through agreements for purchase of power' inserted in Section 86(1)(b) of the 2003 Act bring about a significance distinction. It is neither irrelevant nor immaterial as contended by Dr. Singhvi.A PPA may be a long term one or a short term one. Regulations have been made by the Commission by making MERC (Terms and Conditions of Tariff) Regulations, 2005. Short term power procurement refers to an agreement for procurement of power for a period of less than one year. Regulation 23.1 requires the distribution licensee to prepare a five year plan inter alia upon taking into consideration the sources for procurement thereof. Regulation 24.1 mandates obtaining of prior approval of the Commission therefor. Approval by Commission is granted upon examining the process of procurement having regard to the....
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....sputably, however, the generator of an electrical energy, although is not subject to the grant of licence but while supplying electrical energy to a distributing agency, in turn would be subject to approval and directions of the Commission. CONCLUSION 1) Activities of a generating company are beyond the purview of the licensing provisions. 2) The Parliament therefor did not think it necessary to provide for any regulation or issuance of directions except that which have expressly been stated in the Act. 3) Section 21 occurs in the chapter of "licensing" under which the generating companies would not be governed. 4) As almost all the sections preceding Section 23 as also Section 24 talk about licensee and licensee alone, the word "supply" if given its statutorily defined meaning as contained in Section 2(70) of the Act would lead to an anomalous situation as by reason thereof supply of electrical energy by the generating company to the consumers directly in terms of Section 12(2) of the Act as also by the transmission companies to the consumers would also come within its purview. 5) In a case of this nature the principle of exclusion of the definition of Sec....