Holding

The High Court’s approach was erroneous; tariff determination must be based on actual expenditure and the statutory parameters, not on a hypothetical ideal situation.

Summary

The Punjab State Electricity Board appealed against the Punjab State Electricity Regulatory Commission’s tariff order, which had been upheld by the Punjab and Haryana High Court on the ground that the Commission failed to consider certain parameters. The industrial consumers (M/s SIEL Ltd. and others) had challenged the tariff on issues such as estimation of agricultural consumption, T&D losses, energy input, manpower, investment, and rate of return. The Supreme Court held that the High Court erred by applying an "ideal situation" test, which is inappropriate for commercial evaluation, and emphasized that actual expenditure, not hypothetical scenarios, must form the basis of tariff determination. It clarified that cross‑subsidy is a tariff design issue and that the Commission must assess the annual revenue requirement in accordance with the Electricity Regulatory Commissions Acts of 1998 and 2003. Consequently, the Court set aside the High Court’s order and remitted the matter to the Commission to re‑examine the tariff with the correct parameters. The appeals were allowed.

Issues considered

Whether the High Court correctly applied the "ideal situation" test in reviewing the tariff order.
Whether cross‑subsidy is a matter of tariff design or a cost component to be considered by the Commission.
Whether interest on borrowing due to non‑receipt of government subsidy can be included in the annual revenue requirement.
Whether the Commission complied with the statutory parameters under the Electricity Regulatory Commissions Acts, 1998 and 2003 in determining tariff.

Legislation cited

Electricity Regulatory Commissions Act, 1998s. 29(2)(d), s. 29(3), s. 29(5), s. 9
Electricity (Supply) Act, 1948s. 16

Subjects

tariff determinationcross-subsidyelectricity regulatory commissionideal situation testcommercial evaluationstatutory appealannual revenue requirementelectricity law

Judgment

[2008] 12 S.C.R. 156

A PUNJAB STATE ELECTRICITY BOARD ~
II.
M/S SIEL LTD. AND ORS.
(Civil Appeal Nos. 5380~5389 of 2005)
AUGUST 18, 2008
B
[DR. ARIJIT PASAYAT AND S.H. KAPADIA,, JJ.]
,_
Electricity Regulatory Commissions Act, 2003 - ss. 29,
61 and 82 - Electricity Regulatory Commissions Act, 1998 -
c s.9 - Determination of tariff by State Electricity Regulatory
Commission - Challenge to - Statutory appeals by industrial
consumers - Allowed by High Court - On appeal, held: Ap-
proach of High Court was not correct and analysis was not
done by it in the correct prospective, inasmuch as it introduced
the concept of/deal situation - The ideal situation test has no
D
place in commercial evaluation - Hence, order of High Court
set aside and matter remitted to Electricity Commission with
-t"
direction to examine the matter afresh keeping in view the ''-{

parameters of the 2003 Act.

E Respondent industrial consumers, challenged the
determination of tariff by the Punjab State Electricity Regu-
latory Commission by filing statutory appeals before the
High Court. The dispute related to (i) estimation of agri-
cultural. consumption and trans11;1ission and distribution
F loss (T & D loss) (ii) energy input and coal transportation,
(iii) manpower requirement and (iv) investment and rate ~
of return.
The High Court held that the Electricity Commission
had not addressed itself to relevant parameters and al-
G lowed the appeal after stressing on certain aspects like
cross subsidy and inadequacy of the materials produced.
Hence the present appeals by the Punjab State Electric- -L
ity Board.

H 156

~

-~~ ...... J
PUNJAB STATE ELECTRICITY BOARD v. M/S 157
SIEL LTD. AND ORS.

)< Allowing the appeals, the Court A
HELD:1.1.The basic issue which the High Court tried
to address related to cross subsidy. But it introduced a
concept of ideal situation which is not the correct ap-
proach. The ideal situation test has no place in the case
of commercial evaluation. Actual expenditure has to be B
the basis and not the hypothetical ideal situation. Ideal
t situation is essentially contemplation of the future. [Paras
7, 11, 18] [159, H; 160,A; 161,B; 163,G-H]
' Hindustan Zinc Ltd. etc. etc. v. Andhra Pradesh State Elec-
tricity Board and Ors. (1991) 4 SCC 299; West Bengal Elec- C
tricity Regulatory Commission v. CESC Ltd. (2002) 8 SCC 715
and Association of Industrial Electricity Users v. State of A.P
and Ors. (2002) 3 SCC 711 - referred to.
1.2. Since the High Court's approach is not correct
0
and analysis was not done in the correct prospective, the
order of the High Court is set aside and the matter is re-
mitted to the Commission to examine the matter afresh
keeping in view the parameters of the Electricity Regula-
tory Commissions Act, 2003. [Para 19] [164,A-B]
E
Case Law Reference
(1991) 4 SCC 299 referred to Para 15
(2002) 8 SCC 715 referred to Para 16
(2002) 3 SCC 711 referred to Para 17
·'
F
CIVIL APPELLATE JURISDICTION :·Civil Appeal Nos.
5389 of 2005
From the Judgment and final Order dated 21.11.2003 of
the High Court of Punjab and Haryana at Chandigarh in F.A.0.
Nos. 5371, 5243, 5298, 5557 of 2002, 216, 278, 371, 412, G
508 and 875 of 2003
WITH
C.A. Nos. 5394, 5395, 5392, 5397, 5390, 5391, 5393,
5396, 5379 and 5398 of 2005. H

T
158 SUPREME COURT REPORTS [2008] 12 S.C.R.

A K.N. Bhatt, Ranjit Kumar, M.G. Ramachandran, Mohinder
Jit Singh Rupal, Kaadmbri, Sacchin Puri, Vikas (for Mis. Gagrat * ..
& Co.), Suresh Chandra Tripathy, P.H. Parekh, Ajay K. Jha, Nitin
Thukral, (for M/s. P.H. Parekh & Co.) Nidhesh Gupta, Vinod
Shukla, Deepak Goel, S. Janani, Shobha, Rakesh K. Sharma,
B Madhukar Agarwal, Meera Agarwal, Ramesh Chandra Mishra,
B. Vijayalakshimi Menon, Shruti, Varuna Bhandari Gugnani and
Shalu Sharma for the Appearing Parties. ,.
The Judgment of the Court wad delivered by ,
c Dr. ARIJIT PASAYAT, J. 1. Cha!Lenge in these appeals is
to the judgment of the Division Bench of the Punjab and Haryana
High Court allowing the statutory appeals filed by the respon-
dents in these appeals questioning the order of the Punjab State
Electricity Regulatory Commission (in short the 'Commission').
The determination of tariff by the C~rimission was the subject
D
matter of challenge.
·2. The High Court held that the Commission had not ad- 1"
dressed itself to the relevant parameters and, therefore, the '{
"""'
order suffers from infirmities. The matter was remitted to the ,,.-
E Commission to decide the issues afresh keeping in view the
observations made and after elicitin~fthe appropriate informa-
tion from ~he appellant-Punjab State Electricity Board (in short
the 'Board') wherever it has been found the deficient on the
part of the Board. Stress in these appeals, essentially is to-
F cused on various conclusions on specific issues.
r
3. The dispute relates to the period from 1.8.2002 to ~-
31 .7.2003. The annual cost requirement as per the Board was
4

~s. 7,437. 78 crores while the Commission allowed Rs.6,341.14
crores. The challenge was essentially by industrial consumers
G ·before the High Court. The dispute as noted above relate to (i)
estimation of agricultural consumption and transmission and
distribution loss (in short 'T&D Loss'), (ii) energy input and coal
transportation, (iii) manpower requirement, (iv) investment and
+
rate of return.
H
" PUNJAB STATE ELECTRICITY BOARD v. MIS 159
SIEL LTD. AND ORS. [DR. ARIJIT PASAYAT, J.]
y
4. So far as the last head is concerned, the rate claimed A
is 3% of net fixed assets and 14% of equity.
5. The basic premises on which the Commission pro-
ceeds is to find out whether existing tariff generates surplus
revenue or not. If it is more, then there is scope for reduction in
tariff and if it is less it leads to increase in tariff. One of the basic B
., issues relates to cross subsidization. In other words, industrial
consumers pay more than actual average cost of supply and
subsidize the consumers in the agricultural and domestic sec-
tors.
c
6. According to learned counsel for the appellant-Board
cross subsidization is a tariff design issue. The Government
has no role to play in cross subsidy. It is not an element of cost
and essentially is redesigning of tariff. Hypothetically, High Court
is not correct in saying it is a loss of revenue measure.
D
~ 7. Learned counsel for the respondents submitted that the
'r High Court has rightly stressed on certain aspects like cross
subsidy, inadequacy of materials produced, and rational and
down to earth approach has been adopted. The Government
has really no role to play. It is a legacy of the past and principally E
aims at progressively reducing the element of cross subsidy.
The cost of supply is different to different classes of consum-
ers. The average cost of supply can be categorized into (i) the
average cost to every consumer and (ii) the average cost to a
class of consumers. It is pointed out and in fact there is no dis- F
pute that cost of supply varies depending upon the consump-
tion i.e. in case of lower voltage relatable to domestic consum-
ers, the cost of supply is higher vis-a-vis the cost and at higher
voltage by industrial consumers it is less. The technical and com-
mercial losses are lower because of high voltage and it be-
G
comes higher if it is a case of low voltage. Till now, there ap-
---t pears to be no authoritative determination on a particular class
of consumers. Thus, one of the methods can be by adoption of
average cost principle. The basic issues which the High Court
tried to address related to cross subsidy. But it introduced a
H
..
160 SUPREME COURT REPORTS [2008] 12 S.C.R.
;(

A concept of ideal situation which in our opiriion is not the correct
approach. Subsidy in essence is a privilege which can either
be given or not to be given.
8. The Commission which has been appointed under the
Electricity Regulatory Commissions Act, 1998 (in short the '1998
B Act') or the Electricity Regulatory Commissions Act, 2003 (in , __

short the '2003 Act') exercises the statutory powers for deter-
mination of tariff. The guidelines and parameters have been
provided under Section 9 of 1998 Act and Sections 29, 61 and
82 of 2003 Act.
·C
9. The Commission is primarily concerned with determin-
ing the annual revenue requirement (in short 'ARR'). The Com-
mission designs the tariff and by rationalizing the same is sent
to_ the Government which takes a decision annually as to the
quantum of subsidy and the class of beneficiaries. Thereafter,
D
the Commission finalises the tariff. t
'-(

10. One of the basic issues raised in these appeals was
whether the interest on borrowing because of non receipt of
subsidies can be taken as a part of ARR. The Commission is
E required to work out the details. It was stated that being the first
year of fixation of tariff, the Commission was faced with various
problems. If it is established that the borrowings are general in
,..
(
\

nature it certainly forms parts of the ARR, but where it is appar-
ently made because of non receipt of subsidy amount from the
F Government, the question may arise whether it can be taken f-
into account by fixing the ARR. If the Board by cogent material
established that the interest is relatable to general borrowing, it
would definitely form part of the ARR. If on the other hand the
consumer is able to establish that the interest is relatable to
borrowing on account of non receipt of subsidy, the details have r>--
G
to be worked out by the Commission. The commercial expedi- +- r

ency test has to be applied by the Commission. Difficulties arise
when it relates to determination for the first year. At the begin-
ning of the year the question of delay in receipt cannot be gone
into. This is a matter for the subsequent period. '
H
PUNJAB STATE ELECTRICITY BOARD v. M/S 161
SIEL LTD. AND ORS. [DR. ARIJIT PASAYAT, J.]
)'
i 11. In relation to agricultural meter and T&D losses it is to A
be noted that in the past agricultural consumers were not hav-
ing meters. Therefore, per force estimate had to be done. The
Commission fixed 25.52% to be T&D losses. The High Court
proceeded on the basis that meters should have been there. In
the absence of meters, the consumers should not suffer. This is B
what is normally known as ideal situation test. Such test as indi-
t
cated above has no place in the case of commercial evalua-
tion.

12. In the case of industrial and domestic consumers, the
exact figures are known because meters are there. It is pointed c
out that the technical loss is fixed at 15% whereas at the distri-
bution level it is 10 to 11 % and 4 to 5% loss on account of trans-
mission.
13. So far as the commercial losses and un-metered ag-
D
ricultural consumers are concerned, the same cannot be pre-
-t
'1-- cisely quantified for the losses.
14. It is to be noted that when the Board's stand was that
the loss is less than the national level load factor and the energy
" input is best in the country, the High Court again proceeded to E
apply the ideal situation test to say that there was scope for
improvement and found no defect in the conclusions of the Com-
mission by stating that the production should be optimum.

15. The cross subsidy is an accepted principle. In
Hindustan Zinc Ltd. etc.etc. v. Andhra Pradesh State Electric- F
ity Board and Ors. (1991 (4) sec 299) in para 33 it was ob-
served as follows:

"33. Shri Kapil Sibal appearing on behalf of some of the
appellants confined the challenge to the mode of exercise
G
. -i of power by the Board. He laid great emphasis on the
' effect of absence of consultation with the Consultative
Committee under Section 16 of the Electricity. (Supply)
Act, 1948. He also claimed that the quantum of increase
could at best be justified only to the extent of one-half and
H
162 SUPREME COURT REPORTS [2008] 12 S.C.R.

)f
A no more. Shri Sibal claimed that certain extraneous factors
had been taken into account for the purpose of revising
the tariffs. The irrelevant considerations, according to Shri
Sibal, taken into account are the capital sums owed by
the Board and the overall losses incurred by the Board
B which according to him is impermissible under Section
59 of the Electricity (Supply) Act. He also argued that the
upward revision of HT tariffs is intended to subsidies
another class of consumers which is not permissible. His
arguments are already covered by our earlier discussion.
c Similarly, the arguments of Shri K.N. Bhat, forthe appellant
in C.A. No. 5379 of 1985 to the same effect need no
further discussion. The details of the several factors taken
into account for the revision in tariffs, to the limited extent
they can be gone into within the permissible scope of
judicial review in such a manner also do not require any
D
further consideration."
1""
16. The observations of this Court in West Bengal Elec- --...(

tricity Regulatory Commission v. CESC Ltd. (2002 (8) SCC
715) need to be noted: ,.,
E "91. A perusal of Sections 29(2)(d), 29(3) and 29(5) of the
1998 Act shows that the consumers should be charged
only for the electricity consumed by them on the basis of
average cost of supply of energy, and the tariff should be
determined by the State Commission without showing any
F undue preference to any consumer. The statute also
obligates the State Government to bear the subsidy which
f-
if it requires to be given to any consumer or any class of
consumers, should be only on such conditions that the
Commission may fix and such burden should be borne by
G the Government. However, the High Court in its judgment
has directed the Company to maintain its tariff structure in
regard to different types of supplies as it was prevailing
+- .
before the Commission fixed the new tariff. It also directed
the increase in the average rate of tariff which it had
H permitted to be distributed pro rata by the Company
PUNJAB STATE ELECTRICITY BOARD v. MIS 163
SIEL LTD. AND ORS. [DR. ARIJIT PASAYAT, J.]
y
amongst different consumers, so that the percentage of A
increase of each rate is the same. In effect, therefore, the
High Court has directed the continuance of cross-subsidy.
One of the reasons given by the High Court in this regard
is that Calcutta Tramways which is otherwise running a
cheap transportation system might have to increase its B
fare and the same cannot be permitted since Calcutta
Tramways were not heard in the matter of fixation of tariff
and there is, therefore, a likelihood of wide discontentment
if the fares are to be increased. We have noticed that the
object of the 1998 Act is to prevent discrimination in fixation c
of tariff by imposing cross-subsidy, but at the same time
under Section 29(5) of the 1998 Act, if the State
Government so chooses to subsidise the supply of energy
to any particular class of consumers, the same can be
done provided of course the burden of loss suffered by
\ D
the Company is borne by the State Government and not

~ imposed on any other class of consumers. In this view of
the matter, we are of the opinion that while the Commission
was justified in its view as to the non-applicability of cross-
subsidy, the High Court was in error in issuing a direction
to the Commission, contrary to the object and provisions E
of the 1998 Act to maintain a tariff structure which was
prevailing prior to the Commission's report. It is still open
to the State Government if it so chooses to direct the
Commission to fix the tariff of supply of electricity to any
-~
class of consumers at a reduced rate provided the State F
Government itself subsidises the same".

17. In Association of Industrial Electricity Users v. State
of A.P and Ors. (2002 (3) sec 711) also the position was ex-
amined in detail.
G
-+ 18. We make it clear that actual expenditure has to be the
basis and not the hypothetical ideal situation. Ideal situation is
essentially contemplation of the future.. Additionally, the compu-
tation of input is the actual cost on the basis of per unit.
H
164 SUPREME COURT REPORTS (2008] 12 S.C.R.

A 19. Since the High Court's approach is not correct and
analysis was not done in the correct prospective, we set aside
the order of the High Court and remit the matter to the Commis-
sion to examine the matter afresh keeping in view the param-
eters of 2003 Act in the light of what has been stated above on
8 specific issues.
20. The appeals are allowed to the aforesaid extent.
8.B.8. Appeals allowed.

+-