Case: M/S. Punjab State Power Corporation Limited Vs. Punjab State Electricity R.Comm

Pursuant to a statutory scheme of transfer, vide notification dated 16.04.2010, the PSEB had been unbundled and the functions of generation and distribution came to be vested in the Punjab State Power Corporation Limited (Corporation). By order dated 03.09.2014 the Corporation has been substituted as the appellant in place of the PSEB.2. Before the learned Appellate Tribunal the tariff orders of the Punjab State Electricity Regulatory Commission (Commission) dated 30.11.2004 and 14.06.2005 for the financial years06 were under challenge. Such challenge was both by the present appellant as well as various industrial consumers. By the impugned judgment while the appeals filed by the present appellant have been dismissed, those filed by the industrial consumers have been disposed of with certain directions. Aggrieved, the instant appeal has been filed under Section 125 of the Electricity Act, 2003 (for short "the Act") against the aforesaid common order of the Appellate Tribunal.

Court's reasoning:
11. The Commission while considering the fixation of tariffs for the years06 based its determination on the average cost of supply which plainly is to be worked out by taking into account the total volume of electricity produced and the total cost incurred in such production. The industrial consumers in the appeal before the Tribunal contended that the cost of supply should be the voltage cost of supply, namely, the cost at which the consumer receives electricity at a particular voltage as a higher voltage would mean a lower price on account of lesser amount of distribution losses. As the industrial consumer receives supply of electricity at a high voltage, the average cost of supply, according to the industrial consumers, were to their detriment and was thus not contemplated under the Act. The Appellate Tribunal on an interpretation of Section 61(g) and 62(3) particularly in the absence of any prefix to the expression "cost of supply" in Section 61(g) took the view that it is more reasonable to advance towards a regime of voltage cost of supply which would provide a more actual/realistic basis for dealing with the issue of cross subsidies. However, as the progress to a regime of voltage cost of supply by reduction/elimination ofis to be gradual, the learned Appellate Tribunal held that no fault can be found with the determination of the average cost of supply made by the Commission for the financial years in question. However, keeping in view what the Tribunal understood to be the ultimate object of the Act it had directed that the relevant data with regard to voltage cost should be laid before the Commission and for the future the Commission would gradually proceed to determine the voltage cost of supply.12. We have considered the perspective adopted by the learned Appellate Tribunal in seeking an answer to the issue of cost of supply/cross subsidies that had arisen for decision by it. The provisions of the Act and the National Tariff Policy requires determination of tariff to reflect efficient cost of supply based upon factors which would encourage competition, promote efficiency, economical use of resources, good performance and optimum investments. Though the practice adopted by many State Commissions and utilities is to consider the average cost of supply it can hardly be doubted that actual costs of supply for each category of consumer would be a more accurate basis for determination of the extent ofthat are prevailing so as to reduce the same keeping in mind the provisions of the Act and also the requirement of fairness to each category of consumers. In fact, we will not be wrong in saying that in many a State the departure from average cost of supply to voltage cost has not only commenced but has reached a fairly advanced stage. Moreover, the determination of voltage cost of supply will not run counter to the legislative intent to continue cross subsidies. Such subsidies, consistent with executive policy, can always be reflected in the tariff except that determination of cost of supply on voltage basis would provide a more accurate barometer for identification of the extent of cross subsidies, continuance of which but reduction of the quantum thereof is the avowed legislative policy, at least for the present. Viewed from the aforesaid perspective, we do not find any basic infirmity with the directions issued by the Appellate Tribunal requiring the Commission to gradually move away from the principle of average cost of supply to a determination of voltage cost of supply.13. Disallowance of Interest cost on account of alleged diversion of fundsThe Commission disallowed a total of Rs.100 crores on account of interest paid on borrowed funds on the ground that the loans obtained to meet capital expenditure were diverted by the Board (PSEB) to meet revenue expenditure. The bulk of the interest (except Rs.100 crores) was, however, allowed by the Commission on the ground that the same is a consequence of the events in force prior to the coming into existence of the Commission and that if the Board is asked to bear the burden of the entire interest it will have a crippling effect on its resources. In considering the issue the Commission further came to the finding that the total assets of the Board would be of the value of Rs.9.431.06 crores out of which the assets created with the funds available from consumers contribution, grants and subsidy towards capital assets etc. works out to Rs. 1784.48 crores leaving the balance assets at Rs.7646.58 crores. As against this, the PSEB has availed loans and equity amounting to Rs.11828.48 crores upto the period ending March 31, 2004. The Commission accordingly recorded the finding that the Board had availed loan to the extent of Rs.4181.90 crores in excess of its capital assets. Obviously, the entire of the said excess amount was diverted towards meeting revenue expenditure which is against all canons of acceptance. Therefore, the amount on this loan paid by the PSEB cannot be shifted to the consumer. Despite the said findings, for the reasons already noticed, the Commission had disallowed interest of an amount of Rs.100 crores only allowing the balance to be charged on the consumers through the tariff. The Appellate Tribunal taking note of the facts mentioned above did not interfere with the limited disallowance made by the Commission and instead remanded the issue for a fuller consideration of the Commission, in the determination for the subsequent years, in the following termsthe issue of diversion of funds is interlinked with other issues namely RSD cost allocation, subsidy, high rate of interest on Government loans etc., the controversy relating to the extent of interest which can be allowed as a pass through cannot be resolved unless the other issues are also decided by the Commission as directed by us. The resolution of these issues are bound to take time and cannot be decided without relevant data. Therefore, relief can only be given to the consumers for the future years.In view of the foregoing, we direct that for the yearthe issue relating to the extent of interest which can be allowed as a pass through shall be determined and resolved by the Commission alongwith the determination of the issue relating to RSD cost allocation, subsidy and high rate of interests on Govt. loans. This shall be accomplished during the truing up exercise for the yearconclusion of the learned Tribunal being on a consideration of the facts and circumstances noted above, we can only approve the views expressed.14. Disallowance of Employees CostThe Board had projected employees cost at Rs.1605.40 crores in the ARR forand at Rs.1700 crores forThe Commission in its tariff order for financial yearhad allowed employees cost of Rs.1274.66 crores with the rider that for the next year the employees cost will be capped. However, the employees cost for financial year05 had remained capped. The Commission allowed a cumulative increase of 15.6% for the yearby taking into account the increase in wholesale price index taking the financial yearas the base year. The approved level of employees cost of the Board of Rs.1274.66 crores for the yearconsequently, stood allowed to the extent of Rs.1473.63 crores.15. In the appeal before the Appellate Tribunal, the Board contended that the capping of the increase of employees cost for the yearwas not justified and that the increase allowed by the Commission for the financial yearis not adequate. The employees of the Board are governed by the Punjab State Electricity Service Regulations 1972 whereunder the employees are given parity with the pay scales of the State Government employees. As the Board had adopted the recommendation of the 5th Pay Commission a higher pay scale was required to be given to its employees. The Board also placed before the Tribunal the details of the efforts made by it to contain the employees cost including reduction in the number of its employees.16. The Appellate Tribunal took the view that what was obligatory on the Board was to provide parity of pay scales of its employees with those of the State Government at the time when the transfer of the Electricity Board took place. Grant of higher pay scale without linking the same to performance would, according to the Tribunal, defeat the provisions of Electricity Act 2003. The Tribunal further held that the measures pointed out by the Board to cut the employees cost were cosmetic. In this regard the Tribunal observed that though the Board had claimed to have reduced its employees from 91224 in the yearto 82494 in the yearappointment on contract basis as well as in the exigencies of service continued to be made on no known basis. The Tribunal found that even the voluntary retirement scheme which could have been a viable option was not adopted on the ground that the State Government was not in a position to provide the expenses. In this regard the Tribunal in its order has specifically found thatThe number of consumers of electricity in the State of Punjab is the least as compared to the other six States referred to in the charts;(ii) PSEB 0.24 MU per employee, which puts the Board in the second lowest position in the matter of sale of energy per employee;(iii) Each employee of the PSEB caters to 59 consumers in the State of Punjab. This ranking is the lowest amongst the seven SEBs;(iv) PSEB has the highest percentage of establishment cost to total cost as it constitutes 56 paise/Kwh cost of energy sold, which is also the highest compared to other six States and(v) The Boards per employee cable line circuit is the lowest being 2.95 Km/ckt cost against 7.84 Km/ckt in respect of Gujarat State.It is in the light of the aforesaid facts that the Appellate Tribunal came to the conclusion that the employees cost computed and claimed by the PSEB at 1700 crores for the financial yearcannot be allowed. However, the Tribunal taking into account the fact that for the previous two years05 no increase in employees cost have been allowed thought it proper to allow the cumulative increase permitted by the Commission i.e. 15.61% over and above the employees cost of Rs.1274.66 crores in the yearwhich, on proper calculation, works out to Rs.1473.63 crores.18. The eventual conclusion of the learned Appellate Tribunal having been arrived at in the manner indicated above and being on due consideration of the facts relevant to the issue we are of the view that no interference in exercise of the limited jurisdiction of this Court under Section 125 of the Act would be justified.19. Coal transit lossesFor the yearthe Tribunal had allowed transit loss of 2% as against 3% allowed in the previous year i.e.The Tribunal also directed the PSEB to bring down the level of transit loss to 1% in the next 3 years with yearly reduction target of 0.33%. For the yearhowever, the learned Tribunal had approved the allowance of transit loss of 0.8% allowed by the Commission. Though there appears to be a slight inconsistency in the above view of the Tribunal, as the same has been prompted by the necessity to bring down losses by the utilities by adopting appropriate and prudent measures we do not think that any interference will be justified particularly when what has been allowed is as per the CERC norms (0.8%). The Tribunal had also taken the view that excessive loss reflected inefficiency and must therefore be eliminated. If the Appellate Tribunal, on consideration of the above fact had for the yearallowed transit loss to the extent of 2% as against the prescribed norm of 0.8% and for the yearhad kept such allowance at 0.8%, we do not see how interference with the above directions would be justified in the present appeal under Section 125 of thestatement of objects and reasons for the enactment of the Act, extracted above, would indicate a legislative realisation that the power sector in the country was in dire straits. This was largely on account of implementation of policy decisions to provide free or highly subsidized power to certain classes of consumers. In a regime wherein tariff was a matter of governmental dictation and directives providing free or subsidised power to one section at the cost of another or others and a host of such related decisions divorced from commercial and prudent practices had plunged the power sector into uncertainty and darkness. To remedy the situation, the Act of 2003 was enacted which,vested the power of fixation of tariff in the Regulatory Commissions with the Legislature itself clearly enunciating the principles for such determination as are to be found in Section 61 details of which has already been noted. Section 61(g), as originally enacted, contemplated a progressive journey to reduce and ultimately eliminateby identifying the cost of supply to the consumer. The vision of each consumer fully paying for the power drawn by such consumer was to be reached over a period of time. In fact in the tariff policy notified under Section 3 of the Act it was visualized that by the end of the yeartariff should be within 20 per cent of the average cost of supply (average cost). The aforesaid National Tariff Policy was published in the year 2006