Case: Indian Aluminum Company Etc Vs. Kerala State Electricity Board

1. The short but important question which arises for determination in this appeal is whether a State Electricity Board has power to enhance the rates for supply of electricity notwithstanding an agreement binding it to supply electricity at certain rates where it finds that the contractual rates arc less than the cost of generation, distribution and supply of electricity and in the result there is loss to the State Electricity Board in its operations? In order to appreciate how the question arises, it is necessary to state a few facts giving rise to the appeal.The petitioner is a limited liability company which carries on business of manufacturing aluminium. The manufacture of aluminium involves three processes, viz., mining of bauxite ore, dressing it and converting it into alumina and reduction of alumina into aluminium. The petitioner carried on bauxite mining at the quarries in Bihar and also set up its factory in Bihar for dressing Bauxite ore and converting it into alumina. So far as the process of reducing alumina into aluminium is concerned, it involves the application of the method of electrolysis ill which electrical energy is a primary raw material and, therefore, the petitioner was anxious to set up a factory for this purpose at a place where electric power would, be cheap. The Government of the then native State of Travancore offered to supply electric power to the petitioner at reasonable rates for a long period of time if the petitioner established its factory for reducing alumina into aluminium within its territory. An agreement datedwas accordingly entered into between the petitioner and the Government of the State of Travancore for supply of electrical energy at certain rates for period of 34 years fromwith an option of renewal in favour he petitioner for a further period of 20 years. In view of this agreement, the petitioner established a factory at Alupuram near Alwaye fol. reducing alumina and converting it into aluminium, though alumina for this purpose had to be brought all the way from Bihar and the aluminium produced at the factory had to be transported outside the State of Travancore for the purpose of sale.On the integration of the States of Travancore and Cochin, a new state ofwas formed in 1948 and the agreement(hereinafter referred to as the Principal Agreement) was accepted by the new State as binding upon it. The terms and conditions of supply of electrical energy laid down in, the Principal Agreement were, however, varied and modified by a supplemental agreement (hereinafter referred to as the first Supplemental Agreement) datedentered into between the petitioner and the State of56 a new State of Kerala was formed comprising inter alia the territories of the existing State of Travancore Cochin, barring a small portion transferred to the State of Madras under the StatesAct 1956, and by reason of section 8 7 of that Act, the Principal Agreement as modified by the First Supplemental Agreement was deemed to have been made in the exercise of executive power of the State of Kerala and all rights and obligations under it became the rights and obligations of the State of Kerala. The Kerala Government thereafter by a Notification issued urbder section 5, subsection (1) of the Electricity Supply Act, 1948 (hereinafter referred to as the Supply Act), constituted the Kerala State Electricity Board (hereinafter referred to as the Board) with effect fromSection 60 of the Supply Act provides, inter alia that all the contracts entered into by or with the State Government for any of the purposes ot the Act before the first constitutional of the Board shall be deemed to have been entered into by or with the Board. The Principal Agreement as modified by the First Supplemental Agreement was, therefore. deemed to have been entered into with the petitioner by the Board. The terms and conditions of agreement were subsequently modified under another supplemental agreement (hereinafter referred to as the Second Supplemental Agreement) datedentered into between the petitioner and the Board. This modification did not affect either the rates or the duration of the Principal Agreement.It appears that the petitioner required additional electric power for expansion of the operations of its alumina reducing factory and an agreement dated(hereinafter referred to as the Second Agreement) was, therefore, entered into between the petitioner and the Board whereby the Board agreed to supply to the petitioner from 1965 a total of 12500 Killowatts of electric power at the rates and on the terms and conditions set out in the agreement. The duration of this agreement was 25 years fromwith an option to the petitioner to renew it for a further period of 25 years. Another agreement (hereinafter referred to as the Third Agreement) was entered into between the petitioner and the Board onfor supply of further 12500 k.w. Of electric power at certain rates for a period of 25 years fromwith an option of renewal in favour of the petitioner for a further period of 25 years on the same terms and conditions.3. Whilst these agreements were in force, the Board framed the Kerala State Electricity Board (General Tariffs) Regulations 1966 in exercise of the powers conferred under sect ion 79 (j) read with sections 49 and 59 of the Supply Act. Regulation 4 empowered the Board to prescribe different terms and conditions for different classes of consumers and Regulation 6 provided that the Board may fix different tariffs for different classes of services under various heads. The Board was conferred power under Regulation 10 by Notification or otherwise to fix special terms and conditions fol. supply for special purposes and` under Regulation 11 the Board could amend the terms and conditions of supply from time to time. These Regulations were amended by the Board by making the Kerala Electricity Board (General Tariffs) (Amendment) Regulations, 1969. By the amendment Regulations 6 and 8 were substituted by a new Regulation 6 which empowered the Board to fix different tariffs for different classes of services under the broad heads, low tension supply, high tension supply and extra high tension supply. Now it appears that since September 1965, when the last revision of tariffs was made by the Board, there was a steep rise in "prices of all commodities including plant and equipment, construction materials, etc. salary and wages of employees" thereby increasing the operation and maintenance cost of the Board with the result that the Board found itself in a position where it was working at a loss. Section 59 of the Supply Act enjoins the Board that "it shall not, as far as possible, carry on its operations under this Act at a loss and shall adjust its rates accordingly from time to time". The Board, therefore, in exercise of the power conferred under section 49 of the Supply Act and the Regulations, "and other enabling provisions in the Statute", issued an order datedcalled "Kerala State Electricity Board Extra High Tension Tariff order 1969" fixing the rates Or tariffs for supply of electric power to all extra high tensioncategory which included the petitioner. Clause (6) of t his order provided that the rates or tariffs fixed by it shall apply "to all extra high tension consumers" notwithstanding anything to the contrary contained in any agreement entered into with any extra high tension consumer either by the Government or by the Board or anything the tariff Regulations or Rules previously issued". The result was that despite the Principal Agreement, the Second Agreement and the Third Agreement, which were in force, the Board claimed to be entitled to recover from the petitioner the rates or tariffs fixed by this order. though they were manifestly higher than the rates or tariff stipulated in these respective agreements. The petitioner thereupon filed a writ petition in the High Court of Kerala challenging the validity of this order but the challenge failed. The High Court sustained the order on the ground that it was within the competence of the Board under sections 49 and 59 of the Supply Act. This view is assailed in the present appeal brought with certificate obtained from the High Court. FBefore we proceed to consider the question which arises for determination in this appeal, it will be convenient at this stage to refer to a few relevant provisions of the Supply Act for this is the statute with which we are concerned in this appeal. The Supply Act, as its preamble and long title show, is enacted "to provide for the rationalisation of the production and supply of electricity and generally for taking measures conducive to electrical development". That is the object and purpose of the Statute and this object and purpose is sought to be achieved by the establishment of the Central Electricity Authority and State Electricity Boards charted with certain functions, powers and duties. Section 5 (1) provides that the State Government shall, as soon as may he after the issue of the notification under section 1(4) bringing into force the various provisions of the Act, "constitute by notification in, the official Gazette a State Electricity Board under such name as shall be specified in the notification". Chapter TV sets out the powers and duties of the State Electricity Board. Section 18, which is the first section in that chapter enumerates duties, which also) represent the function, of the State Electricity Board. It Says, to quote the words of the section: "Subject to the provisions of this Act the Board shall be charged with the general duty of promote the coordinated development of the generation, supply and distribution of electricity within the State in the most efficient and economical manner, with particular reference to such development in areas not for the time being served or adequately served b y any licensee, and without prejudice to the generality of the foregoing provisions it shall be the duty of theto prepare and carry out schemes sanctioned under Chapter V; (b) to supply electricity to owners of controlled stations and to licensees whose stations are closed down under this Act; (c) to supply electricity as soon as practicable to any other licensees or persons requiring such supply and whom the Board may be competent under this Act so to supply." Then follow other sections in that Chapter which deal with the powers of the State Electricity Board. They are not material and we need not refer to them. Chapter V is headed "The Boards Works and Trading Procedure". It contains the fasciculus of sections dealing with making of a scheme for all area "with a view to rationalising the production and supply of electricity` in that area. Then there are other sections, not relevant for our purpose, which speak of controlled stations and generating stations, provide for supply of electricity by the State Electricity Board to a licensee and lay down the mode of fixation of grid tariff. Section 49 enacts a provision for sale of electricity by the State Electricity Board to a person other than a licensee. It reads:"(1) Subject to the provisions of this Act and of regulations, if any, made in this behalf the Board may supply electricity to any person not being a licensee upon such terms and conditions as the Board thinks fit and may for the purposes of such supply frame uniform tariffs.(2) In fixing the uniform tariffs, the Board shall have regard to all or any of the following factors,) the nature of the supply and the purposes for which it is required;(b) the coordinated development of the supply and distribution of electricity within the State in the most efficient and economical manner, with particular reference to such development in areas not for the time being served or adequately served by the licensee:(c) the simplification and standardisation of methods and rates of charges for such supplies;(d) the extension and cheapening of supplies of electricity to sparsely developed areas.(3) Nothing in the foregoing provisions of this section shall derogate from the power of the Board, if it considers it necessary or expedient to fix difference tariffs for the supply of electricity to any person not being a licensee, having regard to the geographical position of any area, the nature or the supply and purpose for which supply is required and any other relevant factors.(4) In fixing the tariff and terms and conditions for the supply of electricity, the Board shall not show under preference to any person."4. Chapter VI deals with "The Boards Finance Accounts and Audit. the first section in this Chapter, which is material, is section 59 which is in the following terms:The Board shall not, as far as practicable and after taking credit for any subventions from the State Government under section 63, carry on its operations under this Act at a loss, and shall adjust its charges accordingly from time to time."Then comes section 63 which provides inter alia that "all contracts" contracts into by, with the State Government for any of the purposes of this Act before the first constitution of the Board shall be deemed to have been entered into by, with the Board". Lastly, section 63 empowers the State Government with the approval of the State Legislature, from time to time to make subventions to the Board for the purposes of this Act on such terms and conditions as the State Government may determine".

Court's reasoning:
9. The principle laid down in these cases is unexceptionable and can not be doubted. But the question is: does it apply in the present case We do not think so. The principle is attracted when an attempt is made to fetter in advance the future exercise of statutory powers otherwise than by the valid exercise of a statutory power. The covenant in Ayr Harbours case (supra) tied the hands of the Harbour Trustees and prevented them fro m constructing works on the land acquired, however necessary they might become for the proper management of the undertaking and thus fettered the Harbour Trustees in the exercise of the statutory power entrusted to them by the Legislature for the purpose of the undertaking. But this covenant was entered into by the Harbour Trustees as a private contract with the owner of the land acquired in order to save money in respect of severence and not in exercise of a statutory power and hence the principle was invoked to invalidate the covenant. So far as York Corporation case (supra) is concerned, it came to be severely criticised by Sargant, L.J., in Southport Corporation v. Birkdale District Electric Supply Co. (1) and t he learned Lord Justice pointed out that the decision in York Corporations case (supra) could hardly stand with the judgment of the Court in Southport Corporations case (supra). This criticism of the decision in York Corporations case (supra) was adopted by Earl of Berkenhead when the Southport Corporation case (supra) was taken in appeal to the House of Lords. Lord Sumner also observed in that case that he did not think that there was a true analogy between Ayr Harbours case (supra) and York Corporations case (supra). The House of Lords as well as the Court of Appeal in the Southport Corporations case (supra) seemed to be of the view that the York Corporations case (supra) was wrongly decided. O f course, they did not doubt the validity of the principle enunciated by Russell, J., but questioned its applicability to the facts of the York Corporations case (supra). They appeared to think that the discharge of their statutory duties by t he Harbour Trustees would be facilitated rather than fettered by a reasonable latitude of discretion in fixing tolls and both ouse and Foss agreements must, therefore, be regarded as having been entered into by the Harbour Trustees in exercise of the statutory power of fixing tolls and hence they would be valid. But they pointed out that there were certain peculiar features in the York Corporations case (supra) on which the actual decision of Russell, J., holding ouse and Foss agreements to be void, could be sustained. The discussion of these two cases shows that the principle that a public authority cannot by contract fetter the exercise of the statutory power, which is conferred upon it for the public good, is limited in its application to those cases where the attempt to do so is otherwise than by the valid exercise of a statutory power.The position is different where a statutory power, is exercised to enter into a stipulation with a third party which fetters the future l. exercise of other statutorysuch stipulation is made not us part of private contract in general terms as Devlin L.J. calls it in Commissioner of Crown Lands v. Page(2), but in exercise of a statutory power. In such a case it is difficult to see how the exercise of the statutory power could be held to be invalid as a fetter on the future exercise of other strututory powers. If it were so held it would render the statutory power meaningless and futile. It would nullify the existence of the statutory power and that would be contrary to all canons of construction. If the statutory power is to have any meaning. and content. the stipulation made in exercise of the statutory power must b e valid and binding and it would, as pointed out by Pennycuick, VC. in Dowty Boulton v. Wolverhampton Corporation(3), "exclude the exercise of other statutory powers in respect of the sameTo put it differently, where a stipulation in a contract is entered into by a public authority in exercise of a statutory power, then, even though such stipulation fetters subsequent exercise of the same statutory power or future exercise of another statutory power, it would be valid and the exercise of such statutory power would protanto stand restricted. That would follow on the principle of harmonious construction. The public authority would not, in such a case, be free to denounce the stipulation as a nullity and claim to exercise its statutory power in disregard of it. If that were permissible, it would mean that the stipulation has no binding force and the public authority has no statutory power to enter into such stipulation. But that would be plainly contradictory of the premise on which the argument is based.The distinction must always, therefore, be borne in mind whether the stipulation by which the public authority is alleged to have fettered in advance the future exercise of the statutory power, is one which is entered into as part of private contract in general terms, or in exercise of a statutory power. If it is the former, the stipulation would he bad on the principle that a public authority cannot by contract fetter the exercise of a statutory power which is conferred upon it for the public good. But if it is the latter, the stipulation being in exercise of a statutory power would be valid and it would not be open to the public authority to disregard the stipulation and exercise the statutory power initiated or fettered by it. This last statement, must, however, be qualified by making it clear that a case may conceivably arise where there. may be an overriding statutory provision which expressly or by necessary implication authorises the public authority to set at naught, in certain given circumstances, a stipulation though made in exercise of a statutory power. Where there is such a statutory provision, the stipulation would certainly be bindings but. when the specified circumstances rise, the public authority, would have the power to override the stipulation and act in derogation of it. But that again would be a matte ofWe are, therefore, of the view that the Board was not entitled to enhance the charges in derogation of the stipulation as to charges contained in the agreements with the appellant and the notification dated 28th November, 1969 fixing tariff s for extra high tension consumers was not enforceable against the appellant. We accordingly issue a writ quashing and setting aside the notification dated 28th November, 1969 in so far as it seeks to make the tariffs specified in it applicable to the appellant and declare that the Board is not entitled to claim from the appellant anything more than the charges specified in the agreements. We also issue a writ restraining the Board from enforcing the notification dated 28th November, 1969 against the appellant or claiming from the appellant anything more than the charges specified in the agreements.