IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 5380-5389 OF 2005

Punjab State Electricity Board ..Appellant

Versus

M/s SIEL Ltd. and Ors. ..Respondents

WITH  

(Civil Appeal Nos. 5394, 5395, 5392, 5397, 5390, 5391, 5393, 5396, 5379 and 5398 of 2005)

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

1. Challenge  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  respondents   in

these  appeals  questioning  the  order  of  the  Punjab  State

Electricity Regulatory Commission (in short the ‘Commission’).

The determination of tariff by the Commission was the subject

matter of challenge.  

2. The  High  Court  held  that  the  Commission  had  not

addressed itself to the relevant parameters and, therefore, the

order suffers from infirmities. The matter was remitted to the

Commission to decide the issues afresh keeping in view the

observations  made  and  after  eliciting  the  appropriate

information from the 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

focused on various conclusions on specific issues.  

3. The  dispute  relates  to  the  period  from  1.8.2002  to

31.7.2003. The annual cost requirement as per the Board was

Rs.7,437.78 crores while the Commission allowed Rs.6,341.14

crores. The challenge was essentially by industrial consumers

2

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.  

4. So far as the last head is concerned, the rate claimed is

3% of net fixed assets and 14% of equity.   

5. The basic premises on which the Commission proceeds

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

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 sectors.

6. According  to  learned  counsel  for  the  appellant-Board

cross subsidization is a tariff design issue. The Government

3

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.   

7. Learned counsel for the respondents submitted that the

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 aims at progressively reducing the element of cross

subsidy. The cost of supply is different to different classes of

consumers. 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  dispute  that  cost  of  supply  varies  depending  upon  the

consumption i.e. in case of lower voltage relatable to domestic

consumers, the cost of supply is higher vis-à-vis the cost and

at  higher  voltage  by  industrial  consumers  it  is  less.  The

technical  and  commercial  losses  are  lower  because  of  high

4

voltage and it becomes higher if it is a case of low voltage.   Till

now, there appears 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 concept of ideal situation which

in our opinion 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  Act’)  or  the  Electricity  Regulatory  Commissions  Act,

2003 (in short the ‘2003 Act’) exercises the statutory powers

for determination of tariff. The guidelines and parameters have

been provided under Section 9 of 1998 Act and Sections 29,

61 and 82 of 2003 Act.  

9. The Commission is primarily concerned with determining

the  annual  revenue  requirement  (in  short  ‘ARR’).  The

Commission designs the tariff and by rationalizing the same is

5

sent to the Government which takes a decision annually as to

the  quantum  of  subsidy  and  the  class  of  beneficiaries.

Thereafter, the Commission finalises the tariff.  

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

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 apparently made because of non receipt of subsidy

amount from the Government, the question may arise whether

it can be taken 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 to be worked out by the Commission.

The  commercial  expediency  test  has  to  be  applied  by  the

6

Commission. Difficulties arise when it relates to determination

for the first year. At the beginning of the year the question of

delay in receipt cannot be gone into. This is a matter for the

subsequent period.  

11. In relation to agricultural meter and T&D losses  it is to

be  noted  that  in  the  past  agricultural  consumers  were  not

having 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 what is normally known as ideal situation test.

Such  test  as  indicated  above  has  no  place  in  the  case  of

commercial evaluation.  

12. In the case  of  industrial  and domestic consumers,  the

exact  figures  are  known  because  meters  are  there.  It  is

pointed out that the technical loss is fixed at 15% whereas at

the  distribution  level  it  is  10  to  11% and 4  to  5% loss  on

account of transmission.  

7

13. So  far  as  the  commercial  losses  and  un-metered

agricultural  consumers  are  concerned,  the  same  cannot  be

precisely 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 apply the ideal situation test to say that there

was  scope  for  improvement  and  found  no  defect  in  the

conclusions of the Commission 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

Electricity Board and Ors. (1991 (4) SCC 299) in para 33 it

was observed as follows:

“33.  Shri  Kapil  Sibal  appearing  on  behalf  of some of the appellants confined the challenge to the mode of exercise of power by the Board. He laid great emphasis on the effect of absence

8

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  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 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. Similarly, the arguments of Shri K.N. Bhat,  for the 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 further consideration.”

16. The observations of this Court in West Bengal Electricity

Regulatory Commission v. CESC Ltd. (2002 (8) SCC 715)  need

to be noted:

“91. A perusal of Sections 29(2)(d), 29(3) and 29(5)  of  the  1998  Act  shows  that  the

9

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  undue preference to any consumer. The statute also obligates  the  State  Government  to  bear  the subsidy which 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  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 permitted to be  distributed  pro  rata  by  the  Company amongst  different  consumers,  so  that  the percentage  of  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 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 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

10

course  the  burden  of  loss  suffered  by  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  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 Government itself subsidises the same”.

17. In  Association of Industrial Electricity Users v.  State of

A.P.  and  Ors.  (2002  (3)  SCC  711)  also  the  position  was

examined in detail.   

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

computation of  input is the actual  cost  on the basis of  per

unit.  

11

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

Commission to examine the matter afresh keeping in view the

parameters of 2003 Act in the light of what has been stated

above on specific issues.

20. The appeals are allowed to the aforesaid extent.  

…………………………….J. (Dr. ARIJIT PASAYAT)

…………………………….J. (S.H. KAPADIA)

New Delhi, August 18, 2008

12