BSES RAJDHANI POWER LTD. versus DELHI ELECTRICITY REGULATORY COMMISSION on 18 October 2022

790

SUPREME COURT REPORTS

[2022] 14 S.C.R.

ABSES RAJDHANI POWER LTD.

v.

DELHI ELECTRICITY REGULATORY COMMISSIONCIVIL APPEAL NO(S). 4324 OF 2015

BOCTOBER 18, 2022

[S. ABDUL NAZEER AND KRISHNA MURARI, JJ.]

Electricity Act, 2003 : ss. 2(17), 12, 14, 43, 61, 62 and 64 –Determination of tariff – Exercise of ‘truing up’ – Appellants aredistribution licensees, involved in distributing and supplyingCelectricity in their designated areas within the NCT of Delhi – Interms of the 2003 Act, Delhi Electricity Regulatory Commission-DERC, regulated the Annual revenue requirement-ARR of theappellants to conduct the licensed business and consequently thetariff to be recovered from the consumers – DERC madeDdisallowances in Tariff orders dated 26.08.2012 for determinationof ARR and Tariff for FY 2011-12 and truing up of financials forFY 2008-09 and FY 2009-10 – DERC changed methodology ofcomputation of ARR at the stage of true up – Challenged by theappellants before the appellate tribunal for Electricity – Appellantscontented that since privatization, the ARR determined by the DERCEwas not even sufficient to meet the actual power purchase cost whichled to creation of a huge revenue gap; that the DERC in repeateddisregard to its statutory regulations and its own statutory advicerefused to make periodic increase in the tariff rate, leading to theindebtness of appellants – Findings of DERC confirmed by APTELF– On appeal, held: It is not permissible to amend the tariff orderduring true up exercise – On the pretext of prudence check andtruing up, DERC could not have amended the tariff order –Regulator cannot ‘change the rules after it has begun’ in the ‘truingup exercise’ – Thus, the findings of the DERC, as confirmed by theAPTEL in the on issues pertaining to change in methodology inGcomputation of AT&C losses; change in methodology forcomputation of depreciation; disallowance of salary for FR/SRStructure; and disallowance of Fringe Benefit Tax, are contrary tothe order of the original MYT determination Tariff Order dated23.02.2008 and 28.05.2009, thus, set aside – As regards theH

disallowance of interest incurred on Consumer Security Depositretained by DPCL, the appellants are entitled to recover interest onConsumers Security Deposit as held by the DPCL – As regards,reduction in million units in relation to enforcement sale for thepurpose of calculation of Aggregate Technical and Commerciallosses, pertaining to theft/unauthorized use of electricity, theassessed energy has to be considered as supply by the appellants inthe enforcement cases – DERC to consider assessed energy forcalculation of enforcement sales and allow the impact of the samealong with carrying costs – Thus, the order of the DERC and thejudgment of the APTEL impugned herein are set aside.

s. 64 – Procedure for tariff order – Amendment of tariff ordermade u/s. 64 during the ‘truing up’ exercise – Permissibility of –Held: A tariff order is quasi-judicial in nature which becomes finaland binding on the parties unless it is amended or revoked u/s.64(6) or set aside by the appellate authority – ‘Truing up’ stage isnot an opportunity for the DERC to rethink de novo on the basicprinciples, premises and issues involved in the initial projections ofthe revenue requirement of the licensee – ‘Truing up’ exercise cannotbe done to retrospectively change the methodology/principles oftariff determination and re- opening the original tariff determinationorder thereby setting the tariff determination process to a naught at‘true-up’ stage – Revision or re-determination of the tariff alreadydetermined by DERC on the pretext of prudence check and truingup would amount to amendment of the tariff order, which can bedone only as per the provisions of sub-Section (6) of s.64 within theperiod for which the Tariff Order was applicable – DERC cannotamend the tariff order for the period 01.04.2008 to 31.03.2010 inthe guise of ‘true-up’ after the relevant financial year is over andthe same is replaced by a subsequent tariff Order – This wouldamount to a retrospective revision of tariff when the relevant periodfor such tariff order is already over – Thus, not permissible to amendthe tariff order made u/s. 64 during the ‘truing up’ exercise.

s.125 – Appeal to Supreme Court – Exercise of jurisdictionunder – Held: Existence of a ‘substantial question of law’ arisingfrom the judgment of the APTEL is sine qua non for exercise ofjurisdiction by this Court u/s. 125 – Code of Civil Procedure – s.100.

Words and Phrases:

AB

C

D

E

F

G

H

A‘Truing up’ – Meaning of – Held: ‘Truing up’ is the adjustmentof actual amounts incurred by the licensee against the estimated/projected amounts determined under the Annual revenuerequirement-ARR.

‘Substantial Question of Law’ – Meaning of – Discussed.B‘Appeal’ – Meaning – Discussed.

Allowing the appeals, the Court

HELD: 1.1 An appeal to this Court under Section 125 couldbe filed on the grounds specified in Section 100 of the CPC. UnderCSection 100 of the CPC, an appeal could be filed only when thecase involves ‘a substantial question of law’, as may be framedby the appellate court. Thus, the existence of a ‘substantialquestion of law’ arising from the judgment of the APTEL is sinequa non for exercise of jurisdiction by this Court under Section125 of the 2003 Act. [Para 27][807-H; 808-A-B]D

1.2. A tariff order is quasi•judicial in nature which becomesfinal and binding on the parties unless it is amended or revokedunder Section 64(6) or set aside by the Appellate Authority. Apartfrom this, at the stage of ‘truing up’, the DERC cannot changethe rules/methodology used in the initial tariff determination byEchanging the basic principles, premises and issues involved inthe initial projection of ARR. [Para 51][816-C-D]

1.3. ‘Truing up’ means the adjustment of actual amountsincurred by the Licensee against the estimated/projected amountsdetermined under the ARR. ‘Truing up’ stage is not an opportunityFfor the DERC to rethink de novo on the basic principles, premisesand issues involved in the initial projections of the revenuerequirement of the licensee. ‘Truing up’ exercise cannot be doneto retrospectively change the methodology/principles of tariffdetermination and re•opening the original tariff determinationorder thereby setting the tariff determination process to a naughtGat ‘trueup’ stage. [Para 52, 53][816-D-E; 817-B-C]

1.4 Revision or re-determination of the tariff alreadydetermined by DERC on the pretext of prudence check and truingup would amount to amendment of the tariff order, which can be H

done only as per the provisions of sub•Section (6) of Section 64of the 2003 Act within the period for which the Tariff Order wasapplicable. DERC cannot amend the tariff order for the period01.04.2008 to 31.03.2010 in the guise of ‘true-up’ after therelevant financial year is over and the same is replaced by asubsequent tariff Order. This would amount to a retrospectiverevision of tariff when the relevant period for such tariff order isalready over. Therefore, it is not permissible to amend the tarifforder made under Section 64 of the 2003 Act during the ‘truingup’ exercise. [Para 55][817-E-G]

1.5 In the original MYT determination (Tariff Order dated28.05.2009), the DERC took into account the full late paymentsurcharge (‘LPSC’) revenue as also the DVB arrears whilecomputing the targets of Collection Efficiency. However, whiletruing up for the year in question, the DERC has retrospectivelysought to take away part of the LPSC revenue by deducting theFinancing Cost on LPSC in comparing the actual CollectionEfficiency with the projected Collection Efficiency. Hence,allowingthe Financing Costs on LPSC revenue and then deducting it fromthe LPSC revenue would tantamount to giving by one hand andtaking it away by the other. This order of the DERC is contraryto the original MYT determination. [Para 57, 58][818-A-B; 819-E-F]

1.6 In the Original Determination Order dated 28.05.2009(F.Y. 2008-09), DERC has allowed depreciation on the assetsfunded by consumer contributions. However, DERC changed themethodology of computation of ARR at the stage of true up.According to the learned counsel for the respondent, DERC hadinadvertently made an error and adopted an approach contraryto the mandate of 2007 MYT Regulations while computing thedepreciation when originally issuing the tariff order, which wasrectified in the true up exercise. However, learned counsel forthe appellants submit that no error has been committed by theDERC in the tariff order dated 28.05.2009 and it is only afterconsidering the relevant MYT Regulations that depreciation tothe appellants on the assets that were funded by consumercontributions was allowed. Perusal of the Tariff Order dated28.05.2009 would clearly indicate that after considering the AB

C

D

E

F

GH

Acontentions of the parties the aforesaid depreciation has beenallowed. The Court has already held that it is not permissible toamend the tariff order during true up exercise. On the pretext ofprudence check and truing up, DERC could not have amendedthe tariff order. [Paras 59, 60][819-F-H; 820-A-B]

B1.7. During projection of expenses for the entire controlperiod, the Tariff Order dated 23.02.2008 had projected employeeexpenses considering inter alia the impact of the anticipated SixthCentral Pay Commission Report. However, contrary to its ownundertaking, the DERC in Tariff Order dated 26.08.2011 haserroneously changed its own methodology at the stage of truingCup, by not allowing employee expenses of FR/SR employees asper actuals. The DERC, at the stage of truing up, has changedthe methodology and disallowed the actual salary of FR&SRemployees, which is impermissible. The DERC in the Tariff Orderdated 26.08.2011 has acted contrary to its own undertaking of Dtruing up the impact of employee expenses on account of theSixth Central Pay Commission Report. [Paras 61,63][820-B-C;822-F-H]

1.8 As regards the issue is in relation to disallowance offringe benefit tax, the DERC has allowed fringe benefit tax in theEMYT Order dated 23.02.2008. The DERC, at the stage of truingup for the F.Y. 2008•09, has changed the methodology anddisallowed the fringe benefit tax incurred by the appellants. DERCcannot re•open the basis of determination of tariff at the stage of‘truing up’. Revision or redetermination of the tariff alreadydetermined by the DERC on the pretext of prudence check andFtruing up would amount to amendment of tariff order, which isnot permissible in law. Truing up stage is not an opportunity forDERC to re•think de novo the basic principles, premises andissues involved in the initial projection of the revenuerequirements of the licensee. Therefore, the findings of theGDERC, as confirmed by the APTEL in the impugned order, onissue nos. 1, 2, 3 and 5 are contrary to the order of the originalMYT determination (Tariff Order(s) dated 23.02.2008 and28.05.2009) which are accordingly set aside. [Paras 64-67][823-A-B, D-G]

H

1.9. As regards disallowance of interest incurred onConsumers Security Deposit retained by Delhi Power CompanyLimited (‘DPCL’), the DERC in the tariff order dated 26.08.2011has disallowed the interest on Consumers Security Deposit paidfor pre•privatization period received by DVB, which is yet to betransferred to the appellants. The APTEL has confirmed this orderof the DERC. At the time of unbundling of the erstwhile DVB(w.e.f. 01.07.2022), the quantum of Consumers Security Depositreflected in the opening balance sheet notified in terms ofstatutory transfer scheme, was not transferred by the DPCL (theHolding Company wholly owned by the Government of NCT ofDelhi) to the appellants and other successor private Discoms.The appellants being distribution licensees under the 2003 Actare required to and are continuing to pay interest on the saidConsumers Security Deposit in terms of Section 47(4) of the 2003Act even though the principal sum was never transferred to themin its entirety by DPCL. The DERC by its order dated 23.04.2007has held that it does not have power to issue any directions toDPCL. [Para 68, 69][823-G-H; 824-A-C]

1.10. Disallowing interest paid by the appellants towardsConsumers Security Deposit held by DPCL in the ARR of theappellants is wholly misconstrued. Interest on consumers’ depositwhich is being paid by the appellants is a legitimate expense. Itis not in dispute that the security deposit was not transferred bythe DPCL to the appellants. However, the appellants wererequired to bear the costs of the same. In case, the principal sumon Consumers Security Deposit held by DPCL is transferred tothe appellants with interest, the appellants would, subject to theirlegitimate expenditures, retain such interest and benefit of anybalance of excess interest received by the appellants would bepassed on to the consumers in tariff. Therefore, there is no meritin the contention of the learned counsel for the respondent thatif the interest burden is passed on to the consumers presently,the appellants would, in effect, receive a double benefit in casethey succeed in the writ petition pending before the High Court.Therefore, the appellants are entitled to recover interest onConsumers Security Deposit as held by the DPCL. The DERC isdirected to allow the interest on Consumers Security Deposit ABC

D

E

F

G

H

Aheld by the DPCL and impact thereof to the appellants. Thefindings of the DERC and the APTEL in this regard are set aside.[Paras 71,72][824-E-H; 825-A-B]

1.11. As regards, the issue of enforcement sales i.e. saleswhich are deemed to have been occurred in cases of electricityBtheft, the question arose whether the impugned findings in theorder of the APTEL are against the legal principle that when thestatute creates a legal fiction i.e. energy assessed is ‘deemed’ tobe consumed, the same has to be given effect to with all itsconsequences i.e. same quantum of energy is to be accountedfor as supplied. [Para 73][825-B-C]C

1.12 Electricity transmitted may be stolen or usedunauthorizedly. While theft/unauthorized use was approximately60% before privatization, it has now been brought down to 7 to8%. Unauthorized use and theft are dealt with in Section 126ofthe 2003 Act. The Vigilance/Enforcement Department detectsDtheft/unauthorized use of electricity. After giving due opportunity,the bills are generated for electricity stolen/unauthorizeduse.These are called enforcement sales/assessed sales. Thestatutory charge for such theft/unauthorized use is twice thenormal rate. While settling enforcement cases of small consumers,ELok Adalats often provide discounts to errant consumers on theassessed equivalent of the rupee amount and not on the assessedunits of energy. The assessment of units of energy as deemed tobe sales to the consumers is in accordance with Section 126 ofthe 2003 Act read with provisions for such assessment specifiedby the DERC itself. [Para 74-76][825-C-D; 826-A-C]F

1.13. The methodology adopted by the DERC is contraryto the settled principle of law that when the law deems a certainimaginary state of affairs as real, DERC would not let itsimagination boggle at treating the 100 units as sales. Suchimaginary state of affairs must be taken to its logical end andGcommend the treatment of 100 units as ‘sales’. The assessedenergy has to be considered as supply by the appellants inenforcement cases. Therefore, the DERC to consider assessedenergy for calculation of enforcement sales and allow the impactof the same along with carrying costs. [Para 79, 80][827-C-E]

H

A

1.15 The substantial questions of law are answeredaccordingly. The order(s) of the DERC and the judgment of theAPTEL impugned, to the extent mentioned above are herebyset aside. [Para 81][827-F]

Gujarat Urja Vikas Nigam Limited v. TariniInfrastructure Limited & Others (2016) 8 SCC 743 :[2016] (5) SCR 990 – held inapplicable. Sir ChunilalV. Mehta & Sons Ltd. v. The Century Spg. & Mfg. Co.Ltd. 1962 Supp (3) SCR 549 : AIR 1962 SC 1314;PTC India Limited v. Central Electricity RegulatoryCommission, Through Secretary(2010) 4 SCC 603 :[2010] (3) SCR 609; SLDC v. GERC 2015 SCC OnlineAPTEL 50; NDPL v. DERC 2007 ELR (APTEL) 193– referred to.

B

C

Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4324of 2015.

E

From the Judgment and Order dated 28.11.2014 of the AppellateTribunal for Electricity, New Delhi in Appeal No.61 of 2012.

With

Civil Appeal No.4323 of 2015.

F

Arvind Datar, Dhruv Mehta, Nikhil Nayyar, Sajan Poovayya, RahulMehra, S. Wasim A. Qadri, Sr. Advs., Amit Kapur, Anupam Varma,Buddy R. Ranganathan, Pukhrambam Ramesh Kumar, Rahul Kinra,Aditya Ajay, Karun Sharma, Ms. Manu Tiwari, Wahengbam ImmanuelMeitei, Ms. Neha Mathen, Naveen Hegde, Ms. Pritha Srikumar, VireshB. Saharya, Akshat Agarwal, Ms. Molshree Bhatnagar, Ms. ParichitaChowdhary, Utkarsh Singh, Ms. Nishtha Kumar, Chirag M. Shroff, ViksitArora, Amandeep Mehta, Lakshmi Raman Singh, Tamim A. Qadri, SaeedQadri, Shaffi Mather, Siddhartha Chowdhury, Venkatesh, Ms. KanikaChugh, Nitin Saluja, Ashutosh K. Srivastava, Azeem Samuel, NihalBharadwaj, Ms. Priyanka Prasanta, Satyakam, Hasan Murtaza, K. V.

G

H

G

H

AMohan, K. V. Balakrishnan, T. V. S. Raghavendra Sreyas, Satya Mitra,Vivek Singh, K. K. Singh, K. K. Sinha, Pramod Dayal, Arjun Krishnan,Piyush Beriwal, Ms. Shraddha Deshmukh, Shyam Gopal, Ms. ChinmayeeChandra, Gurmeet Singh Makker, B. Krishna Prasad, Ms. Manali Singhal,Santosh Sachin, Ms. Aanchal Kapoor, Deepak Singh Rawat, AakarshKamra, Advs. for the appearing parties.B

Ms. Radhika Chaturvedi, Hitesh Kumar Sharma, Akhileshwar Jha,Ms. Madhu Sukla, Ms. Deepti S. Rane, Amit Kumar, Advs. for theIntervenor.

The Judgment of the Court was delivered byCS. ABDUL NAZEER, J.

1. These two appeals have been filed by BSES Rajdhani PowerLtd. (C.A. No.4324 of 2015) and BSES Yamuna Power Ltd. (C.A.No.4323 of 2015) (hereinafter referred to as ‘Appellants’) challengingcertain findings of the Appellate Tribunal for Electricity, New DelhiD(‘APTEL’) in the common judgment and order dated 28.11.2014(‘Impugned Order’) passed in Appeal Nos.61 and 62 of 2012 (‘TariffAppeals’). The Tariff Appeals were filed by the appellants before theAPTEL challenging certain findings of the Delhi Electricity RegulatoryCommission (‘DERC’) in the Tariff Order dated 26.08.2012 for TruingEUp of financials for FY 2008-09 and FY 2009-10 and Aggregate RevenueRequirement (‘ARR’) for FY 2011-12. DERC has also filed appeals(C.A. Nos.8660-61 of 2015) challenging certain findings in the commonimpugned order and the said appeals will be heard and decided separately.

2. The Appellants are Distribution Licensees (“Discoms”) in termsFof Section 2(17) of the Electricity Act, 2003 (‘2003 Act’). The primaryfunction of a Discom is to give supply to any premises upon an applicationbeing made by a consumer in compliance with the applicable laws,including paying requisite charges, except where prevented by forcemajeure conditions like cyclones or floods.

3. The Appellants purchase 90% to 95% of the power from CentralGand State Generating Companies. Tariff of Central Generating Stationsis determined by the Central Electricity Regulatory Commission (‘CERC’)and, therefore, the Appellants have no control over the tariff to be paidto the Central Generating Stations. Simultaneously, the tariff for the StateGenerating Companies is determined by the State Regulator i.e. DERC.H

A

4. It is the case of the Appellants that since privatization, the ARRdetermined by the DERC was not even sufficient to meet the actualpower purchase cost which has led to creation of a huge revenue gap. Itis also contended that the DERC in repeated disregard to its statutoryregulations and its own statutory advice has refused to make periodicincrease in the tariff rate. The actions of the DERC have resulted in asituation where the Appellants are deeply indebted and have been forcedto borrow/take loans to fund their day-to-day operations which, in turn,have also dried up leaving the Appellants without adequate monies topay their suppliers.

B

5. The Appellants have challenged the finding of the APTEL inthe Impugned Order on the following issues:

C

A.Change in methodology in computation of AggregateTechnical and Commercial (AT&C) losses [Issue 14 inImpugned Order]

B.Change in methodology for computation of DepreciationD[Issue 15 in Impugned Order]

C.Disallowance of salary for Fundamental Rules andSupplementary Rules (FR/SR) structure [Issue 23 inImpugned order]

D.Disallowance of interest accrued on Consumer SecurityEDeposit retained by Delhi Power Corporation Limited(DPCL) [Issue 29 in Impugned Order]

E.Disallowance of Fringe Benefit Tax [Issue 34 in ImpugnedOrder]

F

F.Reduction in Million Units (MUs) in relation to Enforcementsale for the purpose of calculation of AT&C Loss [Issue 14in Impugned Order]

6. It is to be noticed that the above-mentioned Issue ‘C’ has beenchallenged only by BSES Rajdhani Power Ltd. in C.A. No.4324 of 2015while the remaining issues have been challenged by both BSES RajdhaniPower Ltd. and BSES Yamuna Power Ltd. and are subject-matter ofC.A. No.4324 of 2015 and C.A.No. 4323 of 2015.

G

7. The Tariff Appeals were filed by the Appellants challengingthe disallowances in their respective Tariff Orders dated 26.08.2012passed by the DERC for:

H

A(a) Determination of ARR and Tariff for FY 2011-12; and (b) Truing up of financials for FY 2008-09 and FY 2009-10.

8. According to the appellants, the present Civil Appeals give riseto substantial questions of law under Section 125 of the 2003 Act on sixissues. It is contended that the said substantial questions of law haveBarisen primarily because the DERC has, inter alia, deliberately refusedto follow statutory regulations while truing up. Further, it is contendedthat APTEL’s Impugned Order has failed to note the illegal manner oftruing up followed by DERC and, more importantly, APTEL has failedto follow its own rulings in previous cases.

C

9. However, the respondents have contended that the appellantshave entirely failed to establish the existence of any substantial questionof law as required under Section 125 of the 2003 Act, read with Section100 of the Code of Civil Procedure, 1908 (‘CPC’) on any of the aboveissues.

D

10. Before considering the detailed submissions on each of theabove issues, it is necessary to provide an overview of the current andhistorical legal framework of electricity laws in India, including the tariffdetermination process, and the role and powers of the DERC in thetariff determination process.

E

11. Prior to independence, the Indian Electricity Act, 1910 (‘1910Act’) governed the supply and use of electrical energy in India. Part-IIof the 1910 Act was related to supply of electricity and containedprovisions concerning:

(a) Grant of license for supply of electricity by the StateFGovernment in consultation with the State Electricity Boards(“SEB”) and (b) Obligation and rights of licensees, consumers, etc. alongwith other modalities.

Part-III of the 1910 Act dealt with Supply, Transmission and UseGof Energy by Non-licensees. Part-IV of the 1910 Act provided forconstitution, duties of advisory boards at the State and Central levelsalong with other authorities such as electrical inspectors and CentralElectricity Board (“CEB”). CEB, under Section 37 of the 1910 Act, wasempowered to make rules to regulate the generation, transmission, supply,Hand use of energy.

12. On 10.09.1948, the Electricity (Supply) Act, 1948 (“SupplyAct, 1948”) was notified to provide for: (a) the rationalization of theproduction and supply of electricity, (b) taking of measures conducive toelectrical development; and (c) all matters incidental to the above. TheSupply Act, 1948 was a more detailed and comprehensive code andprovided for establishment of SEBs to control generation, distribution,and utilization of electricity within their respective states and the CentralElectricity Authority (‘CEA’) for planning and development of the nationalpower system.

13. On 02.07.1998, the Electricity Regulatory Commissions Act,1998 (‘Commissions Act, 1998’) was notified with effect from 25.04.1998as an Act to provide for the establishment of a Central ElectricityRegulatory Commission (“CERC”) and State Electricity RegulatoryCommission (“SERC”), for rationalization of electricity tariff, transparentpolicies regarding subsidies, promotion of efficient and environmentallybenign policies and other matters connected therewith or incidentalthereto. Chapter-VI of the Commissions Act, 1998 was related to energytariff and provided for the determination of tariff by Central and StateCommissions.

14. Insofar as the National Capital Territory (“NCT”) of Delhi isconcerned, on 08.03.2001, the Delhi Electricity Reforms Act, 2000(“Reforms Act, 2000”) was notified to:

(a) provide re-structuring of the electricity industry (unbundlingof generation, transmission, and distribution), (b) increasing avenues for participation of private sector in theelectricity industry; and

(c) generally, for taking measures conducive to the developmentand management of the electricity industry in an efficient,commercial, economic, and competitive manner in the NCT ofDelhi and for matters connected therewith or incidental thereto.

15. With effect from 01.07.2002, pursuant to the unbundling,restructuring and reform of the erstwhile Delhi Vidyut Board (“DVB”)and privatization of distribution of electricity, the appellants succeededto the respective Distribution Undertakings and Business in their area ofsupply. The appellants have been granted Distribution and Retail SupplyLicense by DERC to undertake distribution (wheeling) and retail supplyof electricity in their respective areas of supply in the NCT of Delhi.

AB

C

D

E

F

GH

AFrom 01.07.2002 till 31.03.2007, the Delhi Transco Ltd. (“DTL”) wasentrusted with the responsibility of bulk procurement and bulk supply ofpower in the NCT of Delhi.

16. In the year 2003, the Parliament repealed the previous threelaws viz., the 1910 Act, the Supply Act, 1948 and the Commissions Act,B1998, and enacted a comprehensive consolidated law called the ElectricityAct, 2003. The objectives of the Act are:- (a) to consolidate the laws relating to generation, transmission,distribution, trading and use of electricity, (b) taking measures conducive to development of electricityCindustry, promoting competition therein, protecting interest ofconsumers and supply of electricity to all areas,

(c) rationalization of electricity tariff, ensuring transparent policiesregarding subsidies, promotion of efficient and environmentallybenign policies,D(d) constitution of the CEA, Electricity Regulatory Commissions,and establishment of an Appellate Tribunal and for mattersconnected therewith or incidental thereto.

17. The scheme of the 2003 Act is predicated on consolidating all laws governing electricity and repealing the existing laws. The legislativeEpolicy of distancing the Government from the tariff determination wascarried forward in the 2003 Act. The intent and purpose of the 2003 Actis to liberalize the electricity sector and to ensure that the distributionand supply of electricity is conducted on commercial principles. Thelegislature intended to promote factors that encourage and rewardFefficiency, competition, economical use of resources and optimuminvestments and safeguard the interest of the consumers vis-à-visrecovery of cost of electricity in a reasonable manner as envisaged underSection 61 of the 2003 Act.

18. Being regulated licensees responsible for distribution and retailGsupply of electricity in their designated areas within the NCT of Delhi interms of Section 12 of 2003 Act, the annual revenue requirement of theAppellants to conduct the licensed business and consequently the tariffto be recovered from the consumers, is regulated by the DERC, beingthe State Electricity Regulatory Commission. DERC is vested with asubstantial set of divergent powers – legislative, executive, adjudicatoryH

and advisory – each being distinctly defined and governed by law. Oneof the critical issues arising in these Civil Appeals relates to sanctity ofeach such function and their interplay. In this regard, it is noteworthythat Section 3 of the 2003 Act provides as under:

“Section 3. National Electricity Policy and Plan. -

(1) The Central Government shall, from time to time, prepare theNational Electricity Policy and tariff policy, in consultation withthe State Governments and the Authority for development of thepower system based on optimal utilisation of resources such ascoal, natural gas, nuclear substances or materials, hydro andrenewable sources of energy.

(2) The Central Government shall publish National electricity Policyand tariff policy from time to time.

(3) The Central Government may, from time to time in consultationwith the State Governments, and the Authority review or revisethe National Electricity Policy and tariff policy referred to in sub-section (1).

(4) The Authority shall prepare a National Electricity Plan inaccordance with the National Electricity Policy and notify suchplan once in five years.

Providedxxxxxxxxx

(5) The Authority may review or revise the National ElectricityPlan in accordance with the National Electricity Policy.”

19. Section 14 of the 2003 Act provides for grant of licences onapplication made under Section 15 of the Act - (a) to transmit electricityas a transmission licensee; or (b) to distribute electricity as a distributionlicensee; or (c) to undertake trading in electricity as an electricity trader,in any area which may be specified in the licence.

20. Section 43 of the 2003 Act provides for the universal supplyobligation of the Discoms, which is as under:

“43. Duty to supply on request –

(1) Save as otherwise provided in this Act, every distributionlicensee, shall, on an application by the owner or occupier of anypremises, give supply of electricity to such premises, within onemonth after receipt of the application requiring such supply.

A

B

C

D

E

F

G

H

21. Section 61 of the 2003 Act lays down the guiding principlesfor tariff which are as under:

B“61. Tariff regulations.- The Appropriate Commission shall, subjectto the provisions of this Act, specify the terms and conditions forthe determination of tariff, and in doing so, shall be guided by thefollowing, namely:- (a)the principles and methodologies specified by the CentralCCommission for determination of the tariff applicable togenerating companies and transmission licensees; (b)the generation, transmission, distribution and supply ofelectricity are conducted on commercial principles;

(c) the factors which would encourage competition, efficiency,Deconomical use of the resources, good performance andoptimum investments; (d)safeguarding of consumers’ interest and at the same time,recovery of the cost of electricity in a reasonable manner; (e)the principles rewarding efficiency in performance; E

(f) multi-year tariff principles;

(g) that the tariff progressively reflects the cost of supply ofelectricity and also, reduces cross-subsidies in the mannerspecified by the Appropriate Commission; F(h)the promotion of co-generation and generation of electricityfrom renewable sources of energy;

(i) the National Electricity Policy and tariff policy:

Provided that the terms and conditions for determination of tariffunder the Electricity (Supply) Act, 1948, the Electricity RegulatoryGCommission Act, 1998 and the enactments specified in theSchedule as they stood immediately before the appointed date,shall continue to apply for a period of one year or until the termsand conditions for tariff are specified under this section, whicheveris earlier.”

H

22. Sections 62 and 64 of the 2003 Act lay down the procedurefor determination of tariff for, inter alia, wheeling and retail sale ofelectricity as under:

“62. Determination of tariff.-

(1) The Appropriate Commission shall determine the tariff inaccordance with the provisions of this Act for –

(a) supply of electricity by a generating company to a distributionlicensee:

Provided that the Appropriate Commission may, in case ofshortage of supply of electricity, fix the minimum andmaximum ceiling of tariff for sale or purchase of electricityin pursuance of an agreement, entered into between agenerating company and a licensee or between licensees,for a period not exceeding one year to ensure reasonableprices of electricity; (b)transmission of electricity;

(c) wheeling of electricity;

(d) retail sale of electricity:

Provided that in case of distribution of electricity in the same areaby two or more distribution licensees, the Appropriate Commissionmay, for promoting competition among distribution licensees, fixonly maximum ceiling of tariff for retail sale of electricity.

(2) The Appropriate Commission may require a licensee or agenerating company to furnish separate details, as may be specifiedin respect of generation, transmission and distribution fordetermination of tariff.

(3) The Appropriate Commission shall not, while determining thetariff under this Act, show undue preference to any consumer ofelectricity but may differentiate according to the consumer’s loadfactor, power factor, voltage, total consumption of electricity duringany specified period or the time at which the supply is required orthe geographical position of any area, the nature of supply and thepurpose for which the supply is required.

(4) No tariff or part of any tariff may ordinarily be amended,more frequently than once in any financial year, except in respect A

B

C

D

E

F

G

H

A

of any changes expressly permitted under the terms of any fuelsurcharge formula as may be specified. The Electricity Act, 2003.

(5) The Commission may require a licensee or a generatingcompany to comply with such procedures as may be specified forcalculating the expected revenues from the tariff and chargesBwhich he or it is permitted to recover.

(6) If any licensee or a generating company recovers a price orcharge exceeding the tariff determined under this section, theexcess amount shall be recoverable by the person who has paidsuch price or charge along with interest equivalent to the bankrate without prejudice to any other liability incurred by thelicensee.”

C

“64. Procedure for tariff order.-

(1) An application for determination of tariff under section 62shall be made by a generating company or licensee in such mannerand accompanied by such fee, as may be determined by regulations.

D

(2) Every applicant shall publish the application, in such abridgedform and manner, as may be specified by the AppropriateCommission.

(3) The Appropriate Commission shall, within one hundred andEtwenty days from receipt of an application under sub-section (1)and after considering all suggestions and objections received fromthe public,- (a) issue a tariff order accepting the application with suchmodifications or such conditions as may be specified in thatorder; F

(b) reject the application for reasons to be recorded in writingif such application is not in accordance with the provisions ofthis Act and the rules and regulations made thereunder or theprovisions of any other law for the time being in force:

Provided that an applicant shall be given a reasonableopportunity of being heard before rejecting his application.

G

(4) The Appropriate Commission shall, within seven days of makingthe order, send a copy of the order to the Appropriate Government,the Authority, and the concerned licensees and to the personconcerned.

H

BSES RAJDHANI POWER LTD. v. DELHI ELECTRICITYREGULATORY COMMISSION [S. ABDUL NAZEER, J.]

(5) Notwithstanding anything contained in Part X, the tariff forany inter-State supply, transmission or wheeling of electricity, asthe case may be, involving the territories of two States may, uponapplication made to it by the parties intending to undertake suchsupply, transmission or wheeling, be determined under this sectionby the State Commission having jurisdiction in respect of thelicensee who intends to distribute electricity and make paymenttherefor.

(6) A tariff order shall, unless amended or revoked, continue to bein force for such period as may be specified in the tariff order.”

23. ARR of the Appellants, and consequently the tariff to berecovered from the consumers, is regulated by the DERC, and determinedunder Section 62 read with Section 61 of the 2003 Act.

24. Section 86 of the 2003 Act lays down the functions of theState Commissions i.e. DERC in this case, and the rule-making powerof the Central Government is set out in Section 176 thereof.

25. Before considering the other questions, let us consider thepreliminary objection raised by learned counsel for the respondent-DERCas to whether the appeals involve any substantial question of law asrequired under Section 125 of the 2003 Act read with Section 100 of theCPC?

26. Section 125 of the 2003 Act provides for an appeal to thisCourt against the decision or order of the APTEL which reads as under:

“-125. Appeal to Supreme Court.

Any person aggrieved by any decision or order of the AppellateTribunal, may, file an appeal to the Supreme Court within sixtydays from the date of communication of the decision or order ofthe Appellate Tribunal, to him, on any one or more of the groundsspecified in section 100 of the Code of Civil Procedure,1908 (5 of1908):

Provided that the Supreme Court may, if it is satisfied that theappellant was prevented by sufficient cause from filing the appealwithin the said period, allow it to be filed within a further periodnot exceeding sixty days.”

27. Thus, an appeal to this Court under Section 125 could be filedon the grounds specified in Section 100 of the CPC. Under Section 100

AB

C

D

E

F

G

H

Aof the CPC, an appeal could be filed only when the case involves ‘asubstantial question of law’, as may be framed by the appellate court.Thus, the existence of a ‘substantial question of law’ arising from thejudgment of the APTEL is sine qua non for exercise of jurisdiction bythis Court under Section 125 of the 2003 Act.

B28. The expression ‘appeal’ has not been defined in the CPC.Black’s Law Dictionary (10[th] Edn.) defines an ‘appeal’ as “a proceedingundertaken to have a decision reconsidered by bringing it to a higherauthority.” An appeal is judicial examination of a decision of a subordinatecourt by a higher court to rectify any possible error(s) in the order underappeal. The law provides the remedy of an appeal in recognition of theCfact that those manning the judicial tiers too may commit errors.

29. The test to determine whether a question is a substantialquestion of law or not was laid down by a Constitution Bench of thisCourt in Sir Chunilal V. Mehta & Sons Ltd. v. The Century Spg. &Mfg. Co. Ltd.[1] as under : (AIR p. 1318, para 6)D

“6. … The proper test for determining whether a question of lawraised in the case is substantial would, in our opinion, be whetherit is of general public importance or whether it directly andsubstantially affects the rights of the parties and if so whether it iseither an open question in the sense that it is not finally settled byEthis Court or by the Privy Council or by the Federal Court or is notfree from difficulty or calls for discussion of alternative views. Ifthe question is settled by the highest court or the general principlesto be applied in determining the question are well settled and thereis a mere question of applying those principles or that the pleaFraised is palpably absurd the question would not be a substantialquestion of law.”

30. Thus, the word ‘substantial’ as qualifying ‘question of law’means, of having substance, essential, real, of sound worth, important orconsiderable. It is to be understood as something in contradistinctionGwith technical, of no substance or consequence, or academic. Fordetermining whether a case involves substantial question of law, the testis not merely the importance of the question, but its importance to thecase itself necessitating the decision of the question. The appropriatetest for determining whether the question of law raised in the case is H1 1962 Supp (3) SCR 549 : AIR 1962 SC 1314

AB

substantial would be to see whether it directly and substantially affectsthe rights of the parties. If it is established that the decision is contrary tolaw or the decision has failed to determine some material issue of law orif there is substantial error or defect in the decision of the case on merits,the court can interfere with the conclusion of the lower court or tribunal.The stakes involved in the case are immaterial as long as the impact oreffect of the question of law has a bearing on the lis between the parties.

31. Thus, in a second appeal, the appellant is entitled to point outthat the order impugned is bad in law because it is de hors the pleadings,or it was based on no evidence or it was based on misreading of materialdocumentary evidence or it was recorded against the provision of law orthe decision is one which no Judge acting judicially could reasonablyhave reached. Once the appellate court is satisfied, after hearing theappeal, that the appeal involves a substantial question of law, it has toformulate the question and direct issuance of notice to the respondent/s.

C

32. Now, let us consider as to whether the present appeals involveany substantial question(s) of law.

D

33. The APTEL has recorded findings on 35 issues raised by theappellants. According to the appellants, six issues decided by the APTELgive rise to substantial question of law which are as follows:

1. Change in methodology in computation of AT&C Losses.E

2. Change in methodology for computation of Depreciation.

3. Disallowance of salary for FR/SR Structure.

4. Disallowance of interest incurred on Consumer SecurityDeposit retained by DPCL.

F

5. Disallowance of Fringe Benefit Tax.

6. Reduction in MUs in relation to Enforcement sale for thepurpose of calculation of AT&C Losses (this issue dealswith theft/unauthorized use of electricity).

G

34. Mr. Arvind P. Dattar and Mr. Dhruv Mehta, learned seniorcounsel appearing for the appellants, would submit that the findings ofthe APTEL on Issue Nos.1, 2, 3 and 5 are contrary to the binding DERCTariff Regulations. It is argued that the Regulator cannot ‘change therules of the game after it has begun’ in the ‘truing up exercise’. In thisregard, they have taken us through the findings of the DERC in the H

ATariff Order and also the findings of the DERC after the truing up stage.It is further argued that the tariff order is in the nature of a quasi-judicialdetermination and that in the guise of truing up, the DERC cannot amenda tariff order.

35. On the other hand, Mr. Nikhil Nayyar, learned senior counselBappearing for the respondent-DERC, submits that one of the facets ofthe tariff determination exercise is the process of ‘truing up’. Since theinitial tariff order is prepared by the DERC, based on the projectionssubmitted by the Discoms as its ARR petition, the subsequent tariff orderis issued after the financial year pursuant to the ‘truing up’ exercise. It isalso pointed out that the findings on the aforesaid six issues are neitherCcontrary to law nor opposed to any regulations.

36. Having considered the submissions of the learned counselsfor the parties and after perusing the Impugned Order, we are of theview that these appeals involve the following substantial questions oflaw:D

“On Issue No.1

(a) Whether the impugned findings on Issue No.1 are contraryto the mandate of Sections 3, 61(b), (c), (d) and (e), 62, 64(read with the Tariff Policy) and 86(3) of the 2003 Act interms of which:E

(i) Tariff must ensure recovery of all costs of undertakingdistribution of electricity with reasonable return,rewarding efficiency in performance?

(ii) Regulator cannot “change the rules of the game afterFit has begun” in the ‘truing up exercise’?

(b) Whether the impugned findings violate the principles andmethodology for tariff determination specified in the bindingDERC’s Tariff Regulations?

G

(a) Whether the impugned Findings on Issue No.2 are contraryto the mandate of Sections 3, 61(b), (c), (d) and (e), 62, 64(read with the Tariff Policy) and 86(3) of the 2003 Act interms of which:

H

A

(i) Tariff must ensure recovery of all costs of undertakingdistribution of electricity with reasonable return,rewarding efficiency in performance?

(ii) Regulator cannot “change the rules of the game afterit has begun” in the ‘truing up exercise’?

B

(b) Whether the impugned findings violate the principles andmethodology for tariff determination specified in the bindingDERC’s Tariff Regulations?

(a) Whether the impugned Findings on Issue No.3 are contraryto the mandate of Sections 3, 61(b), (c), (d) and (e), 62, 64(read with the Tariff Policy) and 86(3) of the 2003 Act interms of which:

C

(i) Tariff must ensure recovery of all costs of undertakingdistribution of electricity with reasonable return,rewarding efficiency in performance?

D

(ii) Regulator cannot “change the rules of the game afterit has begun” in the ‘truing up exercise’?

(b) Whether the impugned findings violate the binding statutoryTransfer Scheme and the Tri-Partite Agreements betweenEthe GONCTD, the DVB and the Employees’ Unions, whichform the basis of the privatization of Discoms?

(a) Whether the impugned findings on Issue No.4 are contraryto the mandate of Sections 3, 61(b), (c), (d) and (e), 62, 64(read with the Tariff Policy) and 86(3) of the 2003 Act interms of which tariff must ensure recovery of all costs ofundertaking distribution of electricity with reasonable return,rewarding efficiency in performance?

F

G

On Issue No.5

(a) Whether the impugned Findings on Issue No.5 are contraryto the mandate of Sections 3, 61(b), (c), (d) and (e), 62, 64(read with the Tariff Policy) and 86(3) of the 2003 Act interms of which:

H

A(i)Tariff must ensure recovery of all costs of undertakingdistribution of electricity with reasonable return,rewarding efficiency in performance?

B

(b) Whether the impugned findings violate the principles andmethodology for tariff determination specified in the bindingDERC’s Tariff Regulations?

On Issue No.6

(a) Whether the impugned Findings on Issue No.6 are contrary tothe mandate of Sections 3, 61(b), (c), (d) and (e), 62, 64 (readwith the Tariff Policy) and 86(3) of the 2003 Act in terms ofwhich Tariff must ensure recovery of all costs of undertakingdistribution of electricity with reasonable return, rewardingefficiency in performance?

C

D

(b) Whether the impugned findings are against settled law thatwhen a statute creates a legal fiction i.e. energy assessed is“deemed” to be consumed, the same has to be given effect towith all its consequences i.e. same quantum of energy is to beaccounted for as supplied?

E37. One of the substantial questions of law raised on four issues(Issue Nos.1, 2, 3 and 5) is whether it is permissible to amend the tarifforder made under Section 64 of the 2003 Act during the ‘truing up’exercise which needs to be answered before answering each of theaforesaid issues.

F38. Section 82 of the 2003 Act envisages the constitution of aState Electricity Regulatory Commission. By virtue of Section 84 of theAct, such State Commission comprises of a Chairperson and Members,being persons possessing “ability, integrity and standing who haveadequate knowledge of, and have shown capacity in, dealing withproblems relating to engineering, finance, commerce, economics,Glaw or management”, with the Chairperson being a person who is, orhas been, a Judge of a High Court.

39. DERC, constituted under Section 82 of the 2003 Act, is anexpert body vested with wide powers and functions under the Act. Thisincludes the power to frame regulations and the power to determineHtariff.

40. Under Section 86 of the 2003 Act, the State Commissioncarries out various functions including determination of “the tariff forgeneration, supply, transmission and wheeling of electricity,wholesale, bulk or retail, as the case may be, within the State”. Theprocess of determination of tariff in the present case, as part of thebroader regulatory power of the Commission, is to be done in accordancewith Section 62 and 64 of the 2003 Act. As per Section 62, the AppropriateCommission (the State Commission in the present case) shall determinethe tariff in accordance with the provisions of the Act for inter aliaretail supply of electricity.

41. In addition to the above functions, the State Commission isalso vested with the power to make regulations, under Section 181 ofthe 2003 Act, - dealing with inter alia “the terms and conditions fordetermination of tariff under Section 61” and “issue of tariff orderwith modifications or conditions under sub-section (3) of Section64”.

42. It is pertinent to note that while framing the Regulations, theState Commission is required to be guided by the principles specified inSection 61 of the 2003 Act.

43. In framing such regulations, the Commission, as an expertpolicy making body, is entrusted with the duty of striking a balancebetween the various competing concerns and interests. This balance isexpressed in the DERC (Terms and Conditions for Determination ofWheeling Tariff and Retail Supply Tariff) Regulations, 2007 (“2007 MYTRegulations”) which are the relevant regulations governing the issues inthe present case.

44. DERC, for a given Multi-Year period (also called the ControlPeriod), frames regulations for determination of tariff. DERC thendetermines the ARR for the said Control Period in a Tariff Order knownas the Multi-Year Tariff Order based on the data available.

45. It is also necessary to note that sub-section (6) of Section 62of the 2003 Act mandates that the Tariff Order shall continue to be inforce for such period as may be specified in the Tariff Order unlessamended or revoked. Therefore, if any of the parties are aggrieved byany of the clauses in the Tariff Order, they are at liberty to seek itsamendment or revocation under this provision. Secondly, the said orderis also appealable under Section 111 of the 2003 Act before the Appellate AB

C

D

E

F

G

H

ATribunal and thereafter before this Court under Section 125. The TariffOrder made under Section 64 is quasi-judicial in nature and it is bindingas-it-is on the parties unless it is amended or modified in a processknown to law.

46. Mr. Arvind Datar and Mr. Dhruv Mehta, learned senior counselBappearing for the appellants have submitted that ‘truing up’ cannot beused to upset the methodology used for determination of ARR. Accordingto them, such a conduct essentially amounts to ‘changing the rules of thegame after the game has started’ or ‘changing the goal post’ with thesole intention to deny legitimate allowances to the appellants. It is alsoargued that ‘truing up’ stage is not an opportunity for the DERC to re-Cthink de novo on the basic principles, premises and issues involved inthe initial projections of revenue requirement of the licensee. It was alsoargued that DERC has no unfettered power to control the tariffdetermination process as well as ‘truing up’ exercise.

47. On the other hand, Mr. Nikhil Nayyar, learned senior counselDappearing for the respondent-DERC, has submitted that one of the facetsof tariff determination exercise is the process of ‘truing up’. Since theinitial tariff order is prepared by the DERC based on projections submittedby the Discoms with its ARR petition, the subsequent tariff order isissued after the financial year pursuant to the ‘truing up’ exercise. Theprocess of ‘truing up’ requires the DERC to carry out a prudence check.EA prudence check is not a mere accounting or mathematical exercise. Aprudence check requires a scrutiny of reasonableness of the expenditureincurred or proposed to be incurred by the Discoms and also such otherfactors that the DERC considers appropriate for determination of tariff.DERC being an expert body, due deference ought to be given to theirFunderstanding as recorded in various regulations. It is argued that thecontrolling factor throughout the entire ‘truing up’ exercise is the MYTRegulations itself. It is further argued that the tariff determination exercisecarried out by the DERC is a continuous process. The tariff determinationexercise includes the initial tariff order - in the instant case it is 23.02.2008

--- a ‘truing up’ inter alia the ARR and Multi-Year Tariff Order for theGyears, F.Y. 2007-08 to F.Y.2010-11, as well as the subsequent TariffOrder dated 26.08.2011, inter alia, ‘true up’ for F.Y. 2008-09 and F.Y.2009-10. Mr. Nayyar has placed reliance on the judgment of this Courtin Gujarat Urja Vikas Nigam Limited v. Tarini InfrastructureLimited & Others[2] in support of his submissions.H2 (2016) 8 SCC 743

48. We have carefully considered the submissions of the learnedsenior counsel for the parties. We have already noticed that the StateElectricity Regulatory Commissions constituted under Section 82 of the2003 Act are a multi-member body comprising a Chairperson andmembers being persons having adequate knowledge, of ability, integrityand standing who have adequate knowledge, and have shown capacity,in dealing with problems relating to engineering, finance, commerce,economics, law or management, with the Chairperson being a personwho is or has been Judge of a High Court. Under Section 86 of the 2003Act, the State Commission carries out various functions includingdetermination of tariff for generation, supply, transmission and wheelingof electricity in wholesale, bulk or retail as the case may be within theState. The process of determination of tariff has to be done in accordancewith Sections 62 and 64 of the 2003 Act. It is well settled that theCommission (in this case, the DERC) performs a quasi-judicial functionwhile determining tariff. This has been expressly recognized by theConstitution Bench of this Court in PTC India Limited v. CentralElectricity Regulatory Commission, Through Secretary[3] as under:

“50. Applying the above test, price fixation exercise is reallylegislative in character, unless by the terms of a particular statuteit is made quasi-judicial as in the case of tariff fixation under Section62 made appealable under Section 111 of the 2003 Act, thoughSection 61 is an enabling provision for the framing of regulationsby CERC. If one takes “tariff” as a subject-matter, one finds thatunder Part VII of the 2003 Act actual determination/fixation oftariff is done by the appropriate Commission under Section 62whereas Section 61 is the enabling provision for framing ofregulations containing generic propositions in accordance withwhich the appropriate Commission has to fix the tariff. This basicscheme equally applies to the subject-matter “trading margin” ina different statutory context as will be demonstrated by discussionhereinbelow.”

49. The DERC determines the tariff of the licensee under Section62 in such a manner as determined by the 2007 MYT Regulations. Thisfunction is governed, inter alia, by safeguarding all consumers’ interestand at the same time recovering the cost of electricity in a reasonablemanner, such that ‘distribution and supply of electricity are conducted AB

C

E

F

G

H

Aon commercial principles’ which encourage and reward competition,efficiency, economic use of resources, good performance and optimuminvestments.

50. DERC determines ARR of the licensee i.e. costs of undertakingthe licensed business which are permitted in accordance with theBrequirement specified by DERC which is to be recovered from the tariffin the year end. ARR determined by DERC is based on projections.Since the tariff and the ARR are regulated, the Discoms cannot recoveranything more than from its consumers than what is allowed by theDERC.

C51. As noticed above, a tariff order is quasi-judicial in nature whichbecomes final and binding on the parties unless it is amended or revokedunder Section 64(6) or set aside by the Appellate Authority. Apart fromthis, we are also of the view that at the stage of ‘truing up’, the DERCcannot change the rules/methodology used in the initial tariff determinationby changing the basic principles, premises and issues involved in theDinitial projection of ARR.

52. ‘Truing up’ has been held by APTEL in SLDC v. GERC[4] tomean the adjustment of actual amounts incurred by the Licensee againstthe estimated/projected amounts determined under the ARR. Conceptof ‘truing up’ has been dealt with in much detail by the APTEL in itsEjudgment in NDPL v. DERC[5] wherein it was held as under:- “60. Before parting with the judgment we are constrained toremark that the Commission has not properly understood theconcept of truing up. While considering the Tariff Petition of theutility the Commission has to reasonably anticipate the RevenueFrequired by a particular utility and such assessment should bebased on practical considerations. … The truing up exercise ismeant (sic) to fill the gap between the actual expenses at the endof the year and anticipated expenses in the beginning of the year.When the utility gives its own statement of anticipated expenditure,Gthe Commission has to accept the same except where theCommission has reasons to differ with the statement of the utilityand records reasons thereof or where the Commission is able tosuggest some method of reducing the anticipated expenditure.

H

4 2015 SCC Online APTEL 50 [Para. 17]

5 2007 ELR (APTEL) 193

This process of restricting the claim of the utility by not allowingthe reasonably anticipated expenditure and offering to do theneedful in the truing up exercise is not prudence.”

53. This view has been consistently followed by the APTEL in itssubsequent judgments and we are in complete agreement with the aboveview of the APTEL. In our opinion, ‘truing up’ stage is not an opportunityfor the DERC to rethink de novo on the basic principles, premises andissues involved in the initial projections of the revenue requirement ofthe licensee. ‘Truing up’ exercise cannot be done to retrospectively changethe methodology/principles of tariff determination and re-opening theoriginal tariff determination order thereby setting the tariff determinationprocess to a naught at ‘true-up’ stage.

54. In Gujarat Urja Vikas Nigam Ltd. (supra), this Court wasconsidering a case where tariff was incorporated in the power purchaseagreement between a generating company and a distribution licensee.This Court held that it is not possible to hold that the tariff agreed by andbetween the parties, though finding a mention in a contractual context, isthe result of an act of volition of the parties which can, in no case, bealtered except by mutual consent. We are of the view that this judgmentis not applicable to the facts of the present case.

55. Revision or re-determination of the tariff already determinedby DERC on the pretext of prudence check and truing up would amountto amendment of the tariff order, which can be done only as per theprovisions of sub-Section (6) of Section 64 of the 2003 Act within theperiod for which the Tariff Order was applicable. In our view, DERCcannot amend the tariff order for the period 01.04.2008 to 31.03.2010 inthe guise of ‘true-up’ after the relevant financial year is over and thesame is replaced by a subsequent tariff Order. This would amount to aretrospective revision of tariff when the relevant period for such tarifforder is already over. Therefore, we hold that it is not permissible toamend the tariff order made under Section 64 of the 2003 Act during the‘truing up’ exercise.

56. Issue Nos. 1, 2, 3, and 5: We have already noticed that oneof the substantial questions of law involved in Issue Nos.1, 2, 3 and 5 iswhether the Regulator can ‘change the rules of the game after it hasbegun’ in the ‘truing up exercise’.

AB

C

D

EF

G

H

A

B

C

D

E

G

H

57. Issue No. 1: In the original MYT determination (Tariff Orderdated 28.05.2009), the DERC took into account the full late paymentsurcharge (‘LPSC’) revenue as also the DVB arrears while computingthe targets of Collection Efficiency as under:- “3.10. An analysis of the components of AT&C loss levelindicates that the revenue collection on account of sale of energywas Rs.2810.3 Crs. However, this amount could not be verifiedfrom the audited accounts of the petitioner. The petitioner has,instead, submitted a daily collection sheet to substantiate itscollection of Rs.2810.3 Crs.

3.11 The Commission is not receptive to the methodology ofverifying the collection from the Daily Collection Sheet asproposed by the petitioner. Accordingly, the petitioner wasdirected during the validation session to reconcile the amountof cash collected bases on the opening levels of debtors, salesmade during the year, DVB arrears collected and the closinglevel of debtors, with the total collections shown for FY 07-08.

However, the petitioner expressed inability to reconcile thefigures using this methodology.

3.12. The petitioner was, thereafter, directed to provide a copyof the daily collection sheet duly audited by its StatutoryAuditors. The petitioner was also directed that the StatutoryAuditors should establish that the amount mentioned in the DailyCollection Sheet does not included any collections on accountof other sources of revenue like sale of power through bilateral,intra-state, UI, etc. and revenue from operations (non-energy).

3.13. In response to the above, the petitioner submitted a copyof its Statutory Auditor’s certificate certifying the Day-wiseCollection Statement for FY 07-08 vide its letter no.RCM/08-09/245 dated 16[th] February, 2009. The Certificate clarified theexclusion of collections made on account of trading of energy,non-energy charges, subsidy received from GoNCTD, etc. andinclusion of LPSC, electricity duty, amount collected by BYPLon behalf of BRPL, etc.

3.14. Accordingly, based on the clarifications provided in thestatutory auditor’s certificate and the audited financialstatements, the amount mentioned in the Daily Collection Sheetsubmitted by the petitioner has been taken into account.

BSES RAJDHANI POWER LTD. v. DELHI ELECTRICITYREGULATORY COMMISSION [S. ABDUL NAZEER, J.]

…

3.24. In the light of the above background, the revised AT&Closs levels of the petitioner for the first year of the ControlPeriod i.e. FY 07-08 is as summarized in the Table 6 below:

Table 6: Trued-up AT&C loss for FY 07-08 (Rs.crs.)

58. However, while truing up for the year in question, the DERChas retrospectively sought to take away part of the LPSC revenue bydeducting the Financing Cost on LPSC in comparing the actual CollectionEfficiency with the projected Collection Efficiency. Hence, allowing theFinancing Costs on LPSC revenue and then deducting it from the LPSCrevenue would tantamount to giving by one hand and taking it away bythe other. This order of the DERC is contrary to the original MYTdetermination.

59. Issue No.2: In the Original Determination Order dated28.05.2009 (F.Y. 2008-09), DERC has allowed depreciation on the assetsfunded by consumer contributions. However, DERC changed themethodology of computation of ARR at the stage of true up. Accordingto the learned counsel for the respondent, DERC had inadvertently madean error and adopted an approach contrary to the mandate of 2007 MYTRegulations while computing the depreciation when originally issuingthe tariff order, which was rectified in the true up exercise. However,learned counsel for the appellants submit that no error has been committedby the DERC in the tariff order dated 28.05.2009 and it is only afterconsidering the relevant MYT Regulations that depreciation to the A

B

C

D

E

F

G

H

Aappellants on the assets that were funded by consumer contributionswas allowed.

60. Perusal of the Tariff Order dated 28.05.2009 would clearlyindicate that after considering the contentions of the parties the aforesaiddepreciation has been allowed. We have already held that it is notBpermissible to amend the tariff order during true up exercise. On thepretext of prudence check and truing up, DERC could not have amendedthe tariff order.

61. Issue No.3: During projection of expenses for the entirecontrol period, the Tariff Order dated 23.02.2008 had projected employeeexpenses considering inter alia the impact of the anticipated Sixth CentralCPay Commission Report. The relevant portion of the said Tariff Order isas under:

“4.99 The Petitioner has submitted the employee expenses forFY07 as Rs 137.60 Cr and has considered the same as thebase for the Control Period. The Petitioner has consideredDthe following factors while projecting the escalation factorfor the employee expenses for the Control Period:

(a) Anticipated 6th Pay Commission report

(c) Research of lead HR consultants on salary trends in thecountry E(c) Initiatives undertaken to retain quality manpower anddemand for employees in the power industry.

(d) Inflation during last 12 months € increase in employees tocater to growth of consumers.

4.100 The Petitioner has projected its total employee expensesFfor the Control Period considering different escalation ratesfor different components of the employee expenses. The annualgrowth rates for various components of employee expensesas proposed by the Petitioner are given below:

(a) Basic Salary: The year on year increase in basic salaryGfor all the employees during the Control Period has beenestimated at 23.2%, 11.1%, 11.3%, and 11.5% for FY08,FY09, FY10 and FY11 respectively.

(b) Dearness Allowance (DA): Annual estimated increase inDA is considered as 9%, 6%, 6%, and 6% for FY08, FY09,FY10 and FY11 respectively.

H

(c) Terminal Benefits: Contribution to terminal benefits/liability fund is considered at 26% of basic salary anddearness allowance for each year of the Control Period.

(d) Other Allowances and expenses including HRA: Consideredin proportion to the basic salary.”

62. The DERC, while projecting employee expenses for the entirecontrol period in its MYT Tariff Order dated 23.02.2008, had categoricallyacknowledged the uncontrollable nature of the Sixth Central PayCommission Report as well as the impact of the same on the salaries ofFR&SR employees and held that since the salary of FR&SR employeeswas an uncontrollable item and that it would be trued up on actuals asunder:

“4.108 During the privatization process, part of the employeesof the erstwhile DVB were transferred to BRPL. As per theTransfer Scheme, the terms and conditions of serviceapplicable to the erstwhile Board employees in the TransfereeCompany shall in no way be less favourable than or inferiorto that applicable to them immediately before the Transfer.Further, their services shall continue to be governed by variousrules and laws applicable to them prior to privatization. Thusthe salary/compensation and promotion of the erstwhile DVBemployees in BRPL are still governed by the rules and payscales as specified by the GoNCTD.

4.109 In consideration of the above, the Commission hasrecognized the uncontrollable nature of the 6[th] PayCommission recommendations in determination of employeeexpenses during the Control Period. The Commission hasassumed that the revision in pay, if any, shall be applicablefrom January 1, 2006. The Commission has considered anincrease of 10% in total employee expenses for the values inFY06 (3 months) and FY07 due to the same.

…

4.112 Similarly, the increase in salaries has been consideredfor each year, but the impact of such increase has only beentaken from FY09 onwards. The Commission shall true-up theimpact on account of 6[th] Pay Commission recommendationsbased on the actual impact of the same.

A

B

C

D

EF

G

H

A

B

C

D

E

F

G

4.113 The summary of the revised employees expensesconsidering the effect of 6[th] Pay Commission recommendationsis given below:

Table 72: Revised Employee Expenses for FY06 and FY07(Rs Cr)

4.114 For the calculation of the employee expenses for theControl Period, the Commission has considered the following:

(a) Revised employee expenses for the base year have beenescalated as per the escalation factors mentioned in Table 67to arrive at the employee expenses for the Control Period.

(b) All arrears due to the impact of the 6[th] Pay Commissionrecommendations would be payable in FY09. For the purposeof projecting the arrears arising due to recommendation ofthe 6[th] Pay Commission for FY08, the Commission hasconsidered the difference between the employee expenses forFY08 arrived by escalating the revised employees expensesfor FY07 (i.e. Rs 146.19 Cr) and the employees expenses forFY08 arrived by escalating the trued up employee expenses(net of SVRS amortization) for FY07 (i.e. Rs 137.60 Cr).”

63. However, contrary to its own undertaking, the DERC in TariffOrder dated 26.08.2011 has erroneously changed its own methodologyat the stage of truing up, by not allowing employee expenses of FR/SRemployees as per actuals. The DERC, at the stage of truing up, haschanged the methodology and disallowed the actual salary of FR&SRemployees, which is impermissible. The DERC in the Tariff Order dated26.08.2011 has acted contrary to its own undertaking of truing up theimpact of employee expenses on account of the Sixth Central PayCommission Report.

64. Issue No.5 : This issue is in relation to disallowance of fringebenefit tax. The DERC has allowed fringe benefit tax in the MYT Orderdated 23.02.2008. Relevant extract of the MYT Order dated 23.02.2008is as under:

“Commission’s Analysis

4.242 The Commission is of the opinion that projecting theactual tax liability for the Control Period is difficult andcomplex. Thus for simplicity, the Commission provisionallyapproves Rs 5.00 Cr each year towards income tax and fringebenefit expenses. The Commission would, however, true-upthe tax expenses based on the actual tax liability at the end ofeach year of the Control Period.The Commission has allocatedthe tax expenses into Wheeling and Retail Supply in the ratioof 20:80, respectively.”

65. The DERC, at the stage of truing up for the F.Y. 2008-09, haschanged the methodology and disallowed the fringe benefit tax incurredby the appellants.

66. We have already taken a view that DERC cannot re-open thebasis of determination of tariff at the stage of ‘truing up’. Revision orredetermination of the tariff already determined by the DERC on thepretext of prudence check and truing up would amount to amendment oftariff order, which is not permissible in law. Truing up stage is not anopportunity for DERC to re-think de novo the basic principles, premisesand issues involved in the initial projection of the revenue requirementsof the licensee.

67. Therefore, the findings of the DERC, as confirmed by theAPTEL in the impugned order, on issue nos. 1, 2, 3 and 5 are contrary tothe order of the original MYT determination (Tariff Order(s) dated23.02.2008 and 28.05.2009) which are accordingly set aside. In view ofthe above, it is unnecessary for us to consider the other substantialquestions of law on the aforesaid four issues.

68. Issue No.4: This issue relates to disallowance of interestincurred on Consumers Security Deposit retained by Delhi PowerCompany Limited (‘DPCL’). The DERC in the tariff order dated26.08.2011 has disallowed the interest on Consumers Security Depositpaid for pre-privatization period received by DVB, which is yet to betransferred to the appellants. The APTEL has confirmed this order of A

BC

D

E

F

G

H

Athe DERC. It is to be stated here that, at the time of unbundling of theerstwhile DVB (w.e.f. 01.07.2022), the quantum of Consumers SecurityDeposit reflected in the opening balance-sheet notified in terms ofstatutory transfer scheme, was not transferred by the DPCL (the HoldingCompany wholly owned by the Government of NCT of Delhi) to theappellants and other successor private Discoms. The appellants beingBdistribution licensees under the 2003 Act are required to and arecontinuing to pay interest on the said Consumers Security Deposit interms of Section 47(4) of the 2003 Act even though the principal sumwas never transferred to them in its entirety by DPCL.

69. The DERC by its order dated 23.04.2007 has held that it doesCnot have power to issue any directions to DPCL.

70. Learned counsel for the respondent-DERC submits that theappellants have sought transfer of deposits along with interest from DPCLand the issue of DPCL to make this payment is pending before the DelhiHigh Court in W.P. (Civil) No.2396/2008. It is further submitted that,should the appellants succeed in their claim against DPCL and receiveDthe deposit amount along with interest, the amount would be made overto the appellants along with interest. As such, if the expenses were to bepresently allowed in the ARR, and interest burden was passed on to theconsumers presently, the Discoms would, in effect, receive double benefitat the time of disposal of the writ petition since the consumers wouldEhave already borne the costs of interest which would also be then madeover by DPCL to the appellants. It is argued that, as a Regulator, it isincumbent upon the DERC to protect the consumers’ interest.

71. We are of the view that disallowing interest paid by theappellants towards Consumers Security Deposit held by DPCL in theARR of the appellants is wholly misconstrued. Interest on consumers’Fdeposit which is being paid by the appellants is a legitimate expense. It isnot in dispute that the security deposit was not transferred by the DPCLto the appellants. However, the appellants were required to bear thecosts of the same. In case, the principal sum on Consumers SecurityDeposit held by DPCL is transferred to the appellants with interest, theappellants would, subject to their legitimate expenditures, retain suchGinterest and benefit of any balance of excess interest received by theappellants would be passed on to the consumers in tariff. Therefore,there is no merit in the contention of the learned counsel for the respondentthat if the interest burden is passed on to the consumers presently, theappellants would, in effect, receive a double benefit in case they succeedHin the writ petition pending before the High Court.

72. Therefore, we hold that the appellants are entitled to recoverinterest on Consumers Security Deposit as held by the DPCL. We directthe DERC to allow the interest on Consumers Security Deposit held bythe DPCL and impact thereof to the appellants. The findings of theDERC and the APTEL in this regard are set aside.

73. Issue No.6: This issue pertains to enforcement sales i.e.sales which are deemed to have been occurred in cases of electricitytheft. The question for consideration is whether the impugned findings inthe order of the APTEL are against the legal principle that when thestatute creates a legal fiction i.e. energy assessed is ‘deemed’ to beconsumed, the same has to be given effect to with all its consequencesi.e. same quantum of energy is to be accounted for as supplied?

74. Electricity transmitted may be stolen or used unauthorizedly.While theft/unauthorized use was approximately 60% before privatization,it has now been brought down to 7 to 8%. Unauthorized use and theftare dealt with in Section 126 of the 2003 Act, relevant clauses whereofare as under:

“Section 126: (Assessment): — (1) If on an inspection of anyplace or premises or after inspection of the equipments, gadgets,machines, devices found connected or used, or after inspection ofrecords maintained by any person, the assessing officer comes tothe conclusion that such person is indulging in unauthorized use ofelectricity, he shall provisionally assess to the best of his judgement the electricity charges payable by such personor by any other person benefited by such use.

[…]

[(5) If the assessing officer reaches to the conclusion thatunauthorised use of electricity has taken place, the assessmentshall be made for the entire period during which such unauthorizeduse of electricity has taken place and if, however, the period duringwhich such unauthorised use of electricity has taken place cannotbe ascertained, such period shall be limited to a period of twelvemonths immediately preceding the date of inspection.]

(6) The assessment under this section shall be made at arate equal to twice the tariff rates applicable for the relevantcategory of services specified in sub-section (5).”

(Emphasis supplied)

A

B

C

D

E

F

G

H

A

A75. The Vigilance/Enforcement Department detects theft/unauthorized use of electricity. After giving due opportunity, the bills aregenerated for electricity stolen/unauthorized use. These are calledenforcement sales/assessed sales. The statutory charge for such theft/unauthorized use is twice the normal rate.B76. While settling enforcement cases of small consumers, Lok B76. While settling enforcement cases of small consumers, LokAdalats often provide discounts to errant consumers on the assessedequivalent of the rupee amount and not on the assessed units of energy.The assessment of units of energy as deemed to be sales to the consumersis in accordance with Section 126 of the 2003 Act read with provisionsfor such assessment specified by the DERC itself.C

77. In a particular case of unauthorized use of electricity underSection 126, suppose using the ‘LDHF formula’ (specified by DERCitself), the appellants assess the consumer as having consumed 100 unitsof electricity.

(a) By virtue of the Supply Code Regulations framed by theDDERC itself, these 100 units are to be treated as “sales”.

(b) Upon the assessment of 100 Units, the Appellant raises abill on the said consumer. Under Section 126 of theElectricity Act, the bill has to be raised at twice the normalbilling rate. If the normal ABR were Rs. 5 per Unit, theESection 126 Bill will be raised for Rs 1,000 (i.e. 100×[Rs5×2]);

(c) By virtue of a Settlement which is entered into betweenthe Appellant and the consumer before the Lok Adalat etc.,suppose the Appellant agrees to give up Rs 200, theAppellant then recovers Rs 800/- rather than Rs 1,000/-.

F

(d) Now, though the settlement is only for the Rupee equivalentof the Assessed Bill and not the ‘Units sold’, the DERCnow takes Rs 800, divides it by Rs 10 (i.e. twice the ABR)and arrives at an imaginary ‘sales’ figure of electrical energyof 80 Units.

G

(e) This is in complete contrast to the Assessment of Energysold of 100 Units in terms of the LDHF Formula specifiedby the DERC itself according to which the sales are“deemed to be” 100 units.

(f) Therefore, by entering into a settlement before the LokHAdalat (which is in harmony with the entire Lok Adalat philosophy), the Appellant first loses Rs 200 in monetaryterms and then loses 20 Units of electricity which theAppellant is deemed to have sold such consumer in thefirst place.

78. Learned counsel for the appellants submit that when the statutecreates a legal fiction, i.e. energy assessed is deem to be consumed, thesame has to be given effect to with all its consequences i.e. same quantumof energy is to be accounted for as supplied. However, learned counselappearing for the respondent DERC submitted that that concurrent findingsof the DERC and the APTEL cannot be reversed and the methodologyadopted by the Commission has to be maintained.

79. Having considered this question in detail, we are not inagreement with the stand taken by the respondent. We are of the viewthat the methodology adopted by the DERC is contrary to the settledprinciple of law that when the law deems a certain imaginary state ofaffairs as real, DERC would not let its imagination boggle at treating the100 units as sales. We are of the view that such imaginary state ofaffairs must be taken to its logical end and commend the treatment of100 units as ‘sales’.

80. We are of the view that the assessed energy has to beconsidered as supply by the appellants in enforcement cases. Therefore,we direct the DERC to consider assessed energy for calculation ofenforcement sales and allow the impact of the same along with carryingcosts. In view of our conclusion as above, we do not deem it necessaryto answer the other contentions on this issue.

81. The substantial questions of law are answered accordingly.Resultantly, the appeals are allowed and the order(s) of the DERC andthe judgment of the APTEL impugned herein, to the extent mentionedabove. are hereby set aside. Parties to bear their respective costs.

Nidhi Jain(Assisted by : Tamana, LCRA)

Appeals allowed.

A

B

C

D

E

F

G

H