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   REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4117 OF 2006

U.P. Power Corporation Ltd.            …

Appellant

Versus

N.T.P.C. Ltd. & Ors. …Respondents

WITH CIVIL APPEAL NOS.5361-5362 OF 2007

J U D G M E N T

T.S. THAKUR, J.

1. This  appeal  under  Section 125 of  the Electricity  Act,  

2003 calls in question the correctness of a Judgment and  

Order dated 7th July, 2006 passed by the Appellate Tribunal  

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for  Electricity  whereby  the  Tribunal  has  while  partially  

modifying  the  Order  passed  by  the  Central  Electricity  

Regulatory Commission (‘CERC’ for short) dismissed Appeal  

No.36 of 2006 filed by the appellant.  

2. The  CERC  had  by  the  Order  impugned  before  the  

Tribunal  allowed  Petition  No.139  of  2004  filed  by  the  

respondent-Corporation  and  permitted  capitalisation  of  

Rs.4.521 crores over the approved cost for the completion of  

Feroz Gandhi Unchahar Thermal Power Station Stage-I for  

the period 1st April, 2001 to 31st March, 2004.  While doing  

so the CERC had in Para 37 of its Order held respondent  

No.1 entitled to return on equity and interest on loan on the  

said  amount  payable  along  with  the  tariff  for  the  period  

2004-2009.  What is significant is that both the CERC and  

the  Appellate  Tribunal  rejected  the  contention  urged  on  

behalf  of  the  appellant-Corporation  that  the  additional  

capital expenditure incurred by the respondent-Corporation  

could  not  be  taken  into  consideration  for  tariff  fixation  

without  the  same  having  been  approved  by  the  Central  

Electricity  Authority  (“CEA”  for  short)  as  required  under  

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Regulation  2.5  of  the  CERC  (Terms  and  Conditions  for  

Determination  of  Tariff)  Regulations,  2001.  The  primary  

question that therefore falls for consideration in this appeal  

is  whether  the  CERC  and  the  Tribunal  have  correctly  

interpreted  Regulation  2.5  of  the  said  regulations  while  

permitting  capitalisation  of  the  additional  expenditure  for  

purposes of determining the tariff.  That question arises in  

the following factual backdrop:  

3. Feroz Gandhi Unchahar Thermal Power Station Stage-I  

was taken over by the respondent-National Thermal Power  

Corporation from the erstwhile U.P. State Electricity Board  

on  13th February,  1992.  The  Central  Government  had  

approved the takeover cost of Rs.925 crores in terms of a  

communication dated 2nd May, 1993 issued by the Ministry  

of Power.  By a subsequent letter dated 5th August, 1996 the  

CEA accorded approval for an additional Rs.2.85 crores for  

R&M under Environment Action Plan, thereby taking the total  

approved project cost to Rs.927.85 crores.

4. The  CERC  (Terms  &  Conditions  for  Determination  of  

Tariff) Regulations, 2001 for the period 1st April, 2001 to 31st  

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March,  2004  came  to  be  notified  on  26th March,  2001,  

pursuant whereto the respondent-Corporation filed Petition  

No.41 of 2001 for approval of tariff  for the relevant tariff  

period in respect of the generating plant in question. By an  

Order  dated  24th October,  2003,  the  CERC  approved  the  

tariff taking into consideration the capital cost at Rs.940.70  

crores  as  on  1st April,  2001  but  did  not  consider  the  

additional capitalisation claimed by the respondent since the  

latter was based only on an estimated capital expenditure  

and  was  unsupported  by  an  auditor’s  certificate.  

Respondent-Corporation  then  moved  petition  No.139  of  

2004 before the CERC on 5th October, 2004 seeking approval  

of  the  revised  fixed  charges  in  respect  of  the  generating  

plant for the relevant tariff  period taking into account the  

additional capital expenditure incurred during the said period  

which was estimated at Rs.6.101 crores.  By an order dated  

31st March,  2005,  the CERC disposed  of  the  said  petition  

approving  an  amount  of  Rs.4.521  crores  towards  capital  

expenditure while disallowing the rest.       

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5. The  CERC  held  that  the  respondent  would  not  be  

entitled to tariff  revision during the relevant period in the  

light  of  Regulation  1.10  of  the  CERC  Regulations  which  

prohibited allowance of an additional capital expenditure, if  

such expenditure happened to be less than 20 per cent of  

the approved project cost.  It all the same held in Para 37 of  

its Order that the respondent was entitled to relief  in the  

form of return on equity at the rate of 16% and interest on  

loan on the approved additional capital expenditure for the  

period 2004-2009.  The CERC observed :

“37. As  there  is  nothing  in  the  notification  dated  26.3.2001  to  deny  the  petitioner  the  reasonable   return to service the capital expenditure incurred by  the petitioner and found to be justified by us,  we  direct that the petitioner shall earn return on equity   @  16%  on  the  equity  portion  of  the  additional   capitalization  approved  by  us.   Similarly,  the   petitioner  shall  also  be entitled  to  the  interest  on  loan as applicable during the relevant period.  Return   on equity and interest  shall  be worked out on the  additional capitalization of Rs.4.521 crore approved  by us from 1st April of the financial year following the   financial year to which additional capital expenditure   relates  up  to  31.3.2004.   The  lump  sum  of  the   amount of return on equity and interest on loan so   arrived at shall be payable by the respondents along   with the tariff for the period 2004-09 to be approved  by the Commission.  The exact entitlement of the   petitioner on this account shall be considered by the   Commission  while  approving  tariff  for  the  period   2004-09.”  

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6. Aggrieved  by  the  order  passed  by  the  CERC  the  

appellant-Corporation approached the Appellate Tribunal for  

Electricity in Appeal No.36 of 2006. The appellant thereby  

questioned the CERC’s authority to approve the additional  

capital expenditure of Rs.4.521 crores as also the power to  

award relief in the nature specified in para 37 supra. It was  

contended on behalf of the Corporation that in the absence  

of  approval  of  the expenditure  by  CEA as required under  

Regulation 2.5 of the CERC Regulations, the CERC had no  

authority to hold that the respondent-NTPC was entitled to  

additional  capitalisation.  The  Appellate  Tribunal  for  

Electricity, however, repelled that contention and dismissed  

the appeal filed by the appellant on the ground that CERC’s  

approval of additional capitalisation to the tune of Rs.4.521  

crores  did  not  call  for  any  interference  and  that  the  

respondent-Corporation had placed sufficient material before  

the CERC to substantiate its claim.  The Tribunal declared  

that the CERC was empowered to undertake a prudent check  

and approve  additional  capitalisation  after  the  deletion  of  

Section  43-A(2)  of  the  Electricity  (Supply)  Act,  1948  

because of which deletion CEA ceased to have any role in  

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such matters.  The Tribunal further held that the project had  

been  originally  approved  by  CEA  as  far  back  as  on  5th  

August, 1986 and was taken over while still incomplete by  

the respondent-NTPC in 1992. The incomplete items were  

then completed by the respondent NTPC after the takeover  

which  required  investment  of  additional  capital.   The  

Tribunal  was,  therefore,  of  the  view  that  the  additional  

capital  was  well  within  the  approved  cost  of  the  project  

which  remained unexecuted on the date of  vesting.   The  

Appellate  Tribunal,  however,  accepted  the  appellant’s  

contention that the relief regarding the return on equity and  

interest on loan could not be granted until  the next tariff  

period.  Consequently the Tribunal directed deletion of Para  

37 of the CERC’s order giving liberty to the CERC to take the  

said relief into consideration while determining the tariff for  

the next period. The present appeal assails the correctness  

of the view taken by the CERC and the Appellate Tribunal.   

7. When  this  appeal  came  up  for  admission  on  29th  

September,  2006,  this  Court  admitted  the  same  only  to  

examine the following two questions:  

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“a. What is the true scope and ambit of Regulation   2.5  of  CERC  (Terms  and  Conditions  for   Determination of Tariff) Regulations, 2001?

b. xxxxxxx

c. xxxxxxx

d. Whether  the  CERC  could  have  allowed  the   additional capitalization which was not approved  by the concerned authority i.e. Central Electricity   Authority?

e. xxxxxxx”

8. Appearing  for  the  appellant  Mr.  Pradeep  Misra  

strenuously  contended  that  the  CERC  and  so  also  the  

Appellate Tribunal had failed to correctly interpret Regulation  

2.5  of  the  Regulations  in  question.   He  submitted  that  

Regulation  2.5  of  the  Regulations  was  much  too  clear  to  

admit of any equivocation. A plain reading of the Regulation,  

argued  Mr.  Misra,  left  no  manner  of  doubt  that  any  

additional capital expenditure incurred on the completion of  

the project could be taken into consideration for fixation of  

tariff  only  if  such  excess  was  allowed  by  the  CEA  or  an  

appropriate independent agency constituted under the said  

Regulations. So long as the capital expenditure incurred in  

excess  of  the  approved  expenditure  did  not  have  the  

sanction of the CEA or the independent agency nominated  

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by the CERC, the same could not, according to the learned  

Counsel,  constitute  a valid  input  for  fixing the tariff.   No  

such approval having been sought or granted either by the  

CEA or any independent agency in this case, the CERC could  

not  have  taken  the  additional  capital  expenditure  into  

consideration for purposes of fixing the tariff.  It was also  

contended that the CERC as also the Appellate Tribunal had  

fallen in error in holding that deletion of Section 43A(2) of  

the Electricity (Supply) Act, 1948 made a reference to the  

CEA  in  terms  of  Regulation  2.5  of  the  Regulations  

unnecessary.  The  deletion  of  Section  43A(2)  

notwithstanding,  the CEA continued to exercise  powers in  

terms  of  Sections  28  to  32  of  the  Act.  The  statutory  

requirement of an approval from the CEA of the additional  

cost  had  not,  therefore,  been  rendered  a  surplusage  by  

reason of the removal of Section 43A(2) from the statute  

book.

9. On behalf of the respondent it was contended by Mr.  

Ramachandran  that  the  CERC  as  also  the  Tribunal  were  

perfectly justified in taking into consideration the additional  

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expenditure incurred on the completion of the project, not  

only because there was no dispute that such an expenditure  

had  in  fact  been  incurred  but  also  because  the  said  

expenditure was found to be capital in nature.  The question  

of an approval from the CEA or the independent agency was,  

therefore, rendered academic in the facts and circumstances  

of the case.

10. It  was  further  argued  that  since  the  appellant  itself  

accepted  the  expenditure  to  have  been  incurred  and  the  

nature of the expenditure having been found to be capital in  

character,  the  CEA  or  the  independent  agency  could  not  

have, even if  a reference was made, declined approval to  

the same.  It was also argued that the deletion of Section  

43A(2) of the Electricity (Supply) Act, 1948 from the statute  

book made a material difference and that the CERC and the  

Tribunal had correctly held that a reference to the CEA or  

independent agency was on that count unnecessary.

11. Regulation 2.5 of the Regulations reads as under:

“2.5 Capital Expenditure

The  capital  expenditure  of  the  project  shall  be   financed as per the approved financial package set   

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out  in  the  techno-economic  clearance  of  the   Authority  or  as  approved  by  an  appropriate   independent  agency  as  the  case  may  be.   The  project  cost  shall  include  reasonable  amount  of   capitalized initial spares.

The  actual  capital  expenditure  incurred  on  completion  of  the  project  shall  form the  basis  for   fixation  of  tariff.   Where  the  actual  expenditure   exceeds  the  approved  project  cost,  the  excess  expenditure  as  allowed  by  the  Authority  or  an  appropriate independent agency shall be considered   for the purpose of fixation of tariff.

Provided  that  such  excess  expenditure  is  not   attributable  to  the  Generating  Company  or  its   suppliers or contractors;  

Provided  further  that  where  a  Power  Purchase   Agreement  entered  into  between  the  Generating   Company and the beneficiary provides a ceiling on  capital expenditure, the capital expenditure shall not   exceed such ceiling for computation of tariff.”

12. The  term  “independent  agency”  referred  to  in  the  

above Regulation is defined in regulation 1.9 as under:

“1.9 ‘Independent  agency’  means  the  agency  approved  by  the  Commission  by  a  separate   notification.”

13. A plain reading of the above makes it manifest that the  

basis for fixation has to be the “actual capital expenditure”  

incurred on the completion of the project.  But where the  

actual  expenditure  exceeds  the  approved  expenditure  the  

excess so incurred can be taken into consideration to the  

extent  the  same  is  allowed  by  the  Central  Electricity  

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Authority or an appropriate independent agency nominated  

for the purpose.  This implies that the excess expenditure  

must go through a process of scrutiny either by the CEA or  

the independent agency before it can constitute an input for  

determination of the tariff.  Scrutiny of the excess would in  

turn  primarily  involve examination  of  two distinct  aspects  

viz.

(a) Whether the excess expenditure has been actually  

incurred or is a make believe or an exaggeration  

by the generating company; and

(b) Whether the expenditure was capital in nature.   

14. In cases where the answers to these two questions is in  

the affirmative, the CEA or the Independent Agency would  

have no reason to disallow such expenditure, nor would its  

consideration  for  tariff  fixation  present  any  difficulty.   In  

case  a  lesser  amount  is  allowed  by  the  CEA  or  the  

Independent Agency either because the generating company  

fails  to  substantiate  its  claim  of  having  incurred  the  

expenditure as claimed or even if the amount is incurred,  

only  a  part  of  the  same  was  in  the  nature  of  capital  

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expenditure, the lesser amount alone will constitute an input  

for tariff determination.  To that extent, there is no difficulty  

nor was Mr. Misra, Counsel for the appellant, able to suggest  

any  other  dimension  which  the  CEA  or  the  Independent  

Agency would be entitled to consider while examining the  

question of allowing or disallowing the excess expenditure  

incurred by the generating unit.  If that be so, absence of a  

reference  under  Regulation  2.5  (supra)  to  the  CEA  or  

Independent  Agency  would  make  little  or  no  difference  

having regard to the facts of the case at hand.  We say so  

because although the respondent-Corporation had claimed  

an  excess  expenditure  of  Rs.6.101  crores  the  amount  

actually taken into consideration for fixation of the tariff was  

Rs.4.521 crores only.  The CERC had on a prudent check  

disallowed a substantial part of the excess that was claimed  

by the respondent-Corporation.  What is significant is that  

the  appellant-Corporation  had  fairly  conceded  that  an  

amount  of  Rs.4.521  crores  was  indeed  spent  by  the  

respondent  for  the  completion  of  the  project.   That  is  

evident  from  the  following  observation  of  the  Electricity  

Appellate Tribunal, where Mr. Misra learned counsel for the  

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appellant made a candid admission as to the extent of the  

expenditure incurred over and above the approved Project  

cost:  

“Mr.  Pradeep  Misra,  learned  counsel  for  the   appellant,  while  relying  on  Regulation  1.10  which   provides that there shall be no tariff revision if the   capital expenditure is less than 20% of the approved  cost of the project contended that there could be no   tariff revision at all much less the appellant shall be   made liable to pay 16% ROE as well as interest as   directed  in  Para  37 of  the Impugned Order  under   challenge.  Mr.  Pradeep Misra also contended that   the claim of this additional expenditure, under five   Heads,  are  not  disputed but  they  are  only  maintenance expenditure.  It was also contended by  the learned counsel that in the absence of approval   of expenditure by CEA and there being no proof of   such approval, CERC has no authority to hold that   NTPC had incurred additional capital expenditure and  entitled to additional capitalisation.”             (emphasis supplied)  

15. From the above, we have no difficulty in holding that  

the  first  of  the  two  aspects  that  may  have  engaged  the  

attention  of  the  CEA  or  the  Independent  Agency  was  

concluded by the admission of the appellant, which was the  

best  evidence,  in the matter  apart from the fact that the  

figure arrived at by the Commission was based on a fair and  

prudent check of the extent of admissible expenditure said  

to have been incurred.   

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16. That  leaves  us  with  the  second  aspect  which,  any  

scrutiny or examination by the CEA may have involved viz.  

whether the expenditure was capital or revenue in nature.  

The CERC has found the expenditure to be capital in nature  

which finding has been affirmed by the Appellate Tribunal.  

There is nothing perverse about that finding in our opinion  

nor has this appeal been admitted on the question whether  

the expenditure was capital or revenue.  In the absence of  

any question relating to the nature of the expenditure, we  

find it difficult to appreciate how the absence of a reference  

to  CEA  has  caused  any  miscarriage  of  justice  for  the  

appellant  or  vitiated  the  tariff  fixation  by  the  CERC.  It  

follows that even if a reference to CEA was in the facts of  

the case required to be made, the absence of any failure of  

justice or prejudice would render it  unnecessary for us to  

interfere  with  the  orders  passed  by  the  CERC  and  the  

Appellate Tribunal.   

17. Since the question whether or not a reference to CEA  

was necessary under Regulation 2.5 was argued before us at  

some  length  we  may  as  well  deal  with  the  same  before  

parting.  A reference to the backdrop in which the question  

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arises  becomes  necessary  and  may  be  summarised  as  

under:   

18. The Electricity (Supply) Act, 1948  inter alia dealt with  

the  generation  and  supply  of  electricity  by  generating  

companies.  Chapter V comprising Sections 28 to 58 of the  

said Act dealt with the preparation of schemes by generating  

companies  and concurrence of  the CEA for  such schemes  

including the capital cost to be incurred by these generating  

companies.  Section  43A  of  the  Act  dealt  with  sale  of  

electricity by the generating companies and provided norms  

and parameters to be determined by the CEA and notified by  

the Government of India. Since much of the debate at the  

Bar was around the said provision and the effect of deletion  

of sub-section (2) thereof, it would be useful to reproduce  

the same at this stage.

“43A. Terms,  conditions  and  tariff  for  sale  of   electricity  by  Generating  Company.-  (1) A  Generating Company may enter into a contract for   the sale of electricity generated by it-

(a) with the Board constituted for the State or   any of the States in which a generating station   owned or operated by the company is located;

(b) with  the  Board  constituted  for  any  other   State in which it is carrying on its activities in   

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Central Government may decide.  The Central Government,  

invoked  that  power  and  by  a  notification  dated  11th  

September, 2000, directed the deletion of Section 43A (2) of  

the  Electricity  Supply  Act,  1948  in  respect  of  generating  

companies  regulated  by  the  Central  Commission  

retrospectively w.e.f. 24th July, 1998. Shortly thereafter the  

Central Commission issued an order in regard to operational  

norms  applicable  to  generating  stations  owned  among  

others by respondent-NTPC.  The order was to the following  

effect:

“As regards capital costs, the situation is somewhat   difficult. As the law stands today in respect to PSUs,   the  required  approvals  from  the  Government  and   clearance from CEA have to be obtained before the   commencement  of  the  project,  subject  to  certain   limits for which no clearance is required.  After the   completion of the project, if the actual expenditure   or  the  scope  of  the  project  vary  beyond  certain   limits, they are required to be further approved. This   process of approval is time consuming, resulting in a   provisional  clearance,  making  a  subsequent   retrospective  revision  inevitable.   Changes  in   legislation  are  being  contemplated  by  which  the  clearance from CEA for projects might be done away   with. However, as the law stands today, approvals   are  inevitable.  Still  it  is  possible  to  bring  about   stability in tariff in case a time schedule is worked   out  by  which  utilities  may submit  data  of  CEA at   least 6 months prior to the completion of a project,   so  that  clearance could  be obtained  sufficiently  in   time  before  the  tariff  for  the  station/lines  is   determined.   It  is  hoped  that  any  variations  on   actual  finalization of accounts thereafter  should be   minor  in  nature  which  could  be  absorbed  by  the   

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utility and if substantial, can be taken care of in the   next  revision.   In  view  of  the  above,  all  utilities   seeking  determination  of  tariff  in  respect  of  new  projects, shall submit their applications to us at least   3  months  in  advance  of  the  anticipated  date  of   completion, along with the project cost as approved  by  the  appropriate  independent  authorities,  other   than the Board of  Directors  of  the Company.  This   project  cost  will  constitute  the  basis  for  tariff   fixation, and no revision would be entertained till the   next tariff  period.  This direction presupposes that   CEA may hereafter, unlike the past, clear capital cost   escalations  on  factors  other  than  the  change  in   scope as well.  We would urge upon CEA to consider   and deal with the approval of additional capital costs   other than those due to change in the scope of the   project as well, in the interest of avoidance of tariff   shocks down stream. In case the projects exempted  from CEA clearance, the Commission would consider   accepting  a  due  diligence  clearance  from  any   recognised agency.”

20. The  above  was  followed  by  the  Central  Commission  

framing  Tariff  Regulations  2001,  in  which  Regulation  2.5  

extracted earlier dealt with capital expenditure.  It was in  

the  above  background  that  the  Central  Commission  

determined the Tariff for the generating unit in question for  

the period 1st April, 1997 to 31st March, 2001 by an order  

dated  30th October,  2002.  Shortly  after  that  order  the  

Parliament enacted the Electricity Act, 2003 which came into  

force w.e.f.  10th June, 2003. The new legislation repealed  

the Electricity (Supply) Act, 1948.  The effect of this repeal  

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was  that  all  provisions  of  the  1948  Act  including  those  

requiring  approval  by  the  CEA  of  the  scheme  of  the  

generating stations and capital cost which the repealed Act  

provided for became inapplicable and irrelevant under the  

new  Act.  The  new  law  aimed  at  deregulating  electricity  

generation.   In  the  case  of  Thermal  Power  Stations  the  

capital cost was not required to be approved by the CEA, as  

was the position under the earlier law.

21. In Petition No.139 of 2004, the respondent-Corporation  

sought  additional  capitalisation  of  the  expenditure  on  the  

project in question relevant to the period 2001-2004.  The  

Central Commission determined the additional capitalisation  

and  allowed  the  same  to  the  respondent,  which  

determination  was  upheld  by  the  Tribunal  with  the  

modification to which we have adverted in the beginning of  

this order.

22. There is  no gainsaying that  the prayer for  additional  

capitalisation was made by the respondent-Corporation and  

considered by CERC after the Electricity Act 2003 had come  

into  force,  repealing  the  earlier  enactments.  The  new  

legislation did not set out any role for the CEA, in the matter  

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of approval of the schemes for the generating companies or  

the capital expenditure for the completion of such projects.  

The entire exercise touching the regulation of the tariff  of  

generating  companies  owned or  controlled  by the Central  

Government,  like  the  respondent  was  entrusted  to  the  

Central  Commission.  The  role  of  the  Central  Electricity  

Authority established under Section 7 of the 2003 Act, was  

limited to matters enumerated under Section 73 of the Act,  

approval  of  the  scheme  for  generating  companies  or  the  

capital  expenditure for  the completion of  such projects or  

capitalisation  of  the  additional  expenditure  not  being  one  

such function.  The CERC was, therefore, right when it said  

that the Central Electricity Authority had no part to play in  

the matter of approval for purposes of capitalisation of the  

extra  expenditure  incurred  on  a  project.  That  was  so  

notwithstanding  the  continuance  of  Regulation  2.5  of  the  

regulations  framed  by  the  CERC  providing  for  such  an  

approval by the CEA. The far reaching changes that came  

about  in  the  legal  framework  with  the  enactment  of  the  

2003 Act, made Regulation 2.5 redundant in so far as the  

same envisaged a reference to the CEA or an Independent  

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Agency  for  approval  of  the  additional  capitalisation.  

Insistence  on  a  reference,  to  the  CEA for  such  approval,  

despite the sea change in the legal framework would have  

been both unnecessary as well as opposed to the spirit of  

new law that reduced the role of CEA to what was specified  

in Section 73 of the Act.  The CERC and the Tribunal were in  

that view justified in holding that a reference to the CEA was  

not  indicated  nor  did  the  absence  of  such  a  reference  

denude the CERC of its authority to fix the tariff after the  

2003 Act had come into force.  That was so notwithstanding  

the fact  that  proviso  to  Section  61 of  the  Electricity  Act,  

2003 continued the terms and conditions for determination  

of tariff under the enactments mentioned therein and those  

specified in the Schedule for a period of one year or till such  

terms  were  specified  under  that  section  whichever  was  

earlier. In the result this appeal fails and is hereby dismissed  

with costs assessed at Rs.50,000/-   

Civil Appeal Nos.5361-5362 of 2007

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23. In these appeals the order impugned by the appellant  

places reliance upon the order passed by the Tribunal,  in  

Appeal No.36 of 2006 against which order we have in the  

foregoing  part  of  this  judgment  dismissed  the  appeal  

preferred by the appellant. On a parity of reasoning these  

appeals  are  also  destined  to  be  dismissed  and  are,  

accordingly, dismissed with costs assessed at Rs.50,000/-.  

………………….……….…..…J.        (T.S. THAKUR)

     .……..…………………..…..…J.              (VIKRAMAJIT SEN)

New Delhi September 18, 2013

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