M/s. Sesa Sterlite Ltd. Vs Orissa Electricity Regulatory Comm

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Civil Appeal No.5479 of 2013

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5479 of 2013

M/s. Sesa Sterlite Ltd. ….Appellant(s)

Vs.

Orissa Electricity Regulatory Comm. & Ors. …

Respondent(s)

J U D G M E N T

A.K. SIKRI, J.

1. Instant is a statutory Appeal which is filed by the

Appellant under Section 125 of the Electricity Act, 2003

(hereinafter referred to as ‘the Act’). This Appeal arises out

of the judgment and order dated 3rd May, 2013 passed by

Appellate Tribunal for Electricity.

2. By the aforesaid judgment, the Appellate Tribunal has

affirmed the orders of the Odisha Electricity Regulatory

Commission (hereinafter referred to as the ‘State

Commission’). The essence of these orders is that even

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when the Appellant is a “Deemed Distribution Licensee” for

the purpose of Electricity Act, it is still liable to pay Cross

Subsidy Surcharge (CSS) to the Respondent No.8 viz.

WESCO which is a Distribution Licensee for the area in

question.

3. To put it in nutshell, the case of the Appellant is that it

has its unit in Special Economic Zone (SEZ) and it is a

Developer in the said SEZ area. It is not drawing or utilizing

any electricity from the Distribution Licensee viz. WESCO for

its unit namely VALE-SEZ. In fact, the Appellant had

entered into a Power Purchase Agreement (PPA) dated 18th

August, 2011 with M/s. Sterlite Energy Ltd. The Appellant

had filed application for getting approval of the said PPA.

However the Odisha State Commission, instead of granting

the approval, rejected the said PPA and directed the

Appellant to pay CSS to WESCO holding the Appellant to be

a ‘Consumer’.

4. As per the Appellant, as it is a deemed distribution

licensee for the purpose of Electricity Act by virtue of it

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Civil Appeal No.5479 of 2013

being a ‘Developer’ because of the reason that its unit is in

SEZ area and such a recognition is given to the Appellant

statutorily under the provisions of Special Economic Zone

Act, 2005 (hereinafter referred to as SEZ Act). Therefore,

the question of payment of CSS to the Distribution Licensee

does not arise. It is also the case of the Appellant that, in

any case, since no electricity is being drawn from the open

access network of WESCO, there is no question of making

payment of cross subsidy surcharge. This is the brief

description of the dispute raised by the Appellant and in

order to understand the gravamen of this dispute, we take a

tour of the factual roadmap.

The Facts:

5. These facts are in narrow compass and have been

narrated succinctly by the Appellate Tribunal in its order. As

there is no dispute about the correctness of these facts, we

intend to traverse the same therefrom. The Appellant is

engaged in the business of production and export of

aluminium. The Appellant has set up a 1.25 MTPA capacity

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Civil Appeal No.5479 of 2013

aluminium smelter project in a sector specific Special

Economic Zone. After getting all necessary approvals for

the development of SEZ for manufacture of export of

aluminium the appellant set up the aforesaid plant. These

approvals include the approval with captive power plant as

well. It is also a matter of record that on 27th February,

2009 the Ministry of Commerce and Industry, Government

of India issued a notification declaring the unit of the

Appellant to be SEZ. It was followed by Notification dated

3rd March, 2010 under Section 49(1) of the SEZ Act. By the

said notification, the Central Government of promoting the

objects of Special Economic Zone and in terms of powers

delegated under the Special Economic Zone Act, introduced

a proviso to the provisions of Section 14(b) of the Electricity

Act, 2003. By the said introduction, a developer of a Special

Economic Zone was declared as a deemed licensee

authorized to distribute electricity within the Special

Economic zone area. The effect of the aforesaid Notification

under section 14(b) of the Electricity Act is that the

Appellant became a deemed Distribution Licensee.

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6. It would be pertinent to mention at this stage that the

units of the Appellant are divided into two broad areas. One

is Domestic Tariff Area (DTA) where it has established one

of its unit. Other unit is VAL-SEZ which is in SEZ

(hereinafter referred to as VAL-SEZ Unit). In so far as its

unit in DTA is concerned, it draws power from open access

and duly phased pays cross subsidy surcharge for this area.

There is no dispute to this extent. In the present Appeal, we

are concerned with VAL-SEZ which is in SEZ Area where the

Appellant is stated as deemed Distribution Licensee for the

purpose of Electricity Act by virtue of Notification under

Section 14(b) of the Electricity Act.

7. For supply of energy to this unit in SEZ Area (VAL-2),

the Appellant entered into a PPA on 18th August, 2011 with

Sterlite Energy Ltd. which was arrayed as Respondent No.4

in the Appeal. However during the pendency of the Appeal

under the scheme of merger approved by the High Court,

Sterlite stood merged with the Appellant itself and because

of this reason the Respondent No.4 (hereinafter referred to

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Civil Appeal No.5479 of 2013

as ‘Sterlite’) has been deleted from the array of parties at

the instance of the Appellant.

8. Since the supply of power by a Generating Company to

Distribution Company is regulated under the provisions of

Electricity Act, 2003, the Appellant on 30th August, 2011

filed a petition before the State Commission for approval of

the said PPA. Subsequently, the State Commission at the

preliminary hearing sought some clarifications with regard

to the factual aspects. The Appellant, thereafter filed two

amendment petitions. One was on 8th November, 2011 and

another was on 27th March, 2012 seeking for the additional

prayer requesting the State Commission to grant deemed

distribution licence in favour of the Appellant on the

strength of the Government of India notification issued

dated 3rd March, 2010 with effect from the date of the said

notification.

9. As already pointed out above, the State Commission

rejected this application for grant of deemed Distribution

Licensee and subsequently rejected the prayer of the

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Appellant for approval of PPA also. The State Commission,

while doing so held as under:

“a. Since the Application for grant of Distribution License was rejected, State Commission did not consider it necessary to go into the issues relating to the PPA. b. Consequent upon the rejection of the Application for grant of Distribution License, State Commission held that VAL is to be treated as a consumer of WESCO. c. As a result, VAL has to pay cross subsidy surcharge to WESCO for open access drawal of power from SEL.”

10. This Order of the State Commission has been upheld by

the Appellate Tribunal in Appeal filed by the Appellant.

Question of Law:

11. In the present Appeal, the Appellant has raised

following question of law which the Appellant recall this

Court to determine an answer:

“Whether a developer of a notified Special Economic Zone, who has been deemed by law to be a licensee for distribution of electricity, is required to, once again, apply to Electricity Regulatory Commission under the Electricity Act for grant of a licence or the deeming fiction carved out in Section 14 of the Electricity Act

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Civil Appeal No.5479 of 2013

automatically dispenses with this requirement and ipso facto makes such SEZ developer a distribution licensee.”

The Arguments: Appellant

12. Mr. Shyam Diwan, Learned Senior Counsel appearing

for the Appellant, with full of passion and vehemence

argued that all the three findings of the State Commission,

which are upheld by the Appellate Tribunal, are ex facie

untenable in law. Questioning the first aspect of the order

of the authorities below refusing to register the said PPA, his

plea was that since the PPA is a contract between the two

parties, the State Commission could not have refused to

consider the same. Such outright refusal amounts to failure

to discharge the function enjoined by the Parliament on the

State Commission under Section 86(b) of the Act. Under

this provision, the State Commission has to regulate

electricity purchase and procurement process of distribution

licensee including the price at which electricity shall be

procured from the generating company. Thus it was duty

bound to approve a PPA subject to the terms and conditions

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which it deems fit in law and only when the parties fail to

comply with those terms of the license that such license can

be revoked. The failure to not look into a PPA altogether

amounts to non exercise of jurisdiction.

13. In so far as the opinion of the Appellate Authority that

the Appellant is to be treated as a consumer of WESCO is

concerned, Mr. Diwan placed heavy reliance on the proviso

to Section 14(b) of the Act as per which developer of the

notified SEZ itself becomes deemed Licensee from the date

of such notification. He thus argued that when there was a

specific notification under that proviso declaring the

Appellant as a developer, the Appellant was a deemed

Licensee and therefore there could not have any

requirement for the Appellant to obtain the license under

the Electricity Act. As a fortiorari, such a developer cannot

be treated as a ‘consumer’. Therefore, the authorities

below could not, in law, hold the Appellant to be a consumer

of WESCO.

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In the alternative, it was argued that in any case, the

Appellant was purchasing the electricity from Sterlite under

the PPA and, therefore, by no stretch of imagination, it could

be treated as consumer of WESCO. To buttress this

submission, Mr. Diwan referred to the provisions of Section

2(15) of the Electricity Act which defines the term

“consumer” and submitted that in order to treat the

Appellant as a consumer, it was necessary to establish that

it is supplied with the electricity by such “Licensee” or the

“government” or “any other person engaged in the business

of supplying electricity to the public”.

14. In so far as the third finding holding the Appellant liable

to pay CSS to WESCO for open access drawal of power from

SEZ is concerned, the submission of Mr. Diwan was that

there was no occasion for the State Commission (or for that

matter Appellate Tribunal) to go into the aspect of CSS in an

application filed by the Appellant initially for approval of PPA

only which was later amended on the directions of the State

Commission to include a prayer to the extent that the

Appellant should be recognized as a Distribution Licensee 10

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under Section 14(b) of the Electricity Act. It was submitted

that even in the amended application there was no issue of

CSS and the authorities below exceeded their jurisdiction in

going into this issue and giving such a direction.

Without prejudice to the aforesaid preliminary

submission, Mr. Diwan argued that even on merits that such

a decision was palpably contrary to law. In this behalf his

submission was that since under Section 42 of the

Electricity Act, 2003, cross subsidy surcharge is payable to

the Distribution Licensee of the area of supply only when

the “distribution system” of such Distribution Licensee is

“used” for supply of electricity. Therefore, without a clear

finding of fact on appreciation of evidence, that the supply-

line of SEL-VAL is connected to WESCO and that WESCO’s

“distribution system” is “used” for supply of electricity,

State Commission could not have held that VAL has to pay

cross subsidy surcharge to WESCO for open access drawal

of power from SEL.

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In this context, the attention of the Court was drawn to

the National Tariff Policy dated 6th January, 2014, Clause 8.5,

Orissa Electricity Regulatory Commission (Terms and

Conditions for Open access Charges) Regulations, 2005

(Clause 13(1)(ii)] and to Orissa Electricity Regulatory

Commission (Determination of Open access Charges)

Regulations, 2006 [Clause 2(j). It was submitted that from a

bare perusal of the relevant Clauses of these Regulations, it

is clear that CSS can be levied on “open access customers”

i.e. “a consumer who has availed of or intends to avail of

open access”.

In addition to the aforesaid submission, questioning the

correctness of the each of the findings of the State

Commission and the Appellate Tribunal, Mr. Diwan

emphasized that it is to be kept in mind in deciding the issue

that VAL SEZ is a Deemed Distribution Licensee by operation

of law and it need not be a Distribution Licensee within the

meaning of Section 2(17) of the Electricity Act, 2003. He

admitted that a contention of the Respondents that VAL SEZ

does not qualify as a Distribution Licensee within the 12

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meaning of Section 2(17) of the Electricity Act, 2003 is

misplaced since accepting such contention would defeat the

very purpose of the deeming fiction created by the statute.

The deeming fiction would have no relevance if the reality

which the statute creates by way of fiction already existed.

He argued that none of the five provisos to Section 14 of the

Electricity Act, 2003 require the deemed distribution

licensees mentioned therein to obtain a license under the

Electricity Act. The Developer of a notified SEZ is a special

entity under a special legislation and the definition of

“consumer” or “distribution licensee” etc. as defined under

the Electricity Act, 2003 cannot be made applicable.

It is crucial point that the SEZ Act conceptually

envisages “Developer” of an SEZ distinct from the “Zone”

itself as also distinct from “Unit”. Developer is defined under

Section 2(g) of the SEZ Act whereas Special Economic Zone

is defined under Section (za) of the SEZ Act and Unit is

defined under Section 2(zc) of the SEZ Act. Thus the

Appellant in its capacity as the Developer of the SEZ has the

duty to develop, operate and maintain the Zone. Failing the 13

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reconciliation between the provisions of the Electricity Act,

2003 and the SEZ Act, the provisions, objects and purpose of

the SEZ Act will prevail (Section 51 of the SEZ Act). The

object and purpose of the SEZ Act, inter alia, is to provide an

internationally for export production, expeditious and single

window approval mechanism and a package of incentives to

attract foreign and domestic investments for promoting

export-led growth.

The Arguments: Respondents

15. Mr. R.K. Mehta, Learned Counsel appearing on behalf of

GRIDCO Ltd. refuted the aforesaid submissions of Mr. Diwan.

His main argument was that even though the Appellant was

possessed of notification issued under Proviso to Section

14(b) of the Electricity Act, which treats the Appellant as of

Deemed Distribution Licensee, the concept of Distribution

Licensee under the Electricity Act pre-supposes

supply/distribution of power. An entity which utilizes the

entire quantum of electricity for its own consumption and

does not have any other consumers cannot be deemed to

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be a Distribution Licensee, even by a legal fiction. In

support of this submission, the Learned Counsel referred to

the definitions of “consumer” in Section 2(15), “Distribution

Licensee” as contained in Section 2(17) and “supply” in

relation to electricity to the consumers in Section 2(70). He

also referred to Section 42 of the Act which spells out the

duties of Distribution Licensee and open access. His

submission, thus, was that by virtue of the legal fiction

created by the Notification dated 3rd March, 2010, a person

who distributes Electricity can be deemed to be a

distribution licensee even though he does not have a

distribution license – But the legal fiction cannot go further

and make a person who does not distribute electricity as a

distribution licensee.

16. He also argued that if a ‘Distribution Licensee’ is

equated with ‘Consumer’ the provisions of Section 2(15),

2(17), 42 and 43 of the Electricity Act, 2003 would be

rendered otiose and nugatory. The mandate of Section 42

and 43 of the Electricity Act, 2003 cannot be negated by

exercise of power under Section 49(1)(b) of the SEZ Act. It 15

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was further submitted that only a proviso has been added to

Section 14(b) by Notification dated 3rd March, 2010 qua the

Appellant. There is no stipulation in the Notification that

other provisions of the Electricity Act will not apply to the

Developer of a SEZ.

17. Mr. Mehta called for harmonious construction of the

provisions of SEZ and the Electricity Act to support his

submission that the legal fiction of deemed Distribution

Licensee cannot be taken to the level of absurdity and made

applicable even when it does not involve distribution/supply

of power at all. He further pointed out the object and

scheme of SEZ Act envisages several units being set up in a

SEZ. This is evident from a collective reading of the various

provisions of the SEZ Act viz. Section 2(g)(j)(za)(zc), Section

3, 4, 11, 12, 13 and 15. There can be a Sector Specific SEZ

with Several Units i.e. for IT, Mineral Based Industries etc.

but instances of single unit SEZ like in the present case of

the appellant may be rare. The Notification dated 3rd March,

2010 providing for the “Developer” of an SEZ being

deemed as a “Distribution Licensee” was issued keeping in 16

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view the concept of Multi Unit SEZs and will apply only to

such cases in which the Developer is supplying the power to

multiple Units in the SEZ. The said Notification will not

apply to a Developer like the Appellant who has established

the SEZ only for itself.

18. Mr. Parag P. Tripathi, Learned Senior Counsel appeared

with Mr. Shiv Kumar Suri, Advocate on behalf of WESCO.

His submission was that in the facts of present case WESCO

was entitled to CSS on the electricity purchase by the

Appellant from Sterlite which was consumed wholly and

completely by the Appellant itself. It was pointed out that

surcharge was meant to compensate a Distribution

Licensing from the loss of cross subsidy surcharge that such

distribution licensee would suffer by reason of the consumer

taking supply from someone other than such Distribution

Licensee, the moment it is found that the Appellant is

covered by the Definition of a consumer within the meaning

of Section 2(15) of the Act. He argued that in such a

situation the mere fact that the Appellants claims to be a

deemed Distribution Licensee is of no consequence at all 17

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since the entire power purchase by the Appellant is for its

own use or consumer and not for the purpose of

Distribution. The Appellant, therefore, could be categorized

as a consumer as regards its own consumption even if it is a

deemed Licensee. On merits, it was submitted that

Transmission line between the Generating Company

(Sterlite) and the Appellant is not a Dedicated Transmission

Line, with an attempt to justify it giving various reasons

which we shall advert to all a later stage.

19. It was also argued that as per Regulation 27 of the

OERC (Conditions of supply Code) Regulations 2004, the

“service line” shall be the property of the licensee unless

otherwise specified in writing. Hence the line between the

grid sub-station and the Appellant’s SEZ qualify as the

property of WESCO and therefore any use of such line could

only be by Open Access under the EA and in any event CSS

would be payable. Reference was also made to the Rule 4

of the Electricity Rules, 2005, as per which aforesaid line

would be deemed as part of the Distribution System of

WESCO. On that basis submission of Mr. Tripathi was that 18

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Civil Appeal No.5479 of 2013

from any angle the matter is to be looked into the orders of

the Appellate Tribunal was perfectly justified.

Our Analysis:

20. From the aforesaid narration of events as well as

arguments of the counsel for the parties, it has become

manifest the primary dispute relates to the CSS which the

Appellant is called upon to pay to WESCO. As per the

Appellant no such CSS is payable and the PPA which was

submitted by the Appellant to the State Commission for

approval, should have been accorded due approval by the

State Commission.

(1) Special Feature of the 2003 Act

21. Before adverting to this central issue, it would be apt to

understand conceptually the rationale of payment of such

CSS to the Distribution Company, under the scheme of the

Electricity Act. The first enactment to govern electricity

supply in India was passed in the year 1910 viz. the

Electricity Act, 1910. This Act envisaged growth of

electricity industry through private licences. It created the

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legal framework for laying down of wires and other works

relating to the supply of electricity. Thereafter, the

Electricity (Supply) Act, 1948 mandated the creation of a

State Electricity Board. The Board assigned the

responsibility of arranging the supply of electricity in the

State. It was experienced that over a period of time the

performance of State Electricity Boards had deteriorated on

account of various factors. Main failure on the part of these

Electricity Boards was to take decision on tariffs in

independent manner and cross subsidies had reached

untenable levels. To address this issue and also to distance

governance from determination of tariffs, the Electricity

Regulation Commission Act was enacted in the year 1998.

This Act created regulatory mechanism. Within few years, it

was felt that the three Acts of 1910, 1948 and 1998 which

were operating in the field needed to be brought in a new

self contained comprehensive legislation with the policy of

encouraging private sector participation in generation,

transmission and distribution and also the objectives of

distancing the regulatory responsibilities from the

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Government and giving it to the Regulatory Commissions.

With these objectives in mind the Electricity Act, 2003 has

been enacted. Significant addition is the provisions for

newer concepts like power trading and open access. Various

features of the 2003 Act which are outlined in the statement

of objects and reasons to this Act. Notably, generation is

being delicensed and captive generation is being freely

permitted. The Act makes provision for private transmission

licensees. It now provides open access in transmission from

the outset.

(2) Open Access and CSS

22. Open access implies freedom to procure power from

any source. Open access in transmission means freedom to

the licensees to procure power from any source. The

expression “open access” has been defined in the Act to

mean “the non-discriminatory provision for the use of

transmission lines or distribution system or associated

facilities with such lines or system by any licensee or

consumer or a person engaged in generation in accordance

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with the regulations specified by the Appropriate

Commission”. The Act mandates that it shall be duty of the

transmission utility/licensee to provide non-discriminatory

open access to its transmission system to every licensee

and generating company. Open access in transmission thus

enables the licensees (distribution licensees and traders)

and generating companies the right to use the transmission

systems without any discrimination. This would facilitate

sale of electricity directly to the distribution companies.

This would generate competition amongst the sellers and

help reduce, gradually, the cost of generation/procurement.

23. While open access in transmission implies freedom to

the licensee to procure power from any source of his choice,

open access in distribution with which we are concerned

here, means freedom to the consumer to get supply from

any source of his choice. The provision of open access to

consumers, ensures right of the consumer to get supply from

a person other than the distribution licensee of his area of

supply by using the distribution system of such distribution

licensee. Unlike in transmission, open access in distribution 22

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has not been allowed from the outset primarily because of

considerations of cross-subsidies. The law provides that

open access in distribution would be allowed by the State

Commissions in phases. For this purpose, the State

Commissions are required to specify the phases and

conditions of introduction of open access.

24. However open access can be allowed on payment of a

surcharge, to be determined by the State Commission, to

take care of the requirements of current level of cross-

subsidy and the fixed cost arising out of the licensee’s

obligation to supply. Consequent to the enactment of the

Electricity (Amendment) Act, 2003, it has been mandated

that the State Commission shall within five years necessarily

allow open access to consumers having demand exceeding

one megawatt.

(3) CSS: Its Rationale

25. The issue of open access surcharge is very crucial and

implementation of the provision of open access depends on

judicious determination of surcharge by the State

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Commissions. There are two aspects to the concept of

surcharge – one, the cross-subsidy surcharge i.e. the

surcharge meant to take care of the requirements of current

levels of cross-subsidy, and the other, the additional

surcharge to meet the fixed cost of the distribution licensee

arising out of his obligation to supply. The presumption,

normally is that generally the bulk consumers would avail of

open access, who also pay at relatively higher rates. As

such, their exit would necessarily have adverse effect on the

finances of the existing licensee, primarily on two counts –

one, on its ability to cross-subsidise the vulnerable sections

of society and the other, in terms of recovery of the fixed

cost such licensee might have incurred as part of his

obligation to supply electricity to that consumer on demand

(stranded costs). The mechanism of surcharge is meant to

compensate the licensee for both these aspects.

26. Through this provision of open access, the law thus

balances the right of the consumers to procure power from a

source of his choice and the legitimate claims/interests of

the existing licensees. Apart from ensuring freedom to the 24

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consumers, the provision of open access is expected to

encourage competition amongst the suppliers and also to

put pressure on the existing utilities to improve their

performance in terms of quality and price of supply so as to

ensure that the consumers do not go out of their fold to get

supply from some other source.

27. With this open access policy, the consumer is given a

choice to take electricity from any Distribution Licensee.

However, at the same time the Act makes provision of

surcharge for taking care of current level of cross subsidy.

Thus, the State Electricity Regulatory Commissions are

authorized to frame open access in distribution in phases

with surcharge for:

(a) Current level of cross subsidy to be gradually phased out along with cross subsidies; and (b) obligation to supply.

28. Therefore, in the aforesaid circumstances though CSS is

payable by the Consumer to the Distribution Licensee of the

area in question when it decides not to take supply from

that company but to avail it from another distribution

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licensee. In nutshell, CSS is a compensation to the

distribution licensee irrespective of the fact whether its line

is used or not, in view of the fact that, but for the open

access the consumer would pay tariff applicable for supply

which would include an element of cross subsidy surcharge

on certain other categories of consumers. What is

important is that a consumer situated in an area is bound to

contribute to subsidizing a low and consumer if he falls in

the category of subsidizing consumer. Once a cross subsidy

surcharge is fixed for an area it is liable to be paid and such

payment will be used for meeting the current levels of cross

subsidy within the area. A fortiorari, even a licensee which

purchases electricity for its own consumption either through

a “dedicated transmission line” or through “open access”

would be liable to pay Cross Subsidy Surcharge under the

Act. Thus, Cross Subsidy Surcharge, broadly speaking, is

the charge payable by a consumer who opt to avail power

supply through open access from someone other than such

Distribution licensee in whose area it is situated. Such

surcharge is meant to compensate such Distribution

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licensee from the loss of cross subsidy that such Distribution

licensee would suffer by reason of the consumer taking

supply from someone other than such Distribution licensee.

(4) Application of the CSS Principle

29. In the present case, admittedly, the Appellant (which

happens to be the operator of an SEZ) is situate within the

area of supply of WESCO. It is seeking to procure its entire

requirement of electricity from Sterlite (an Independent

Power Producer (“IPP”) (which at the relevant time was a

sister concern under the same management) and thereby is

seeking to denude WESCO of the Cross Subsidy that WESCO

would otherwise have got from it if WESCO were to supply

electricity to the Appellant. In order to be liable to pay cross

subsidy surcharge to a distribution licensee, it is necessary

that such distribution licensee must be a distribution

licensee in respect of the area where the consumer is

situated and it is not necessary that such consumer should

be connected only to such distribution licensee but it would

suffice if it is a “consumer” within the aforesaid definition.

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30. Having regard to the aforesaid scheme, in normal

course when the Appellant has entered to PPA with Sterlite,

another Electricity Generating Company and is purchasing

electricity from the said Company it is liable to pay CSS to

the WESCO. Admittedly under the PPA, the Appellant is

purchasing his electricity from the said generating station

and it is consumed by the single integrated unit of the

Appellant. The Appellant therefore, qualifies to be a

“consumer” under Section 2(15) of the Electricity Act. It is

also not in dispute that the unit of the Appellant is in the

area which is covered by the licenses granted to WESCO as

distribution licenses.

31. Notwithstanding the above, because of the reason that

the area where the unit of Val-SEZ unit of the Appellant is

situate is a SEZ area and the Appellant is declared as

developer for that area under the SEZ Act, it is the

contention of the Appellant that in such a scenario it is not

liable to pay any CSS to the WESCO. This submission flows

from the fact that there is a notification issued in this behalf

under proviso to Section 49 of the SEZ Act and the 28

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Appellant itself is treated as a deemed Distribution Licensee

as per the provisions of Section 14 of the Electricity Act. On

that basis, detailed submissions are made by the Appellant

with an attempt to show that it cannot be treated as a

“consumer” under the Electricity Act when the Appellant

itself is deemed to be a licensee. It is further argued that

since the supply line of VAL-SEZ is not connected to WESCO

and it is getting the electricity directly from Sterlite under

the PPA, there is no question of payment of CSS to WESCO

at all. Argument of the WESCO that the lines owned by the

VAL-SEZ are only “Transmission Lines” under Section 2 of

the Electricity Act and not “dedicated Transmission Lines”

because of the reason that the duty of the Generator to

establish and maintain dedicated transmission lines, is

sought to be refuted by arguing that even as per Section

2(72) of the Act Transmission Lines are part of the

Distribution System of Licensing”. It is argued that it is not

even the case of WESCO that the supply line of SEL-VAL is a

part of WESCO Distribution System.

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(5) Factual Aspect of the Electricity Supply to the Appellant:

32. In order to appreciate these arguments, it would

appropriate to first advert to the factual aspect of the

supply of electricity by Sterlite to the Appellant under the

PPA. No doubt the Appellant is getting direct supply of

electricity from Sterlite. However, question is as to whether,

in the process, it is using dedicated transmission lines of

WESCO. We may point out at the outset that such an

argument was not even raised before the two authorities

below. Primarily it was argued that having acquired the

status of deemed distribution licensee under the Electricity

Act, it cannot be treated as a “consumer” of other

distribution licensee, viz. the WESCO. Even the question of

law which is proposed and framed in the grounds of appeal

and is already reproduced, does not raise this issue, which

is even otherwise factual. Notwithstanding, the Learned

Counsel for the WESCO has argued that the transmission

line between the Sterlite and the Appellant is not a

dedicated transmission line for the following reasons:

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(a) Under Section 2(16) of the Electricity Act, 2003, a

“Dedicated Transmission Line” is an electric supply line for

“point to point” transmission, which are required for the

purpose of connecting electric line or electric plan of a

generating station to “any transmission line”, or “sub-

station” or “generating station” or the “load centre”, “as the

case may be”.

(b) The Transmission Line in question commences from the

Generator (Sterlite) and connects to the 400 KV Sub-Station

at Sterlite end at Jharsuguda. It does not connect directly to

the “Load Centre” which is the Appellant.

(c) The 400 KV Busbar at the Generator (Sterlite) end is

connected to a 200 KV Busbnar at VAL-CGP caters to the

VAL - Smelter 1 in the Domestic Tariff Area.

(d) The said 400/200 KV sub-station is also connected to

the OPTCL Grid (State Transmission Utility) at Budhipadar

through 220 KV Bus at VAL – CGP end for the purpose of

evacuation of Sterlite power to GRIDCO as well as drawal of

power by VAL – Smelter – 1.

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(e) The said 400/220 kv sub-station is also connected to

Power Grid Corporation of India (PGCIL) line from which 2

nos of 400 KV Lines emanate for Interstate sale of its

Sterlite power through PGCIL Grid.

(f) The said 400/220 kv sub-station which is connected

through 5 Km of 220 KV line to the 220 KV Bus of switching

station at VAL – CGP end. There are 4 no’s of 200 KV

transmission lines branching out from the said 220 KV

switching station to carry power to VAL Smelter-1 Unit of the

Appellant which is within the area of the Distribution

Licensee (WESCO).

(g) The said 400/220 kv sub-station also has 2 nos of 33 KV

Tertiary transmission lines from 100/220/33 KV Transformer

supplying electricity to Vedanta Township.

(h) Three such 400 KV Transmission lines emanating from

the 400 KV Busbar at the Sterlite-IPP (Generator end) also

happens to Supply power from the sub-station to the

Appellant’s load centre (VAL-Smelter-2) in the SEZ area.

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(i) Hence, the only part of the “dedicated” transmission

line, if at all, is from the Generating Station 9Sterlite – IPP)

to such 400 KV Busbar of the 400/220 KV Grid Sub-station.

(j) The transmission line that connects the sub-station to

the load centre of the Appellant is only a “transmission line”

under Section 2(72) of the EP 2003.

33. Following diagram is placed by WESCO to demonstrate

this:

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34. Though the Appellant endeavoured to counter this

position and has given its own diagram that does not lodge

the aforesaid factual aspect. Therefore, prima facie we

accept the position as explained by the WESCO. Thus we

feel that notwithstanding that supply line of SEL-VAL is

transmission line, but not “dedicated transmission line”.

The Appellant cannot run away from the fact that under

Section 2(10) of the Electricity Act, it is the duty of the

Generating Company (i.e. WESCO) in this case to establish,

operate and maintain dedicated transmission lines. Since it

is duty bound to establish, operate and maintain these

dedicated lines by making huge investment, in order to get

into the consumption in the area in question the very

necessity of payment of CSS arises by the consumer of

Electricity covered by the definition of “consumer” under

Section 2(15) of the Act but is not getting supply of that

Generator and someone else. We have also to keep in mind

the provision of Regulation 27 of OERC (Conditions of Supply

Code) Regulation 2004. As per this Regulation the “service

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line” shall be the property of the licensee unless otherwise

specified in writing. This clause reads as under:

“27. The entire service line, notwithstanding that whole or portion thereof has been paid for by the consumer, shall be the property of the licensee and shall be maintained by the licensee who shall always have the right to use it for the supply of energy to any other person unless the line has been provided for the exclusive use of the consumer through any arrangement agreed to in writing.”

35. Further as per Rule 4 of the Electricity Rule, 2005 the

aforesaid line would be deemed to be part of Distribution

System of WESCO:

“4. Distribution System – The distribution system of a distribution licensee in terms of sub-section (19) of section 2 of the Act shall also include electric line, sub-station and electrical plant that are primarily maintained for the purpose of distributing electricity in the area of supply of such distribution licensee notwithstanding that such line, sub-station or electrical plant are high pressure cables or overhead lines or associated with such high pressure cables or overhead lines; or used incidentally for the purposes of transmitting electricity for others.” “Distribution system” is defined in Section 2(19) of the Act to mean:- “(19) “distribution system” means the system of wires and associated facilities between the

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delivery points on the transmission lines or the generating station connection and the point of connection to the installation of the consumers:” “Transmission Line” is defined in Section 2(72) to mean:- (72) “transmission lines” means all high pressure cables and overhead lines (not being an essential part of the distribution system of a licensee) transmitting electricity from a generating station to another generating station or a sub-station, together with any step-up and step-down transformers, switch-gear and other works….”

(6) Appellant deemed distribution Licensee: Its effect

36. It is now to be seen as to whether the fact that the

Appellant is a Developer in SEZ, armed with Notification

dated 3rd March, 2010 issued under Proviso to Section 49 of

the SEZ Act and it deemed distribution licensee as per

Section 14 of the Electricity Act, this would take away the

Appellant from the clutches of CSS liability?

37. In order to appreciate this argument let us first refer to

the certain statutory provisions:

Section 49 of the Special Economic Zone Act provides as under:

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“Power to modify provisions of this Act or other enactments in relation to Special Economic Zones.

(1) the Central Government may, by notification, direct that any of the provision of this Act (other than Section 54 and 56) or any other Central Act or any rules or regulations made thereunder or any notification or Order issued or direction given thereunder (other than the provisions relating to making of the rules or regulations) specified in the notification-

(a) shall not apply to a Special Economic Zone or a class of Special Economic Zones or all Special Economic Zones: or

(b) shall apply to a Special Economic Zone or a class of Special Economic Zones or all Specials Economic Zones only with such exceptions, modifications and adaptation, as may be specified in the notifications.”

38. Likewise Section 14 of the Electricity Act reads as under:

“14. Grant of License The Appropriate Commission may, on application made to it under section 15, grant any person licence to any person – (a) To transmit electricity as a transmission licensee: or (b) To distribute electricity as a distribution licensee: or (c) To undertake trading in electricity as an electricity trader, in any area which may be specified in the licence:

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Provided that any person engaged in the business of transmission or supply or electricity under the provisions of the repealed laws or any Act specified in the Schedule on or before the appointed date shall be deemed to be a licensee under this Act for such period as may be stipulated in the licence, clearance or approval granted to him under the repealed laws or such Act specified in the Schedule, and the provisions of the repealed laws or such Act specified in the Schedule in respect of such licence shall apply for a period of one year from the date of commencement of this Act or such earlier period as may be specified, at the request of the licensee, by the Appropriate Commission and thereafter the provisions of this Act shall apply to such business: Provided further that the Central transmission Utility or the State Transmission Utility shall be deemed to be a transmission licensee under this Act: Provided also that in case an Appropriate Government transmits electricity or distributes electricity or undertakes trading in electricity, whether before or after the commencement of this Act, such Government shall be deemed to be a licensee under this Act, but shall not be required to obtain a licence under this Act: Provided also that the Damodar Valley Corporation, established under sub-section(1) of section 3 of the Damodar Valley Corporation Act, 1948, shall be deemed to be a licensee under this Act but shall not be required to obtain a licence under this Act and the provisions of the Damodar Valley Corporation Act, 1948, in so far as they are not inconsistent with the provisions of this Act, shall continue to apply to that Corporation:

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Provided also that the Government Company or the Company referred to in sub-section (2) of section 131 of this Act and the company or companies created in pursuance of the Acts specified in the Schedule, shall be deemed to be a licensee under this Act. Provided also that the Appropriate Commission may grant a licence to two or more persons for distribution of electricity through their own distribution system within the same area, subject to the conditions that the applicant for grant of licence within the same area, subject to the conditions that the applicant for grant of licence within the same area shall, without prejudice to the other conditions or requirements under this Act, comply with the additional requirements (including the capital adequacy, credit worthiness, or code of conduct) as may be prescribed by the Central Government, and no such applicant who complies with all the requirements for grant of licence, shall be refused grant of licence on the ground that there already exists a licensee in the same are for the same purpose: Provided also that in a case where a distribution licensee proposes to undertake distribution of electricity for a specified area within his area of supply through another person, that person shall not be required to obtain any separate licence from the concerned State Commission and such distribution licensee shall be responsible for distribution of electricity in his area of supply: Provided also that where a person intends to generate and distribute electricity in a rural area to be notified by the State Government, such person shall not require any licence for such generation and distribution of electricity, but he

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shall comply with the measures which may be specified by the Authority under section 53: Provided also that a distribution licensee shall not require a licence to undertake trading in electricity.”

39. We would also like to take note of Notification dated 3 rd

March, 2010 issued in the case of Appellant. It makes the

following reading:

“NOTIFICATION

S.O. No.528(E). In exercise of the powers conferred by clause(b) of sub-section (1) of section 49 of the Special Economic zones Act, 2005 (28 of 2005), the Central Government hereby notifies that the provisions of clause (b) of section 14 of the Electricity Act, 2003 (36 of 2003), shall apply to all Special Economic Zones notified under sub- section (1) of section 4 of the Special Economic Zones Act, 2005, subject to the following modification, namely:-

In clause (b) of section 14 of the Electricity Act, 2003

(36 of 2003), the following proviso shall be inserted,

namely:-

“ Provided that the Developer of a Special Economic Zone notified under sub section (1) of section 4 of the Special Economic Zones Act, 2005 shall be deemed to be a licensee for the purpose of this clause, with effect from the date of notification of such Special Economic Zone.”

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40. The reading of Section 49 of SEZ Act would reveal that

the Central Government has got the authority to direct that

any of the provisions of a Central Act and rules and

regulations made thereunder would not apply or to declare

that some of the provisions of the Central Acts shall apply

with exceptions, modifications and adaptation to the Special

Economic Zone. So, under the scheme of Special Economic

Zone Act, Central Government has to first notify as to what

extent the provision of the other Acts are to be made

applicable or applicable with modification or not applicable

for the Special Economic Zone area. It is in furtherance

thereto, the Government of India, Ministry of Commerce and

Industry through its notification dated 21st March, 2012, with

regard to power generation in Special Economic Zone, has

declared that all the provisions of the Electricity Act, 2003

and Electricity Rule, 2005 shall be applicable to the

generation, transmission and distribution of power, whether

stand alone or captive power. This notification would clarify

that there is no inconsistency between Special Economic

Zone Act, 2005 and Electricity Act, 2003.

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41. No doubt vide Notification dated 3rd March, 2010

Central Government has added an additional proviso to

Clause (b) of Section 14 of the Electricity Act viz. the

Appellant shall be deemed to be licensee for the purpose of

the said clause w.e.f. the date of notification of such SEZ. It

is on this basis, the argument of the Appellant is that as it is

already a deemed Distribution Licensee it need not apply for

this license to the said Commission before entering into the

PPA and the State Government is bound to grant the

License. This contention is negated by the Appellate

Tribunal on two grounds which are as follows:

(i) There has to be a harmonious construction of SEZ Act

and Electricity Act to give effect to the provisions of both

the acts so long as they are not consistent with each other

in the opinion of the Tribunal. The provisions of Section 51

of SEZ Act, 2005 are to be considered along with the

provisions of Section 49 of the said Act. Accordingly, in view

of the provision of the SEZ Act, 2005 and consequent

notification by the Ministry of Commerce and Industry, the

deemed distribution licensee status as claimed by the 43

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Appellant should also be tested through other provisions of

the Electricity Act, 2003 and Electricity Rules, 2005, for

certifying its validity and converting it into a formal

distribution licensee. In fact, the Appellant has submitted to

the jurisdiction of the State Commission, by filing a petition

before the State Commission seeking for approval of the

PPA and also for grant of distribution licence. The Appellate

Tribunal, thus queried as to how could the Appellant now

question the jurisdiction?

(ii) The Appellate Tribunal pointed out that there are none

provisos to Section 14(b) of the Electricity Act and another

is added in respect of the Appellant vide Notification dated

3rd March, 2010. A reading of these provisos would indicate

that some of them confer status of deemed distribution

licensee on certain specified entities who are not required to

take separate licence from the State Commission under this

Act whereas some other provisos merely declare the party

as deemed licensee and nothing specified as to whether

they are required to obtain the licence or not. However

when it is specially provided in proviso 4 and proviso 8 and 44

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Civil Appeal No.5479 of 2013

2 that the Damodar Valley Corporation and State

Government are not required to obtain licence, and other

provisos do not confer such privilege, they would be

required to obtain licence.

42. Further discussion on this aspect by the Appellate

Tribunal is as under:

“42. Keeping this in mind, the statute makers by the notification dated 3.03.2010 have inserted the additional proviso to Section 14(b) of the Electricity Act. Admittedly, the development and operation of the SEZ are two distinct activities. Thus, the jurisdiction of the State Commission to scruitinise the deemed distribution status of the Appellant is well established in view of the Section 49(1) of SEZ, Act, 2005 and the notification of the Central Government dated 21.03.2012. Therefore, the contention of the Appellant that the State Commission dealt with the matter relating to the grant of distribution licence by going beyond its jurisdiction is misplaced. 43. It is noticed that the Ministry of Commerce and Industry (Department of SEZ Section) has accorded SEZ status to the Appellant for development and operation and maintenance of sector specific Special Economic Zone for manufacture and export of aluminium on the condition that the Appellant should establish captive generating plant as stipulated in the approval letter of Ministry of Commerce and Industry but it is pointed out the still the plant has not been established for various reasons. If

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Captive generating plant of 1215 MW had been established as per the condition inside the SEZ area, the question of power purchase from Sterlite Energy Limited under the pretext of distribution licensee status would not have arisen. That apart, the State Commission has framed Orissa Electricity Regulatory Commission (conduct of business) Regulation, 2004 under the powers conferred under Section 181 of the Electricity Act, 2003. The distribution of electricity Licence (Additional requirement of Capital Adequacy, Credit Worthiness and Code of Conduct) Rules, 2005 framed by the Central Government also would apply to the Appellant for distribution licence in addition to the requirements of State Commission’s Regulations. 45. Section 174 of the Electricity Act provides that the provisions of the Electricity Act shall have to overriding effect notwithstanding anything inconsistent with any other law for the time being in force or in any instrument having effect by virtue of any law other than Electricity Act. That apart, Section 175 also provides that the provisions of the Electricity Act are in addition to and not in derogation of any other law for the time being in force. 47. The perusal of the notification dated 03.03.2010 would make it evident that the legislation’s intention for declaring the developer in SEZ area as deemed distribution licence, is confined only to clause-b of Section 14 of Electricity Act, which deals with the grant of license by the appropriate State Commission to any person for distribution of electricity. The said notification has not curtailed the power of State Commission so far as the applicability of other provisions is concerned. The interpretation of various relevant terms was necessary prior to

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grant of deemed distribution licence by the State Commission. Therefore, the State Commission rightly acted upon those provisions. As a matter of fact, by the said amendment by inserting another proviso to Section 14(b), the context has not been changed as claimed by the Appellant. 49. As correctly indicated by the State Commission, the definition of term “distribution licensee” as enumerated under Section 2(17) of Electricity Act, 2003, emphasizes upon the distribution licensee to operate and maintain a distribution system and supply of power to the consumers. Considering the definition of ‘supply’ in Section 2(70), the supply here means sale of electricity to consumers. By merely being authorized to operate and maintain a distribution system as a deemed licensee, would not confer the status of distribution licensee to any person. The purpose of such establishment is for supply of power to consumers. Mere fact that the Appellant claims to be a deemed distribution licensee is of no consequence at all since admittedly, the entire power purchased by the Appellant is for its own use and consumption and not for the purpose of distribution and supply/sale to consumers. 50. An entity which utilizes the entire quantum of electricity for its own consumption and does not have any other consumers, cannot, by such a notification, be deemed to be distribution licensee, even by a legal fiction. By virtue of the legal fiction created by the notification dated 3.03.2010, the Developer of SEZ notified under the SEZ Act, who distributes electricity can be deemed to be a distribution licensee. Thus, this legal fiction cannot go further and make a person who does not distribute electricity to the consumers as to distribution licensee. Therefore there is no merit in the contention of the Appellant.

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43. We are in agreement with the aforesaid rationale in the

impugned order of the Appellate Tribunal as that is the only

manner in which the two Acts can be harmoniously

construed. To recapitulate briefly, in the present case no

doubt by virtue of the status of a developer in the SEZ area,

the Appellant is also treated as deemed Distribution

Licensee. However with this, it only gets exemption from

specifically applying for licence under Section 14 of the Act.

In order to avail further benefits under the Act, the Appellant

is also required to show that it is in fact having distribution

system and has number of consumers to whom it is

supplying the electricity. That is not the case here. For its

own plant only, it is getting the electricity from Sterlite Ltd.

for which it has entered into PPA. We have to keep in mind

the object and scheme of SEZ Act which envisages several

units being set up in a SEZ area. This is evident from a

collective reading of the various provisions of the SEZ Act

viz. Section 2(g)(j)(za)(zc), Section 3, 4, 11, 12, 13 and 15.

There can be a Sector Specific SEZ with Several Units i.e. for

IT, Mineral Based Industries etc. but instances of single unit

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SEZ like in the present case of the Appellant may be rare.

The Notification dated 03.03.2010 providing for the

“Developer” of SEZ being deemed as a “Distribution

Licensee” was issued keeping in view the concept of Multi

Unit SEZs and will apply only to such cases in which the

Developer is supplying the power to multiple Units in the

SEZ. The said Notification will not apply to a Developer like

the Appellant who has established the SEZ only for itself.

44. Having regard to the aforesaid factual and legal aspects

and keeping in mind the purpose for which CSS is payable,

as explained in detail in the earlier part of this judgment, we

are of the view that on the facts of this case it is not possible

for the Appellant to avoid payment of CSS to WESCO. We,

therefore, do not find any merit in this Appeal which is

accordingly dismissed.

…………………………….………J. [Surinder Singh Nijjar]

…………………………………….J.

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[A.K. Sikri]

New Delhi April 25, 2014

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