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PETITIONER:

ORISSA STATE ELECTRICITY BOARD AND ANOTHER ETC.

Vs.

RESPONDENT:

M/S. IPI STEEL LTD. ETC.

DATE OF JUDGMENT21/04/1995

BENCH:

JEEVAN REDDY, B.P. (J)

BENCH:

JEEVAN REDDY, B.P. (J)

SEN, S.C. (J)

CITATION:

1995 AIR 1553 1995 SCC (4) 320

JT 1995 (4) 102 1995 SCALE (2)919

ACT:

HEADNOTE:

JUDGMENT:

B.P. JEEVAN REDDY, J.:

1. Leave granted. Heard counsel for the parties.

2. The Orissa State Electricity Board is questioning in

this appeal the correctness of the judgment of the Orissa

High Court declaring the proviso to Regulation 46 of the

Orissa State Electricity Board (General Conditions of

Supply) Regula-

107

tions, 1981, (hereinafter referred to as "Regulations") as

unreasonable, arbitrary and illegal. Having struck down the

proviso - i.e., the proviso as substituted by Notification

dated June 25, 1987 - the High Court has directed the Board

to revise the bills issued to the respondent-writ petitioner

"on the basis of proportionate reduction taking into account

the actual consumption of energy".

3. The respondent-writ petitioner (NV S.IPI Steel Limited)

has a mini steel plant in Orissa. On August 16, 1984, it

had entered into an agreement with the appellant-Board

whereunder the Board undertook to supply power "upto but not

exceeding a maximum demand of 7778 KVA/ 7000 KW". The

agreement contains the following stipulations among others:

(1) "The consumer has perused a copy of the Orissa State

Electricity Board (General Conditions of supply)

Regulations, 1981, understood its contents and undertakes to

observe and abide by all the terms and conditions stipulated

therein including all future modifications thereto, to the

extent they are applicable to him. The Orissa State

Electricity Board (General Conditions of Supply)

Regulations, 1981 as modified from time to time shall be

deemed to form part of this Agreement" [Vide clause (2)]

(Emphasis added).

(2) "The consumer shall pay to the Engineer for the power

demand and electrical energy supplied under this Agreement

in accordance with the tariff as mentioned below, subject to

any revision that may be made by the Board from time to

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time.

Large Industries

(a) The monthly charges shall be:-

Demand charges at Rs.35.00 per KVA of maximum demand plus

energy charges at the following rate on units metered less

units billed separately under (c) and (d) below:

Paise 36.00 for each unit without prejudice to payment of

monthly minimum charges indicated below:

(b) The monthly minimum charges shall be calculated at the

above rates, on a demand of 80 percent contract demand and

on units calculated at an average power factor of 0.9 and an

average load factor of 15 per cent on the said contract

demand. [Vide clause (7)]". (The remaining portion of clause

(7) is omitted as unnecessary.)

4. The respondent complains that notwithstanding the

agreement, the Board was in no position to supply the full

quantity of energy stipulated in the agreement. It is,

however, not necessary to consider the said plea, since we

are concerned herein with the period January, 1989 to

August, 1990 alone. During this period, an order under

Section 22-B of the Indian Electricity Act, 1910 read with

Section 78(A) of the Electricity (Supply) Act, 1948 issued

by the Government of Orissa on February 14, 1990 was in

force. It would be appropriate to notice the relevant

contents of the Order. The Order recited that since the

total availability of power from the generating stations in

Orissa will fall short of the total requirement of power in

the State substantially, the State Government is of the

opinion that for maintaining the supply and securing

equitable distribution of energy, it is expedient to

regulate the supply, distribution, consumption and use of

energy from the Orissa grid. The Order

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directed "the Orissa State Electricity Board to reduce the

supply of energy so as to allow the consumer to avail to the

extent as specified in the Annexure anything in any contract

agreement or requisition for supply or increase in the

supply of energy notwithstanding". Contravention of the

provisions of the Order rendered the consumer liable for

disconnection of service line without notice and for payment

of energy charges at double the highest rate of energy

charges for any category in addition to the penalties. In

the Annexure to the said order, the respondent, M/s.IPI

Steel occurs at Sl.No. 13 under the Heading "Large

Industries". It would be appropriate to extract the

schedule insofar as it concerns the respondent:

-------------------------------------------------------------

Sl. Name of the Allowable drawal Provisional

No. Industry Period Quantity allotment for

of water in Million the water 90-

yr. 1989- KWH. 91 (1/7/90 to

(1/7/89 30.6.91)

to

30.6.90)

------------------------------------------------------------

1. 2. 3. 4. 5.

------------------------------------------------------------

Large Industries

13. IPI STEEL 1.7.89 16.863 16.863

Gundichapada to

30.6.90

------------------------------------------------------------

5. It is agreed by the parties that the effect of the

above order is to reduce the supply by fifty per cent. The

Electricity Board has explained how the said fifty per cent

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reduction is being implemented and operated, by producing

before us a statement relating to the water year 1988-89.

It would be appropriate to extract the said statement:

M/S.IPI STEEL LTD: DHENKANAL

1. Contract Demand (C.D.) - 7778 KVA

(Kilo-Volt-Amperes)

2. 80% of C.D. - 0.8 x 7778 KVA - 6222.4 KVA

3. 100% requirement of energy - 37.467 MU

for the water year 1988-89 (Million Units)

4. % of level of allocation for- 50% of the full

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the water year 1988-89requirement

5. Energy allocation for the - 18.737 MU

year 1988-89

------------------------------------------------------------

Sl. Maximum Month Rate per Charges Energy enti-

No. demand KVA tlement per

month (in MU)

of 80% of C.D

------------------------------------------------------------

1. 7778 X 6 Rs.35/- Rs.16,33,380/- 3.122

(no charges for

(18.737/6) six

months)

2. 3889 X12 Rs.35/- Rs.16,33,380/- 1.561

3. 5185 X 9 Rs.35/- Rs.16,33,275/- 2.081

(no charge for

(18.737/3) 3

months)

------------------------------------------------------------

cont.-

------------------------------------------------------------

Liability of consumer Relief Total consumption

for payment

------------------------------------------------------------

Rs. 29,40,084 Rs.13,00,704 Rs. 18,737 MU

Rs. 26,13,408 Rs. 9,80,100 Rs. 18,737 MU

Rs. 19,60,056 Rs. 3,26,781 Rs. 18,737 MU

------------------------------------------------------------

6.Sri Santosh Hegde, learned counsel for the Orissa

Electricity Board explains the contents of the above table

thus: the maximum demand allowed under the Agreement to the

respondent is 7778 KVA; the cut is fifty per cent, i.e., to

the extent of half, the consumer, however, has been given an

option in the matter of utilisation of the fifty per cent

allowed to him. It is open to him to avail of the maximum

demand every month but in such a case he can run his factory

only for six months as mentioned under Sl.No. 1 in the Table

contained in the above statement, if, however, the consumer

wants to operate his plant for twelve months in the year, he

has to reduce his maximum demand to half of 7778 KVA, i.e.,

to 3889 KVA as mentioned under Sl.No.2 of the Table; it is

equally open to the consumer to distribute the maximum

demand permitted to him in such a manner that his plant

works for nine months in the year availing 5185 KVA as

mentioned under Sl.No.3 of the Table - or for that matter,

in any other manner convenient to him. But all this is

subject to the overall ceiling prescribed during such

period. Sri Hegde submits that the energy was made

available to all the bulk consumers on the above basis,

which fact, he says, is not disputed by the respondent nor

any complaint is made by him that energy was not made

available in the manner stated in the said tabular

Statement.

7.At this stage, it would be appropriate to explain certain

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concepts relevant herein. The expression "contract demand"

is defined in clause (viii) of Regulation 3 of the

Regulations. The definition reads thus:

"(viii) Contract demand, means the maximum

kilowatt (KW) or kilo-volt-ampere (KVA) as the

case may be agreed to be supplied by the Board

and contracted by the consumer."

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(In the case of the respondent the contract demand, as

stated hereinabove, is 7778 KVA.)

8. The expression "minimum charges" is referred to and

explained in clause 7(b) of the Agreement between the

parties. The clause, extracted hereinabove, says that "the

monthly minimum charges shall be calculated at the above

rates on a demand eighty per cent of contract demand and on

units calculated at an average power factor of 0.9 and an

average load factor of fifteen per cent on the said contract

demand." (The reason for prescribing the minimum charges is

that the Board generates and keeps in readiness, energy for

the respondent to the extent of contract demand. Even if

the respondent does not avail of it, the energy cannot be

stored or preserved. The respondent is, therefore, made to

pay for the energy generated for his use even though he does

not avail of it at the contracted level; even so, the mini-

mum charges arc pegged at eighty per cent.)

9. The expression "maximum demand" is defined in clause

(xx) of Regulation 3. It reads:

"(xx) Maximum demand, means the average amount

of kilowatts or kilovolt-amperes, as the case

may be, delivered to the point of supply of

the consumer and recorded during a thirty

minutes' period of maximum use in the month or

it shall mean twice the largest number of

kilowatt-hours (KWH) or kilovolt-amperehours

(KVAH) delivered to the point of supply by the

consumer during any consecutive 30 minutes'

period. The Board, however, reserves the

right to shorten this period in special cases,

if necessary."

10. The above definition has to be read in the light of and

in continuation of the definition of the said expression in

clause (8) of Section 2 of the Electricity (Supply) Act,

1948, which runs thus:

"(8). "Maximum demand" in relation of any

period shall, unless otherwise provided in any

general or special order of the State

Government, mean twice the largest number of

kilowatt-hours or kilovolt- ampere-hours

supplied and taken during any consecutive

thirty minutes in that period."

11. It is necessary to elaborate what does the expression

"maximum demand" mean and signify? In the case of bulk

consumers and large scale consumers, the Electricity Boards

all over the country generally adopt a two-part levy system.

One part is called 'the maximum demand charges' and the

other part 'consumption charges'. Every such consumer is

provided with two meters. One is called the 'trivector

meter' and the other is the normal meter which records the

total quantity of energy consumed over a given period which

is ordinarily- a month. The meter which records the total

consumption requires no explanation or elaboration since we

are all aware of it. It is the other meter which requires

some explanation. Now every large scale consumer knows the

amount of energy required by him and requests for it from

the Board. If the Board agrees to supply that or any other

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particular amount of energy, it makes necessary arrangements

therefor by laying the lines to the extent necessary and

installing other requisite equipment. It is obvious that if

a factory uses energy at a particular level/ load and for a

particular period, it consumes a particular quantity of

energy. The trivector meter records the highest level/

111

load at which the energy is drawn over any thirty- minute

period in a month while the other meter records the total

consumption of energy in units in the month. Let us take

the case of the respondent to illustrate the point. The

maximum demand in his case is upto but not exceeding 7778

KVA. That is his requirement. In the normal times, he is

entitled to draw energy at that level/load. That is his

maximum demand under the agreement. But he may not always

do so. Say, in a given month, he draws energy at 6000 KVA

level only, even then he has to pay the minimum charges as

stipulated in the agreement. But if he draws and consumes

energy exceeding eight per cent of the energy, he pays

demand and energy charges for what he utilises. Now, let us

notice how the trivector meter, i.e., the meter which

records the maximum demand works; the meter is so designed

that it only records the maximum load/ level at which energy

is drawn over any thirty-minute period in a month. It only

goes forward but never goes back until it is put back manu-

ally. To be more precise, suppose the respondent has drawn

energy at 7770 KVA for a thirty-minute period on the first

day of the month, the meter will record that figure and will

stay there even if the respondent consumes at 7000 or lesser

KVA level during the rest of the month. From this

circumstances however, one cannot jump to the conclusion

that it is an arbitrary way of levying consumption charges.

Normally speaking, a factory utilises energy at a broadly

constant level. May be, on certain occasions, whether on

account of breakdowns, strikes or shutdowns or for other

reasons, the factory may not utilise energy at the requisite

level over certain periods, but these are exceptions. Every

factory expects to work normally.

So does the Electricity Board expect - and accordingly

produces energy required by the factory and keeps it in

readiness for that factory - keeping it ready on tap, so to

speak. As already emphasised, electricity once generated

cannot be stored for future use. This is the reason and the

justification for the demand charges and the manner of

charging for it. There is yet another justification for

this type of levy and it is this: demand charges and

consumption charges are intended to defray different items.

Broadly speaking, while demand charges are meant to defray

the capital costs, consumption charges are supposed to meet

the running charges. Every Electricity Board requires

machinery, plant, equipment, sub- stations, transmission

lines and so on, all of which require a huge capital outlay.

The Board like any other corporation has to raise funds for

the purpose which means it has to obtain loans. The loans

have to be repaid, and with interest. Provision has to be

made for depreciation of machinery equipment and buildings.

Plants, machines, stations and transmission lines have to be

maintained, all of which requires a huge staff. It is to

meet the capital outlay that demand charges are levied and

collected whereas the consumption charges are levied and

collected to meet the running charges.

12. Pausing here for a moment, we may explain the importance

and significance of maximum demand. The maximum demand of a

given plant/factory determines the type of lines to be laid

and the power of transformers and other equipment to be

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installed for the purpose. A factory having a maximum

demand of say 1000 KVA and a factory having a maximum demand

of 10,000 KVA require different type of lines and other

equipment for providing

112

supply to them. In the case of latter, lines have to be of

a more load-bearing variety. Transformers have to be

installed and of more capacity. Sometimes in the case of

bulk consumers even a sub-station may have to be established

exclusively for such factory/plant. Very often these

industries are situated away from power stations and main

transmission lines which means laying special power lines

over considerable distances to give the supply connection.

As a matter of fact, the significance of the maximum demand

would be evident from the fact that the agreement between

the Board and consumer (like the respondent) specifies only

the maximum demand and not the total units allowed to be

consumed. The agreement concerned herein prescribes the

maximum demand at 7778 KVA but does not prescribe the total

number of units of energy allowed to be consumed. This is

for the reason, explains Sri Hegde, that the total number of

units of energy consumed is determined by the load/level at

which power is drawn. The formula, taking the case of the

respondent is stated to be - 100% unrestricted energy

requirement of the respondent = contract demand in KVA x

power factor x load factor x total number of hours in a

year. In concrete terms, it means - 7778 KVA x 0.90 x 0.61

1 x 8760 = 37,467,590 KWH (Units) = 37.46759 MU (Million

Units). This formula, as it states expressly, is premised

on unrestricted supply. Problems arise only when

restrictions are placed on consumption on account of fall in

production of electricity by the Board, as would be ex-

plained hereinafter.

13. Even during normal times, the Electricity Boards are not

able to generate energy commensurate with their installed

capacity, though it is true, they do try to achieve it. But

situations arise - situations beyond their control - when

they are not able to produce even that much energy as they

generally do. They are obliged to cut down their production

substantially - at times, as much as by half or more. We

are told that the power generated by Hydro-electric stations

in Orissa forms a substantial chunk of the total energy

produced by the Board. If in a given year, the rains fail

and more particularly, if the rains fail during two or three

years consecutively, the production of energy by Hydro-

electric units goes down substantially. Even in the case of

thermal stations, problems of supply of coal and oil,

quality of coal supplied and other problems result in the

Board producing electricity at a level far lower than what

it normally does. During periods of such reduced

generation/supply, problems of distribution arise. There

are several categories of consumers; industrial (including

bulk consumers), commercial, agricultural and domestic

besides some other categories. Naturally, everybody cannot

be supplied the full quantity of energy required; it has to

be rationed and may be, supply staggered. It is precisely

to provide for such situations that Section 22-B of the

Indian Electricity Act, 1910 empowers the Government to make

an order regulating the distribution and consumption of

energy. We may now read he section:

"22-B. Power to control the distribution and

consumption of energy.-- (1) If the State

Government is of opinion that it is necessary

or expedient so to do, for maintaining the

supply and securing the equitable distribution

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of energy it may by order provide for

regulating the supply, distribution,

consumption or use thereof.

(2) Without prejudice to the generality of

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the powers conferred by subsection (1) an

order made thereunder may direct the licensee

not to comply, except with the permission of

the State Government, with-

(i)the provisions of any contract, agreement

or requisition whether made before or after

the commencement of the Indian Electricity

(Amendment) Act, 1959 (32 of 1959), for the

supply (other than the resumption of a supply)

or an increase in the supply of any energy to

any person, or

(ii)any requisition for the resumption of

supply of energy to a consumer after a period

of six months, from the date of its

discontinuance, or

(iii)any requisition for the resumption of

supply of energy made within six months of its

discontinuance, where the requisitioning

consumer was not himself the consumer of the

supply at the time of its discontinuance. "

14. It is obvious that an order made under Section 22-B is

binding upon the Electricity Board and over- rides the con-

tracts and agreements which the Board may have entered into

with the consumers. When an order under Section 22-B is is-

sued, the Board is freed from the obligation to supply

energy at the level stipulated in the agreements with the

consumers and its obligation is to supply in accordance with

the order under Section 22-B. On this score, there is no

controversy. The controversy is with respect to the power

of the Board to collect maximum demand charges at the rate

prescribed in the agreement during such periods of

restricted supply. In short, the question is with respect

to the power of the Board to frame Regulation 46 and more

particularly, the reasonableness of the proviso to the said

Regulation.

15. Section 79 of the Electricity (Supply) Act, 1948

empowers the Board to make Regulations to provide for

matters specified therein. Inter alia, the matters

specified include "(j) principles governing the supply of

electricity by the Board to persons other than licensees

under Section 49". Clause (k) is, of course, of a general

nature. Section 49(1) says that:

"49. Provision for the sale of electricity by

the Board to persons other than licensees.--

(1) Subject to the provisions of this Act and

or regulations, if any, made in this behalf,

the Board may supply electricity to any person

not being a licensee upon such terms and

conditions as the Board thinks fit and may for

the purposes of such supply framed uniform

tariffs."

16.It would help if we notice sub-sections (2), (3) and (4)

of Section 49 also. They read thus:

"(2) In fixing the uniform tariffs, the Board

shall have regard to all or any or the

following factors, namely--

(a)the nature of the supply and the purposes

for which it is required;

(b)the coordinated development of the supply

and distribution of electricity within the

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State in the most efficient and economical

manner, with particular reference to such de-

velopment in areas not for the time being

served or adequately served by the licensee;

(c)the simplification and standardisation of

methods and rates

114

of charges for such supplies;

S.C. (d) the extension and cheapening of

supplies of electricity to sparsely developed

areas.

(3) Nothing in the foregoing provisions of

this section shall derogate from the power of

the Board, if it considers it necessary or

expedient to fix different tariffs for the

supply of electricity to any person not being

a licensee, having regard to the geographical

position of any area, the nature of the supply

and purpose for which supply is required and

any other relevant factors.

(4) In fixing the tariff and terms and

conditions for the supply of electricity, the

Board shall not show undue preference to any

person."

17. In exercise of the power conferred by Section 79 read

with Section 49 of the Electricity (Supply) Act, the Orissa

Board has framed Regulation 46. Before its amendment by

Notification dated June 25 1987, Regulation 46 read as

follows:

"Right of Board in case of break down in

Board's supply system --

If at any time during the continuance of any

agreement between the Board and consumer, due

to reason mentioned in clause-40(d) and 43

above, the Board/Engineer shall be under no

obligation to give supply of electrical energy

as contracted during the period of such break

down/ force measure situation continues. Such

period of discontinuance/reduced supply shall

not be added to the initial period of the

agreement.

Provided that during such period of

discontinuance/reduced supply, the consumer

shall not be liable to pay the minimum charges

in accordance with the agreement, but shall

only pay for the actual quantity of demand

and/or energy supplied to the consumer in lieu

of the contracted demand. "

18.The Regulation was substituted by the Notification dated

June 25, 1987. The substituted Regulation reads as follows:

"If on account of shortage of the generation

of electrical energy, restrictions on power

supply arc imposed by the State Government

under Section 22(B) of the Indian Electricity

Act, 1910 or by the Board under Section 49 of

the Electricity Supply Act, 1948 and all other

power available under law, the Board and the

Engineers shall be under no obligation to

supply energy contracted for except in ac-

cordance with the restriction order and

subject to the other provisions of the

Regulation.

Provided that during the period restrictions

are in force, the consumer shall not be liable

to pay the minimum charges in accordance with

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the agreement if the restriction on supply in

a month exceeds 150 (One Hundred Fifty) hours

but shall only pay, in case of two part

tariff, on the basis of actual energy

consumption and the "maximum demand" as

provided in the agreement and in all other

cases, on the basis of actual consumption of

energy.

19. We arc concerned in this case with the substituted

Regulation 46 and hence, reference to Regulation 46

hereinafter means the amended Regulation 46 only.

20. Regulation 46, it is evident, is designed to meet the

situation obtaining during the period an order under Section

22B of the Electricity Act, 1910 is in force. It says so

specifically. The Regulation says that when such an order

is in operation, the Board shall be under no obligation to

supply the contracted demand/maximum

115

demand and that it will supply energy only in accordance

with the restrictions placed by such order. To this extent

it states the obvious. The proviso - which is the one in

question - then says that during the period of such

restricted supply if the restriction on supply exceeds 150

hours in a month, (a) the consumer shall not be liable to

pay minimum charges in accordance with the agreement but (b)

he shall pay in case of two-part tariff, on the basis of

actual energy consumption and the maximum demand as provided

in the agreement and (c) in all other cases, (i.e., in case

of consumers to whom two-part tariff does not apply) on the

basis of actual consumption of energy.

21. Now, in the case before us, the restriction on supply

did exceed 150 hours in a month; indeed it was fifty per

cent. In accordance with the said proviso, therefore, the

respondent was obliged to pay (i) the maximum demand charges

as provided in the agreement and (ii) the actual energy

consumption charges though he is relieved of the obligation

to pay minimum charges. The maximum demand contracted by

the respondent is upto but not exceeding 7778 KVA as

mentioned hereinbefore. Now, if the respondent draws energy

at full load, i.e., at 7778 KVA, his consumption of energy

over the year would be twice the quota permitted to him

during the year of restriction. Therefore, the respondent

is obliged to - and should - draw energy at half the

maximum/contracted demand, i.e., at 3889 KVA, if he wants to

run his factory for the whole of the year of restriction.

And since, he is relieved of the obligation to pay the

minimum charges as per the agreement, he pays demand charges

only on the basis of the actual maximum K.VA drawn by him

plus the charges for the energy actually consumed by him.

Secondly, the Board explains, there is an option available

to such consumers. If their unit cannot work at a

level/load less than the maximum demand/contract demand or

if the consumer wishes to do so for his own reasons, he is

free to draw energy at the contract/maximum demand level,

but then he can work only for six months in the year of

restriction since he is bound to observe the cut in

consumption of energy by fifty per cent. In other words, if

he avails power/ energy at the maximum agreed level, he will

exhaust his fifty per cent quota in six months itself. It

is however open to a consumer to draw energy at any other

level so long as he does not exceed the fifty per cent quota

permitted to him during the year of restriction, as

explained in the tabular statement referred to hereinbefore.

The option to draw at the maximum level/load permitted is

probably conceived to provide for those units which cannot

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operate except when they draw energy at the maximum demand

level. They can do so but they can operate only for six

months in the year of restriction. So far as the respondent

is concerned, it is admitted that it is not a unit which can

operate only when it draws energy at 7778 KVA or thereabout;

it can operate even if energy is drawn at half the maximum

demand level. May be, such functioning may be less eco-

nomical, but function it can.

22.We shall now deal with the precise grievance of the

respondent-writ petitioner and the grounds on which the High

Court has invalidated the proviso to Regulation 46. The

respondent says that where the cut in the supply Is as much

as half, there is no justification or equity behind the

regulation which entitles the Board to levy full demand

charges. (There is no com-

116

plaint insofar as the levy of actual consumption charges are

concerned, the whole grievance is only about the maximum de-

mand charges or demand charges, as they are called.) The

respondent submits that during the periods of restricted

supply, there are frequent cuts and breakdowns, the supply

is irregular and yet the Board proposes to levy full] demand

charges only because in any thirty-minute period in a given

month, the power is availed at the maximum demand level.

According to the respondent, during the period of such sup-

ply the demand charges should not be collected at all but

only the consumption charges. This submission has been up-

held by the High Court on the following reasoning which may

better be put in their own words:

"Under the two part tariff system which is

meant for big consumers of electricity, the

consumer is required to pay the demand charges

which charges are levied to cover investment

installation and the standing charges to some

extent and energy charges for the actual

amount of energy consumed. The expression

"Demand charges" would mean that the charge

leviable for the readiness of the supplier to

meet the demand of the consumer. Where,

therefore, the supplier, namely, the State

Electricity Board was not at all in a position

to supply the energy as per the demand of the

consumer it would be an unreasonable burden on

the consumer if the supplier is permitted to

raise the entire demand charges. The

excessiveness of the. burden on the economy of

the industry as well as on the consumer would

be apparent from a small illustration. An

industry needs 7000 KVA for running of its

factory but because of the power restrictions

issued by the State Government in exercise of

power under section 22(b) of the Supply Act it

cannot run the factory through out the month

as that would exceed the quantum of energy

which the industry could utilise. But to run

its machinery if the industry in question on

the first day of the month takes power than in

the demand meter it would show 7000 KVA.

Thereafter even if for next twenty nine days

of the month, the industry does not take any

further energy still by virtue of the proviso

to Regulation 46 in accordance with the

agreement between the parties the consumer

will be required to pay towards "demand

charge" to the extent of Rs.35 x 7000. Levy

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of such a charge, in our considered opinion,

cannot but be held to be arbitrary,

unreasonable and confiscatory in nature."

23.The High Court then referred to the decision of this

Court in M/s. Northern India Iron and Steel Co. v. The State

of Haryana and Anr. (1976 (2) S.C.R.677), Maharashtra State

Electricity Board v. Kalyan Borough Municipality (1968 (3)

S.C.R. 137) and to the unreported decision of the Orissa

High Court in MI s.J.M.Graphite Mining & Manufacturing

Company v. Orissa State Electricity Board & Ors. and

observed:

"The ratio of the aforesaid case as well as

the observations extracted above would apply

while testing the reasonableness of the

proviso to Regulation 46, namely, if the Board

is ready and willing to supply but the

consumer does not consume, then obviously the

liability would arise as the Board remains in

readiness to supply energy and non-utilisation

of the energy by the consumer does not affect

the liability of the Board to keep the energy

set apart for consumption. But where the

Board is not in a position to supply and then

by virtue of Regulations like proviso to Regu-

lation 46, levies demand charges on the basis

of contract demand, it would be an unreal

levy, arbitrary levy, irrational levy and as

such violates the basic mandate

117

enshrined in Article 14 of the Constitution.

In course of arguments, the learned counsel

for the petitioner had produced before us a

calculation sheet showing the unreasonableness

of levy towards demand charge in accordance

with the proviso to Regulation 46 and we think

it appropriate to notice the same at this

stage. The contract demand of the petitioner

is 7778 KVA and if there would have been no

power cut in any month and the petitioner

would have been running the factory through

out, then in a month the petitioner would be

consuming 40,32,115 K.W.H. of units of energy

taking the power factor at 90 and load factor

at 80%. But on account of the power

restriction imposed by the State Government

under Section 22(B) of the Act, the units of

power actually consumed during the month of

January, 1989 as is apparent from the bill

No.705 dated 3.2.1989 is 2,56,200 K.W.H. and

in terms of quantity of demand it is 478.3

K.V.A. but on the basis of maximum demand

recorded in the trivector metre it is 683 KVA

and, therefore, the petitioner has been made

liable to pay the demand charge at the rate of

35 per KVA, thus amounting to Rs.2,51,150/-

,though for 478.3 KVA he could have been

charged on proportionate reduction basis only

to the extent of 17,578. The aforesaid

concrete illustration exhibits the

arbitrariness and irrationality of the

provisions in question. On examining the

proviso to Regulation 46, we have not found

any nexus for the same for which it has been

introduced. If the nexus is the readiness of

the supplier to supply power then how can the

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provision be sustained %-hen that readiness is

not there. In the aforesaid facts and circum-

stances, we are of the considered opinion that

the proviso to Regulation 46 is unreasonable,

arbitrary and unreal and the same cannot be

sustained and we accordingly quash the same."

24. Apart from criticizing the above reasoning, Sri

Hegde, learned counsel for the Board complains that the

decision of the High Court is coloured by the extreme

example taken by it relating to the month of January, 1989

(Bill No.705 dated February 3, 1989). The learned counsel

explains that during the month of January, i.e., on January

5, 1989, there was "system disturbance following failure of

a 220/ 132 KV auto-transformer at TTPS, Talcher for which

loads had to be restricted to all the sub-stations receiving

power at 132 KV, from TTPS due to which M/ s.IPI STEEL, were

not allowed to draw their furnace load during several

periods in the month of January, February and March, 1989

which extended to more than 3 days at a stretch each time"

and on which account a special remission has been granted to

the respondent under Board Memorandum No.Com-1-70/83, a copy

of which has been placed before us. The learned counsel

submits that such an unusual situation cannot be taken as

the standard or as a test case for judging the validity of

the provision. One must go by the generality of the

situation. Such breakdowns may occur even during periods of

normal supply. Barring the special situation arising from

the breakdown aforementioned, he says, all the consumers

including bulk and large scale consumers have been supplied

energy as explained in the tabular statement referred to

above. Sri Hegde relies upon Paras 18 to 24 in the decision

of this Court in Bihar State Electricity Board, Patna & Ors.

v. M/s. Green Rubber Industries & Ors. (1990 (1) S.C.C.731)

where this court justified the concept of minimum charges

with reference to several decisions of High Courts. It is

pointed out that this Court referred with approval to the

decision of the Calcutta High Court in Saila Bala Roy v.

Chairman, Darjeeling

118

Municipality (AIR 1936 Cal.265) wherein it was held that

"the minimum charge was not really a charge which had for

its basis the consumption of electric energy. It was really

based on the principle that every consumer's installation

involved the licensee in certain amount of capital expen-

diture in plant and mains on which he was to have a

reasonable return. lie could get a return when the energy

was actually consumed in the shape of payments of energy

consumed. When no such energy was consumed by the consumer,

or a very small amount was consumed in a longer period, the

licensee was allowed to charge minimum charges by his

license, but those minimum charges were really interest on

his capital outlay incurred for the particular consumer."

Learned counsel points out that this Court has also quoted

with approval the decision of the Madras High Court in

MG.Natesa Chettiar v. Madras State Electricity Board (1969

(1) Mad.LJ 69), where it was held that:

"the minimum fixed was only consideration for

keeping the energy available to the consumer

at his end; it was not a penalty for not

consuming a stated quantity of energy but was

a concession shown up to the amount fixed,

energy at a specified rate could be consumed

free, consumption beyond only had to be paid

for. The statutory basis for the terms in the

agreement providing for minimum annual charge

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was found in Section 22 of the Act and Section

48 of the Supply Act. Section 22 deals with

obligation on licensee to supply energy. The

proviso to the section says:

"No person shall be entitled to demand or to

continue to receive, from a licensee a supply

of energy for any premises having a separate

supply unless he has agreed with the licensee

to pay to him such minimum annual sum as will

give him a reasonable return on the capital

expenditure, and will cover other standing

charges incurred by him in order to meet the

possible maximum demand for those premises,

the sum payable to be determined in case of

difference or dispute by arbitration."

Section 48 of the Supply Act empowers the

licensee to carry out arrangement under that

Act."

25.The decision of the Punjab High Court in Watkins Mayor &

Co. v. Jullundhar Electric Supply Co. (AIR 1955 Punj.133),

it is pointed out, was also quoted with approval by this

Court wherein the High Court had taken the view that:

"..... the whole scheme of the Act seems to

show that the provision made in any contract

for a minimum charge was really to provide for

a fair return on the outlay of the licensee,

and it was for this reason that the law

allowed the contract of this kind to be

entered into. Clause XI-A of the schedule to

the Act, as it then stood, provided:

"A licensee may charge a consumer a minimum

charge for energy of such amount and determine

in such manner as may be specified by his li-

cence, and such minimum charge shall be

payable notwithstanding that no energy has

been used by the consumer during the period

for which such minimum charge is made."

The court accordingly held that there was

nothing illegal in the insertion of the term

for payment of a minimum charge in the

agreement of the supply of energy and held

that it had not been made out that it was an

unreasonable levy."

119

26. Sri Hegde further points out that in Para 2 1, this

Court has approved the decisions of the Allahabad and Andhra

Pradesh High Courts holding that the requirement to pay

minimum charges was one of the terms and conditions of

supply and cannot be faulted. Learned counsel points out

that the decision of this Court ultimately rested on the

principle that the stipulation of minimum guarantee charges

in the agreement cannot be held to be ultra vires the

statutory provisions governing the supply and that the

agreement stipulating therefor was reasonable and valid.

Sri Hegde points out that the rationale behind the concept

of minimum charges referred to in the said decision is the

very rationale underlying the concept of two-part levy

concerned herein and which is also incorporated in the

agreement between the parties. Learned counsel emphasises

that the agreement expressly recites that the respondent has

read the regulations and has agreed to be bound by them not

only as they stood on the date of the agreement but with

such modifications thereto as may be made therein in future.

In such a situation, he says, the respondent cannot be al-

lowed to wriggle out of the terms of the agreement by

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resorting to Article 226 of the Constitution. lie submits

further that during the period of restricted supply, the

capital charges remain the same though there may be some

reduction in the running charges, that even during the

period of restricted supply, loans have to be repaid with

interest, the plants, the stations, the transmission lines

and all other equipment have to be maintained in good shape

and depreciation etc. provided for. The staff recruited,

the learned counsel submits, cannot be reduced as soon as an

order under Section 22-B is made and reemployed when the

restriction ceases. He submits that if the respondent had

installed a generating station or unit of his own for the

purpose of supplying the energy required by his steel mill,

he would have been faced with the very same problems as are

faced by the Board.

27. On the other hand, the learned counsel for the

respondent-writ petitioner submits that if the Board is

allowed to Insist upon its pound of flesh and to enforce the

agreement and Regulation 46 as it stand, it would be highly

unjust and inequitable to the consumers like the respondent.

They would not only suffer huge losses but would be obliged

to close down, affecting the workers and the national

economy. He submits that because of the irregular and

uncertain supply of power by the Orissa Board, the

respondent-company has become sick already and its case is

now pending with B.I.F.R. He submits that when the Board is

not able to supply at the agreed level, it cannot at the

same time seek to recover the demand charges at the agreed

rate. Being a statutory public corporation and a State

within the meaning of Article 12 of the Constitution of

India, it is submitted, the Board must act fairly. The

learned counsel relies upon the decisions of this court in

Northern India Steel as also the decision in Bihar State

Electricity Board & Anr. v. M/s.Dhanawat Rice & Oil Mills

(1989 (1) SCC 452) besides the decision in Maharashtra State

Electricity Board v. Kalyan Borough Municipality.

28. Northern India Steel was a case where a power cut was

imposed by the State Government by making an order under

Section 22-B of the Electricity Act, 191 0. The appellant

was an industry governed by two-part levy system. On ac-

120

count of the said power cut, the Board did give certain

reduction in the demand charges because of its inability to

supply energy as per the requirement of the appellant. The

appellant, however, took the stand that no demand charge

should at all be levied when the Board was not in a position

to supply electric energy as per its requirement or that, at

any rate, there should be a proportionate reduction of the

demand charges. Before this Court, the appellant and the

Board took two extreme stands: the Board saying that even if

it were not in a position to supply energy according to the

demand of the consumer, it is entitled to 'claim the full

demand charges as per clause (4) of the Tariffs and the

appellant saying that in such cases, the Board cannot claim

demand charges but that it is entitled only to energy

charges. This Court, however, did not pronounce upon the

said stand in view of the fact that clause (4)(f) of the

Tariffs notified by the Board provided a solution, The said

clause provided that the consumer is entitled to a

proportionate reduction of demand charges in the event of

lock-out, fire or any other circumstance considered by the

supplier beyond the control of the consumer. Ills Court was

of the opinion that the disability of the Board to give full

supply to the appellant-consumer because of the Government

Order under Section 22-B must be treated as a circumstance

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disabling the consumer from consuming the electricity as per

the contract and, therefore, entitled to the benefit of

clause (4)(f).

29. So far as the decision in M/ s.Dhanawat Rice and Oil

Mills is concerned, it does not appear to be a case where a

power cut was imposed under Section 22-B. The decision

entirely turned upon the language of clauses (1), (4) and

(13) of the Agreement between the parties. Clause (13)

provided that where the consumer is prevented from receiving

or using the electrical energy either in whole or in part

due to strike, riots, fire, floods, explosions, act of God

or any other cause reasonably beyond the control or if the

Board is prevented from supplying or is unable to supply

such electrical energy owing to any or all the causes

mentioned above, then the demand charge and guaranteed

energy charge set out in the Schedule to the Agreement shall

be reduced in proportion to the ability of the consumer to

take or the Board to supply such power; the decision of the

Chief Engineer of the Board in that behalf was declared to

be final. The High Court had opined that the consumer was

not at all liable to pay any annual minimum guarantee

charges because of the tripping, load-shedding and power

cuts. This Court, however, held that the High Court was not

right in saying so. It held that in view of clause (13), the

consumer is entitled to proportionate reduction only.

30. The decision of the Constitution Bench in Maharashtra

State Electricity Board v. Kalyan Borough Municipality does

not appear to be relevant on the question at issue herein.

The learned counsel for the respondent could not bring to

our notice any observation in the said judgment which

supports his contentions.

31. Now coming back to the facts of the case before us, it

must be stated at the outset that the validity or

justifiability of the order made by the Government of Orissa

under Section 22-B is not questioned nor is it in issue. We

must, therefore, proceed on the assumption that the cut was

imposed because it was necessary

121

to ensure equitable supply of energy to various consumers in

the State. It is equally beyond dispute that an order made

under Section 22-B is binding upon the Electricity Board as

well as the consumers and supersedes and over-rides the

agreements that may have been entered into between the Board

and the consumers. According to the said order, the cut was

fifty per cent and the cut was operative for one full year,

called 'water year'. The respondent was, therefore, bound

to utilise only fifty per cent of what is permitted under

the Agreement. In other words, it must consume only half

the energy which it was entitled to consume under the

agreement in a month or in a year, as the case may be.

Evidently, if the respondent drew energy at the maximum

demand level, i.e., at the maximum contracted level, and did

so for the whole of the year, it would be utilising the full

quota of energy permissible to him under the agreement,

which he cannot do in view of the fifty per cent cut imposed

by the order under Section 22-B. The order under Section

22-B read with the option given by the Board, means,

according to the Board, that either the consumer draws

energy at half the maximum demand level and operates for

full year or draws energy at full maximum demand level and

operates only for half the relevant year of restriction, as

explained hereinbefore. The choice is left to the consumer

to arrange his affairs in such manner as he thinks fit

provided he does not go beyond the quota (restricted quota)

prescribed for him. Now, Regulation 46 says that during the

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period an order under Section 22-B is in operation and the

hours of restriction exceed 150 hours in a month, the

consumer is relieved of the obligation to pay the minimum

charges, i.e., the obligation to pay eighty per cent of the

charges even if he avails of and consumes less power. The

consumer governed by the two- part tariff is, however,

obliged under the said regulation to pay "on the basis of

actual energy consumption and the 'maximum demand' as

provided in the agreement". Now, what does this mean in

practice? If the consumer avails of energy at half the

maximum demand/contract demand, he will pay demand charges

only for that. In other words, if the respondent had drawn

energy at 3889 KVA, he would pay demand charges only for

3889 KVA plus the charges for the actual number of units

consumed by him. Similarly, had the respondent availed of

the energy at, say 3000 KVA he would have been liable to pay

demand charges only on that basis plus the energy charges,

and if he had availed of energy at maximum demand then he

would have been liable to pay demand charges for the maximum

demand availed by him plus the energy charges - the overall

restriction being !hat he should have remained within the

fifty per cent quota prescribed. Thus, in no event, a

consumer is made to pay maximum demand charges for more than

what he actually availed. As stated above, the over-all

limitation is that he must have remained within the fifty

per cent quota allotted to him during the year of

restriction. We are unable to see any arbitrariness or

unreasonableness in the said proviso. It means and says

that during such periods of restricted supply, the consumer

pays the energy charges for the actual consumption plus

maximum demand charges for the maximum demand availed of by

him at the rate prescribed in the agreement.

32. The High Court faulted the proviso to Regulation 46 on

the ground of arbitrariness and unreasonableness. The rea-

122

soning of the High Court is this: if in a given case, an

industry avails of energy at 7000 KVA on the first day of

the month but does not take any energy for the remaining

twenty nine days of the month, it would still be liable to

pay the demand charges for the month at the rate prescribed

in the agreement, viz., 7000 KVA x Rs.35/ -, which is not

only arbitrary and unreasonable but also confiscatory in

nature. With great respect, we are unable to subscribe to

this view. This would precisely be the result even in the

normal times. Even when there is no power cut in force, if

an industry draws energy at 7000 KVA on the first day of the

month and does not draw the energy at all on the subsequent

twenty nine days, it would still be required to pay the

demand charges at 7000 KVA x Rs.35/-. This is because the

demand charges are meant "to cover investment, installation

'and the standing charges to some extent", as held by this

Court in Northern India Iron and Steel, which is precisely

what we have explained hereinbefore. To say that demand

charges should not be collected if the consumer does not

avail of the electricity on the remaining twenty nine days

in a month in the above illustration would be to deny and

disallow the very concept of and rationale behind the

maximum demand charges. Of course, situation would be

different, if in the above illustration, the Board does not

or is unable to provide even the restricted supply in the

manner explained hereinbefore. In such a situation, the

consumer would certainly be entitled to the relief in an

equitable manner, just as he would have been entitled to re-

lief in normal times. In other words, what would happen if

during normal times such a thing happens? Same would be the

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situation during the period of cut. There is in effect no

distinction between both situations except that during

periods of restricted supply, the availability of energy is

reduced vis-a-vis the contracted supply. Now, it is not the

case of the respondent that in any month electricity energy

was available for the first day of the month or on any par-

ticular day or days and not for the whole month. So far as

the period January to March, 1989 is concerned, the

situation in that month was a special one. It is explained

by the Board that on January 5, 1989 there was a system

disturbance on account of the failure of a 220/132 KV auto-

transformer at TTPS Talcher on account of which the

industries like the respondent were not allowed to draw en-

ergy even in accordance with the cut and restriction imposed

by the Government of Orissa and the Orissa Electricity

Board. It is explained that on account of this unusual

situation and on the basis of the representation of the

respondent, it has been given a special rebate in Board

Memorandum No.Com.1-70/83. Under this memorandum, it has

been decided that "some relief be provided to the consumer

by exempting the demand charge for the period when power was

restricted to this industry for a continuous period of

seventy two or more as special case (for the months of

January '89 to March '89 only). If this is approved, the

monthly maximum demand charges of this unit for the three

months from January, 89 to March, 89 shall be prorated for

the period of supply excluding the period when power supply

was not given to the consumer continuously for seventy two

hours or more. This concession, if allowed, shall be a

special case not to be cited as a precedent for future." It

is stated by Sri Hegde, learned counsel for the Board that a

special concession has been approved and given to the

respon-

123

dent for the said months.

33. The other reason given by the High Court in support of

its decision is contained in the second of the two extracts

from its judgment set out by us hereinbefore. It takes the

January, 1989 situation as a representative situation and

seeks to demonstrate on that basis the arbitrariness and

irrationality of the proviso to Regulation 46. But as

stated hereinbefore that was an unusual situation for which

appropriate relief has been given to the respondent. The

validity of regulations, which have the force of law, should

not be judged by taking either a stray case or an unusual

case but on the generality of the situation. All that

happens during the period of restriction is that electricity

is generated at a lower level than usual; if the fall in

production is expected to be fifty per cent, a corresponding

restriction is imposed on consumption. So far as breakdowns

and trippings etc. are concerned, they are not confined to

periods of restrictions alone; they may occur during normal

times as well. If there is no supply at all for

considerable periods, the situation would be different,

whether it happens during the period of normal supply or

during the period of restricted supply, but we are not

concerned with or called upon to pronounce upon such a

situation. For the unusual situation obtaining during

January-March, 1989 aforesaid, appropriate relief has

already been given to the respondent.

34. We must, therefore, say that no arbitrariness or

unreasonableness is involved in Regulation 46 or its

proviso. It only provides for collecting demand charges for

the actual maximum demand availed by such consumers during

the period of restricted supply. The consumer cannot le-

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gitimately complain of this course nor can it characterise

it as confiscatory. We must also say that none of the

decisions relied upon by the learned counsel for the re-

spondent lays down any principle which can be said to

suggest that such a rule is arbitrary and unreasonable.

Once we understand the system of two-part levy and the

rationale behind it, as also the compulsions arising from an

order under Section 22-B of the Electricity Act, 1910, there

would be no room or ground for impugning the validity of

Regulation 46 of its proviso. Difficulties are no doubt

there difficulties of the consumer and difficulties of the

Board. They are essentially the problems of shortages,

perhaps endemic to a developing economy. As rightly

emphasised by Sri Hegde, the respondent would have faced the

same problems if he had installed his own plant for

generating electricity to meet his needs. While the

respondent says that it has suffered on account of these

cuts, the Board says that by reducing the demand charges

during such periods, it is also suffering. The consumer

accuse Board of several failings and the Board has its own

explanations. It is not possible to go into them. It is

enough to say that in the circumstances, Regulation 46 or

its proviso cannot be termed as arbitrary or unreasonable,

much less confiscatory.

35. The appeal is accordingly allowed and the order of the

High Court is set aside. There shall be no order as to

costs.

36. Before parting with this case, we must mention that

during the hearing of this appeal, M/s.Ispat Alloys

Limited filed a Transfer Petition (C) No.335 of 1994 praying

for transferring the writ petition

124

filed by them in and pending before the Orissa High Court

(O.J.C.No.6565 of 1992) to this Court for being heard along

with this appeal on the ground that the points arising in

this appeal are similar to those arising in its writ

petition. We told Sri Kapil Sibal, learned counsel

appearing for the petitioner that while we are not inclined

to transfer the said writ petition to this Court, we may

hear him as an intervenor in this appeal, We did hear him

for sometime but then we found that the learned counsel was

raising several issues and contentions which arc outside the

purview of the writ appeal and which were not put forward or

argued before the High Court. We, therefore, did not permit

Sri Sibal to raise those contentions. It is not necessary

to set out the learned counsel's submissions nor is it

necessary to express any opinion thereon. Suffice it to say

that our decision is confined to the issues arising in the

appeal before us and will obviously not govern the issues

and questions not raised in this appeal.

37. Accordingly, the Transfer Petition is dismissed as

unnecessary.

127