Page 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4117 OF 2006

U.P. Power Corporation Ltd. …

Appellant

Versus

N.T.P.C. Ltd. & Ors. …Respondents

WITH CIVIL APPEAL NOS.5361-5362 OF 2007

J U D G M E N T

T.S. THAKUR, J.

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

2003 calls in question the correctness of a Judgment and

Order dated 7

th

July, 2006 passed by the Appellate Tribunal

1

Page 2 for Electricity whereby the Tribunal has while partially

modifying the Order passed by the Central Electricity

Regulatory Commission (‘CERC’ for short) dismissed Appeal

No.36 of 2006 filed by the appellant.

2.The CERC had by the Order impugned before the

Tribunal allowed Petition No.139 of 2004 filed by the

respondent-Corporation and permitted capitalisation of

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

Feroz Gandhi Unchahar Thermal Power Station Stage-I for

the period 1

st

April, 2001 to 31

st

March, 2004. While doing

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

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

said amount payable along with the tariff for the period

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

the Appellate Tribunal rejected the contention urged on

behalf of the appellant-Corporation that the additional

capital expenditure incurred by the respondent-Corporation

could not be taken into consideration for tariff fixation

without the same having been approved by the Central

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

2

Page 3 Regulation 2.5 of the CERC (Terms and Conditions for

Determination of Tariff) Regulations, 2001. The primary

question that therefore falls for consideration in this appeal

is whether the CERC and the Tribunal have correctly

interpreted Regulation 2.5 of the said regulations while

permitting capitalisation of the additional expenditure for

purposes of determining the tariff. That question arises in

the following factual backdrop:

3.Feroz Gandhi Unchahar Thermal Power Station Stage-I

was taken over by the respondent-National Thermal Power

Corporation from the erstwhile U.P. State Electricity Board

on 13

th

February, 1992. The Central Government had

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

communication dated 2

nd

May, 1993 issued by the Ministry

of Power. By a subsequent letter dated 5

th

August, 1996 the

CEA accorded approval for an additional Rs.2.85 crores for

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

approved project cost to Rs.927.85 crores.

4.The CERC (Terms & Conditions for Determination of

Tariff) Regulations, 2001 for the period 1

st

April, 2001 to 31

st

3

Page 4 March, 2004 came to be notified on 26

th

March, 2001,

pursuant whereto the respondent-Corporation filed Petition

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

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

Order dated 24

th

October, 2003, the CERC approved the

tariff taking into consideration the capital cost at Rs.940.70

crores as on 1

st

April, 2001 but did not consider the

additional capitalisation claimed by the respondent since the

latter was based only on an estimated capital expenditure

and was unsupported by an auditor’s certificate.

Respondent-Corporation then moved petition No.139 of

2004 before the CERC on 5

th

October, 2004 seeking approval

of the revised fixed charges in respect of the generating

plant for the relevant tariff period taking into account the

additional capital expenditure incurred during the said period

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

31

st

March, 2005, the CERC disposed of the said petition

approving an amount of Rs.4.521 crores towards capital

expenditure while disallowing the rest.

4

Page 5 5.The CERC held that the respondent would not be

entitled to tariff revision during the relevant period in the

light of Regulation 1.10 of the CERC Regulations which

prohibited allowance of an additional capital expenditure, if

such expenditure happened to be less than 20 per cent of

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

its Order that the respondent was entitled to relief in the

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

loan on the approved additional capital expenditure for the

period 2004-2009. The CERC observed :

“37.As there is nothing in the notification dated

26.3.2001 to deny the petitioner the reasonable

return to service the capital expenditure incurred by

the petitioner and found to be justified by us, we

direct that the petitioner shall earn return on equity

@ 16% on the equity portion of the additional

capitalization approved by us. Similarly, the

petitioner shall also be entitled to the interest on

loan as applicable during the relevant period. Return

on equity and interest shall be worked out on the

additional capitalization of Rs.4.521 crore approved

by us from 1

st

April of the financial year following the

financial year to which additional capital expenditure

relates up to 31.3.2004. The lump sum of the

amount of return on equity and interest on loan so

arrived at shall be payable by the respondents along

with the tariff for the period 2004-09 to be approved

by the Commission. The exact entitlement of the

petitioner on this account shall be considered by the

Commission while approving tariff for the period

2004-09.”

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Page 6 6.Aggrieved by the order passed by the CERC the

appellant-Corporation approached the Appellate Tribunal for

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

questioned the CERC’s authority to approve the additional

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

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

contended on behalf of the Corporation that in the absence

of approval of the expenditure by CEA as required under

Regulation 2.5 of the CERC Regulations, the CERC had no

authority to hold that the respondent-NTPC was entitled to

additional capitalisation. The Appellate Tribunal for

Electricity, however, repelled that contention and dismissed

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

approval of additional capitalisation to the tune of Rs.4.521

crores did not call for any interference and that the

respondent-Corporation had placed sufficient material before

the CERC to substantiate its claim. The Tribunal declared

that the CERC was empowered to undertake a prudent check

and approve additional capitalisation after the deletion of

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

because of which deletion CEA ceased to have any role in

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Page 7 such matters. The Tribunal further held that the project had

been originally approved by CEA as far back as on 5

th

August, 1986 and was taken over while still incomplete by

the respondent-NTPC in 1992. The incomplete items were

then completed by the respondent NTPC after the takeover

which required investment of additional capital. The

Tribunal was, therefore, of the view that the additional

capital was well within the approved cost of the project

which remained unexecuted on the date of vesting. The

Appellate Tribunal, however, accepted the appellant’s

contention that the relief regarding the return on equity and

interest on loan could not be granted until the next tariff

period. Consequently the Tribunal directed deletion of Para

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

said relief into consideration while determining the tariff for

the next period. The present appeal assails the correctness

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

7.When this appeal came up for admission on 29

th

September, 2006, this Court admitted the same only to

examine the following two questions:

7

Page 8 “a. What is the true scope and ambit of Regulation

2.5 of CERC (Terms and Conditions for

Determination of Tariff) Regulations, 2001?

b. xxxxxxx

c. xxxxxxx

d.Whether the CERC could have allowed the

additional capitalization which was not approved

by the concerned authority i.e. Central Electricity

Authority?

e. xxxxxxx”

8.Appearing for the appellant Mr. Pradeep Misra

strenuously contended that the CERC and so also the

Appellate Tribunal had failed to correctly interpret Regulation

2.5 of the Regulations in question. He submitted that

Regulation 2.5 of the Regulations was much too clear to

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

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

additional capital expenditure incurred on the completion of

the project could be taken into consideration for fixation of

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

appropriate independent agency constituted under the said

Regulations. So long as the capital expenditure incurred in

excess of the approved expenditure did not have the

sanction of the CEA or the independent agency nominated

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Page 9 by the CERC, the same could not, according to the learned

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

such approval having been sought or granted either by the

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

not have taken the additional capital expenditure into

consideration for purposes of fixing the tariff. It was also

contended that the CERC as also the Appellate Tribunal had

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

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

CEA in terms of Regulation 2.5 of the Regulations

unnecessary. The deletion of Section 43A(2)

notwithstanding, the CEA continued to exercise powers in

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

requirement of an approval from the CEA of the additional

cost had not, therefore, been rendered a surplusage by

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

book.

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

Ramachandran that the CERC as also the Tribunal were

perfectly justified in taking into consideration the additional

9

Page 10 expenditure incurred on the completion of the project, not

only because there was no dispute that such an expenditure

had in fact been incurred but also because the said

expenditure was found to be capital in nature. The question

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

therefore, rendered academic in the facts and circumstances

of the case.

10.It was further argued that since the appellant itself

accepted the expenditure to have been incurred and the

nature of the expenditure having been found to be capital in

character, the CEA or the independent agency could not

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

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

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

book made a material difference and that the CERC and the

Tribunal had correctly held that a reference to the CEA or

independent agency was on that count unnecessary.

11.Regulation 2.5 of the Regulations reads as under:

“2.5 Capital Expenditure

The capital expenditure of the project shall be

financed as per the approved financial package set

10

Page 11 out in the techno-economic clearance of the

Authority or as approved by an appropriate

independent agency as the case may be. The

project cost shall include reasonable amount of

capitalized initial spares.

The actual capital expenditure incurred on

completion of the project shall form the basis for

fixation of tariff. Where the actual expenditure

exceeds the approved project cost, the excess

expenditure as allowed by the Authority or an

appropriate independent agency shall be considered

for the purpose of fixation of tariff.

Provided that such excess expenditure is not

attributable to the Generating Company or its

suppliers or contractors;

Provided further that where a Power Purchase

Agreement entered into between the Generating

Company and the beneficiary provides a ceiling on

capital expenditure, the capital expenditure shall not

exceed such ceiling for computation of tariff.”

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

above Regulation is defined in regulation 1.9 as under:

“1.9‘Independent agency’ means the agency

approved by the Commission by a separate

notification.”

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

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

incurred on the completion of the project. But where the

actual expenditure exceeds the approved expenditure the

excess so incurred can be taken into consideration to the

extent the same is allowed by the Central Electricity

11

Page 12 Authority or an appropriate independent agency nominated

for the purpose. This implies that the excess expenditure

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

the independent agency before it can constitute an input for

determination of the tariff. Scrutiny of the excess would in

turn primarily involve examination of two distinct aspects

viz.

(a) Whether the excess expenditure has been actually

incurred or is a make believe or an exaggeration

by the generating company; and

(b) Whether the expenditure was capital in nature.

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

the affirmative, the CEA or the Independent Agency would

have no reason to disallow such expenditure, nor would its

consideration for tariff fixation present any difficulty. In

case a lesser amount is allowed by the CEA or the

Independent Agency either because the generating company

fails to substantiate its claim of having incurred the

expenditure as claimed or even if the amount is incurred,

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

12

Page 13 expenditure, the lesser amount alone will constitute an input

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

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

any other dimension which the CEA or the Independent

Agency would be entitled to consider while examining the

question of allowing or disallowing the excess expenditure

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

reference under Regulation 2.5 (supra) to the CEA or

Independent Agency would make little or no difference

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

because although the respondent-Corporation had claimed

an excess expenditure of Rs.6.101 crores the amount

actually taken into consideration for fixation of the tariff was

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

disallowed a substantial part of the excess that was claimed

by the respondent-Corporation. What is significant is that

the appellant-Corporation had fairly conceded that an

amount of Rs.4.521 crores was indeed spent by the

respondent for the completion of the project. That is

evident from the following observation of the Electricity

Appellate Tribunal, where Mr. Misra learned counsel for the

13

Page 14 appellant made a candid admission as to the extent of the

expenditure incurred over and above the approved Project

cost:

“Mr. Pradeep Misra, learned counsel for the

appellant, while relying on Regulation 1.10 which

provides that there shall be no tariff revision if the

capital expenditure is less than 20% of the approved

cost of the project contended that there could be no

tariff revision at all much less the appellant shall be

made liable to pay 16% ROE as well as interest as

directed in Para 37 of the Impugned Order under

challenge. Mr. Pradeep Misra also contended that

the claim of this additional expenditure, under five

Heads, are not disputed but they are only

maintenance expenditure. It was also contended by

the learned counsel that in the absence of approval

of expenditure by CEA and there being no proof of

such approval, CERC has no authority to hold that

NTPC had incurred additional capital expenditure and

entitled to additional capitalisation.”

(emphasis supplied)

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

the first of the two aspects that may have engaged the

attention of the CEA or the Independent Agency was

concluded by the admission of the appellant, which was the

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

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

prudent check of the extent of admissible expenditure said

to have been incurred.

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Page 15 16.That leaves us with the second aspect which, any

scrutiny or examination by the CEA may have involved viz.

whether the expenditure was capital or revenue in nature.

The CERC has found the expenditure to be capital in nature

which finding has been affirmed by the Appellate Tribunal.

There is nothing perverse about that finding in our opinion

nor has this appeal been admitted on the question whether

the expenditure was capital or revenue. In the absence of

any question relating to the nature of the expenditure, we

find it difficult to appreciate how the absence of a reference

to CEA has caused any miscarriage of justice for the

appellant or vitiated the tariff fixation by the CERC. It

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

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

justice or prejudice would render it unnecessary for us to

interfere with the orders passed by the CERC and the

Appellate Tribunal.

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

was necessary under Regulation 2.5 was argued before us at

some length we may as well deal with the same before

parting. A reference to the backdrop in which the question

15

Page 16 arises becomes necessary and may be summarised as

under:

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

the generation and supply of electricity by generating

companies. Chapter V comprising Sections 28 to 58 of the

said Act dealt with the preparation of schemes by generating

companies and concurrence of the CEA for such schemes

including the capital cost to be incurred by these generating

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

electricity by the generating companies and provided norms

and parameters to be determined by the CEA and notified by

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

Bar was around the said provision and the effect of deletion

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

the same at this stage.

“43A. Terms, conditions and tariff for sale of

electricity by Generating Company .- (1) A

Generating Company may enter into a contract for

the sale of electricity generated by it-

(a) with the Board constituted for the State or

any of the States in which a generating station

owned or operated by the company is located;

(b) with the Board constituted for any other

State in which it is carrying on its activities in

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Page 17 pursuance of sub-section (3) of section 15A;

and

(c) with any other person with consent of the

competent government or governments.

(2) The tariff for the sale of electricity by a

Generating Company to the Board shall be

determined in accordance with the norms regarding

operation and the Plant Load Factor as may be laid

down by the Authority and in accordance with the

rates of depreciation and reasonable return and such

other factors as may be determined, from time to

time, by the Central Government, by notification in

the Official Gazette:

Provided that the terms, conditions and tariff

for such sale shall, in respect of a Generating

Company wholly or partly owned by the Central

Government, be such as may be determined by the

Central Government and in respect of a Generating

Company wholly or partly owned by one or more

State Governments be such as may be determined,

from time to time, by the government or

governments concerned.”

19.In the year 1998, came the Electricity Regulatory

Commissions Act, 1998, which established the Central

Electricity Regulatory Commission (hereinafter referred to as

“the Central Commission”). The Central Commission was

inter alia charged with the function of determining tariffs of

Central Units such as those owned and controlled by the

respondent-Corporation. Significantly enough Section 51 of

this Act empowered the Central Government to delete sub-

section (2) of Section 43A with effect from such date as the

17

Page 18 Central Government may decide. The Central Government,

invoked that power and by a notification dated 11

th

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

the Electricity Supply Act, 1948 in respect of generating

companies regulated by the Central Commission

retrospectively w.e.f. 24

th

July, 1998. Shortly thereafter the

Central Commission issued an order in regard to operational

norms applicable to generating stations owned among

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

effect:

“As regards capital costs, the situation is somewhat

difficult. As the law stands today in respect to PSUs,

the required approvals from the Government and

clearance from CEA have to be obtained before the

commencement of the project, subject to certain

limits for which no clearance is required. After the

completion of the project, if the actual expenditure

or the scope of the project vary beyond certain

limits, they are required to be further approved. This

process of approval is time consuming, resulting in a

provisional clearance, making a subsequent

retrospective revision inevitable. Changes in

legislation are being contemplated by which the

clearance from CEA for projects might be done away

with. However, as the law stands today, approvals

are inevitable. Still it is possible to bring about

stability in tariff in case a time schedule is worked

out by which utilities may submit data of CEA at

least 6 months prior to the completion of a project,

so that clearance could be obtained sufficiently in

time before the tariff for the station/lines is

determined. It is hoped that any variations on

actual finalization of accounts thereafter should be

minor in nature which could be absorbed by the

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Page 19 utility and if substantial, can be taken care of in the

next revision. In view of the above, all utilities

seeking determination of tariff in respect of new

projects, shall submit their applications to us at least

3 months in advance of the anticipated date of

completion, along with the project cost as approved

by the appropriate independent authorities, other

than the Board of Directors of the Company. This

project cost will constitute the basis for tariff

fixation, and no revision would be entertained till the

next tariff period. This direction presupposes that

CEA may hereafter, unlike the past, clear capital cost

escalations on factors other than the change in

scope as well. We would urge upon CEA to consider

and deal with the approval of additional capital costs

other than those due to change in the scope of the

project as well, in the interest of avoidance of tariff

shocks down stream. In case the projects exempted

from CEA clearance, the Commission would consider

accepting a due diligence clearance from any

recognised agency.”

20.The above was followed by the Central Commission

framing Tariff Regulations 2001, in which Regulation 2.5

extracted earlier dealt with capital expenditure. It was in

the above background that the Central Commission

determined the Tariff for the generating unit in question for

the period 1

st

April, 1997 to 31

st

March, 2001 by an order

dated 30

th

October, 2002. Shortly after that order the

Parliament enacted the Electricity Act, 2003 which came into

force w.e.f. 10

th

June, 2003. The new legislation repealed

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

19

Page 20 was that all provisions of the 1948 Act including those

requiring approval by the CEA of the scheme of the

generating stations and capital cost which the repealed Act

provided for became inapplicable and irrelevant under the

new Act. The new law aimed at deregulating electricity

generation. In the case of Thermal Power Stations the

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

was the position under the earlier law.

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

sought additional capitalisation of the expenditure on the

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

Central Commission determined the additional capitalisation

and allowed the same to the respondent, which

determination was upheld by the Tribunal with the

modification to which we have adverted in the beginning of

this order.

22.There is no gainsaying that the prayer for additional

capitalisation was made by the respondent-Corporation and

considered by CERC after the Electricity Act 2003 had come

into force, repealing the earlier enactments. The new

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

20

Page 21 of approval of the schemes for the generating companies or

the capital expenditure for the completion of such projects.

The entire exercise touching the regulation of the tariff of

generating companies owned or controlled by the Central

Government, like the respondent was entrusted to the

Central Commission. The role of the Central Electricity

Authority established under Section 7 of the 2003 Act, was

limited to matters enumerated under Section 73 of the Act,

approval of the scheme for generating companies or the

capital expenditure for the completion of such projects or

capitalisation of the additional expenditure not being one

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

that the Central Electricity Authority had no part to play in

the matter of approval for purposes of capitalisation of the

extra expenditure incurred on a project. That was so

notwithstanding the continuance of Regulation 2.5 of the

regulations framed by the CERC providing for such an

approval by the CEA. The far reaching changes that came

about in the legal framework with the enactment of the

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

same envisaged a reference to the CEA or an Independent

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Page 22 Agency for approval of the additional capitalisation.

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

despite the sea change in the legal framework would have

been both unnecessary as well as opposed to the spirit of

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

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

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

not indicated nor did the absence of such a reference

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

2003 Act had come into force. That was so notwithstanding

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

2003 continued the terms and conditions for determination

of tariff under the enactments mentioned therein and those

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

terms were specified under that section whichever was

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

with costs assessed at Rs.50,000/-

Civil Appeal Nos.5361-5362 of 2007

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Page 23 23.In these appeals the order impugned by the appellant

places reliance upon the order passed by the Tribunal, in

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

foregoing part of this judgment dismissed the appeal

preferred by the appellant. On a parity of reasoning these

appeals are also destined to be dismissed and are,

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

………………….……….…..…J.

(T.S. THAKUR)

.……..…………………..…..…J.

(VIKRAMAJIT SEN)

New Delhi

September 18, 2013

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