Monnet Ispat and Energy Limited vs Union of India and Others

The main question involved in these writ petitions relates to the validity of rule 3(1)(a)(ii) of the Electricity Rules, 2005 (the Rules).

THE FACTS

Monnet Ispat and Energy Limited (the Petitioner) is a public company registered under the Companies Act. It entered into Memorandum Of Understanding (the MOU) with the State of Chhattisgarh on 21.05.2001, by which it was supposed to set up units to manufacture sponge iron, steel structural rolling mill, and ferro alloys at Raigarh (the Raigarh-unit) and Raipur (the Raipur-unit) districts. Subsequently, another MOU was entered on 04.05.2007, by which the Petitioner was required to further invest in the units.

By the MOUs, the Petitioner was also permitted to establish Captive Generating Plants (CGPs) at both places, referred to as the Raipur-CGP and the Raigarh-CGP.

The Petitioner had planned to set the CGPs along with the units. The CGPs were installed but due to recession, the units could not be installed to their full capacity. The result was they could not utilise the electricity generated by the CGPs to extent it was supposed to do.

In order to use the electricity generated by the CGPs, the Petitioner entered into power purchase agreements with the distribution companies and purchasers in and out of the State of Chhattisgarh. In this regard, the Petitioner took approval and thereafter received money on the tariffs approved by the Chhattisgarh State Electricity Regulatory Commission (the Commission) and also paid open access charges as determined by it.

The Commission issued a show-cause notice dated 10.08.2009 to the Petitioner alleging that the Raipur-CGP had not used 51% of the electricity generated by it and as such, there was violation of sections 10(2) and 42(2) of the Electricity Act 2003 (the Act). By the notice, an explanation was asked to show-cause as to why action may not be taken u/s 142 of the Act.

The Petitioner has filed Writ Petition (C) No. 3140 of 2011 (the first WP) challenging the validity of rule 3(1)(a)(ii) of the Rules, the validity of regulation 11(6)(b)(ii) of the Chhattisgarh State Electricity Regulatory Commission (Intra-State Open Access in Chhattisgarh) Regulations, 2005 (the 2005-Regulations), and the show-cause notice dated 10.08.2009 issued to the Raipur-unit.

Subsequently, the Commission sent a letter dated 10.06.2011 to the Chhattisgarh State Power Distribution Company Limited (the Distribution-Company) mentioning therein that the Petitioner had not utilised the prescribed norm of 51% of the electricity generated by its Raipur-CGP and the needful may be done. The names of some other similarly situate companies were also included in this letter.

In pursuance of the letter dated 10.06.2011, the Distribution-Company issued a bill dated 13.07.2011 demanding a sum of Rs. 9,06,27,250/- as cross-subsidy charges from the Raipur-unit of the Petitioner and the draft notice dated 02.08.2011 was also sent requiring the Petitioner to pay the amount, otherwise, there would be disconnection of supply of electricity.

The Petitioner has filed Writ Petition (C) No. 4481 of 2011 (the second WP) challenging the validity of rule 3(1)(a)(ii) of the Rules, regulation 33(6)(b)(ii) of Chhattisgarh State Electricity Regulatory Commission (Connectivity and Intra-State Open Access) Regulations, 2011 (the 2011-Regulations), the letter dated 10.06.2011 sent by the Commission, the bill dated 13.07.2011 and the draft notice dated 02.08.2011 issued by the Distribution-Company.

POINTS FOR DETERMINATION

We have heard counsel for the parties. The following points arise for determination:

(i) Whether rule 3(1)(a)(ii) of the Rules is ultra vires;

(ii) Whether the notice dated 10.08.2009 issued by the Commission to the Raigarh-unit is illegal.

(iii) Whether the letter issued by the Commission dated 10.06.2011 and the consequent bill dated 13.07.2011 as well as the draft notice for disconnection dated 02.08.2011 issued by the Distribution-Company are illegal;

(iv) Whether regulation 11(6)(b)(ii) of the 2005- Regulations and regulation 33(6)(b)(ii) of the 2011- Regulations are ultra vires.

1st POINT: RULE IS VALID

In support of the first point, the counsel for the Petitioner has placed reliance on Global Energy Ltd. and Another Vs. Central Electricity Regulatory Commission, (the Global-Energy case), Academy of Nutrition Improvement and Others Vs. Union of India (UOI), and Union of India (UOI) and Others Vs. S. Srinivasan, (the Srinivasan case). (see below for the rulings relied by counsel for the Central Government)1. He submits that the rule 3(1)(a)(ii) of the Rules is invalid for the reason that:

� The impugned rule is beyond the rule making power conferred upon the Central Government u/s 176 of the Act;

� There is excessive delegation of legislative function; and

� It is unreasonable.

It is settled law that:

� The rule making authority has to act within the authority conferred by the statute (for rulings see below)2; a rule is illegal if it contravenes contravening any provision of the Constitution (for rulings see below)3 or any Act (for rulings see below)4;

� The essential legislative functions cannot be delegated (for rulings see below)5;

� The delegatee must be furnished with the adequate guidelines so that arbitrariness is avoided (for rulings see below)6;

� The legislature also does not grant power to frame unreasonable or arbitrary rule. If a rule is manifestly unreasonable or arbitrary, it is also liable to be struck down (for rulings see below)7.

The question is, does the impugned rule falls in any one of these categories; is it liable to be struck down?

Cases Cited by Petitioner''s Counsel

In the cases cited by the counsel for the Petitioner, the challenged rule or regulation was struck down. It would be good idea to see their factual background and consider them.

The Global-Energy Case

In the Global-Energy case, the clauses (b) and (f) of Regulation 6-A of the Central Electricity Regulatory Commission (Procedure, Terms and Conditions for Grant of Trading Licence and Other Related Matters) (Amendment), Regulations, 2006 provided qualifications for grant of inter-state trading licence. These clauses were challenged.

The Supreme Court on the reading of the Act came to the conclusion that the Act was silent with regard to the condition for grant of license and did not lay down any pre-qualifications thereof as well as section 52 of the Act did not empower the regulation making authority to provide for qualification or disqualification. It is on this footing that the aforesaid regulations were struck down.

The Nutrition-Improvement Case

In the Nutrition-Improvement case, the vires of rule 44-I of the Prevention of Food Adulteration Rules, 1955 was challenged. This rule restricted the sale and prohibited the use of common salt for human consumption unless it was iodised.

Before the Court, an affidavit was filed by the Government of India in which it was admitted by the Union Government that it was never their case that the use of non-iodised salt is injurious to health: in case it was not injurious it could not be banned. It is for this reason that the aforesaid rule was struck down.

The Srinivasan Case

In the Srinivasan case, rule 5 of the Appellate Tribunal for Foreign Exchange (Recruitment, Salary and Allowances and Other Conditions of Service of Chairperson and Members) Rules, 2000 was challenged. It provided appointment of part-time members.

The Supreme Court held that section 46 of the Act nowhere envisages part-time members: it was beyond the scope of the statute permitting framing of the rules. It is for this reason that the rule permitting the appointment of part-time members was held to be ultra vires.

The aforesaid cases were decided on the provisions of the statute under which they were framed. They go on their own facts. We have to see provisions of the Act and decide the validity of the impugned rule.

Validity of Rule 3(1)(a)(ii)

Rule 3 of the Rules is titled as ''Requirements of Captive Generating Plant''. It clarifies what is a ''captive generating plant''. The impugned rule 3(1)(a)(ii) of the Rules explains that a power plant shall not qualify as a captive generating plant unless 51% or more of the aggregate electricity generated in such plant (determined on an annual basis) is consumed for the captive use. The question is whether it is beyond the rule making power; or are there sufficient guidelines for such a rule; or has legislative function been delegated; or is it unreasonable.

Within the Rule Making Power

Section 176 of the Act confers power on the Central government to make rules. Section 176(1) of the Act provides that the Central Government may make rules for carrying out the provisions of the Act by a notification. Section 176(2) of the Act provides particular instances, when rule can be made.

It is also settled law that the particular instances are merely illustrative in nature and not exhaustive (for rulings see below)8. Even if the particular instances are taken to be exhaustive, suffice to say that section 176(2)(z) of the Act provides that rule may be made regarding any other matter that is required or may be prescribed.

Part III of the Act is titled ''Generation of Electricity''. Section 7 of this chapter is titled ''Generating company and requirement for setting up of generating station''. It provides that any company may establish, operate and maintain a generating station without obtaining a licence under the Act. However, it has to comply with the technical standards provided u/s 73(b) of the Act.

Nevertheless, section 8 of this chapter, titled ''Hydro-electric generation'', provides some restrictions as mentioned therein for setting up a Hydro-electric generation.

Section 9 of this chapter is titled ''Captive generation''. It provides that any person may construct maintain or operate a captive generating plant and dedicated transmission lines.

Section 2 of the Act is the definition clause. Section 2(8) of the Act defines the word ''captive generating plant''. It means that a power plant set up by any person to generate electricity primarily for his own use.

In section 2(8) of the Act, the word used is ''primarily''. It is this word that required to be further defined; it was this word that was required to be defined: the rule further explains it and is not beyond the rule making power.

Sufficient Guidelines and No Excessive Delegation

The word primarily means mainly or chiefly. The Act itself provides sufficient guidelines that a captive generating plant is mainly set up for its own use. However, what exact percentage to be used in order to be called primarily, is not defined; it is left to be clarified in the Rules. This is what has been done under rule 3(1)(a)(ii) of the Rules. It has been properly defined in rule 3 of the Rules.

If a rule fills up the details or the delegatee merely performs ancillary or subordinate legislative function then it cannot be struck down (for rulings see below)9. This is exactly what rule 3(1)(a)(ii) of the Rules does. It merely supplements the Act and not supplant the same.

By using the word ''primarily'', sufficient guidelines have been indicated and there is no excessive delegation.

Reasonable

An electricity generating station generates electricity and provides electricity to the consumers through distribution licencees: a CGP also generates electricity but primarily (as defined in section 2(8) of the Act read rule 3 of the Rules) to itself.

A CGP, like other electricity generating companies may also supply electricity to the consumers through distribution licensees though under the impugned rule, it cannot be more 49% of the aggregate electricity generated in the plant determined on annual basis. However, a CGP enjoys some advantages:

� No licence is required for supply of electricity to any licensee (see second proviso to section 9(1) of the Act);

� No surcharge is leviable on a person on open access for carrying electricity from his CGP for his own use {last proviso to section 38(2), 39(2), 40, fourth proviso to section 42}.

We fail to understand how rule 3(1)(a)(ii) can be said to be unreasonable in light of the fact that:

� A CGP is established, primarily for own use of a person;

� A CGP also derives certain benefits that are not extended to the other licensees.

In our opinion, rule 3(1)(a)(ii) of the Rules is not ultra vires: it is valid.

2nd POINT: VALIDITY OF NOTICE--NOT NECESSARY TO DECIDE

The counsel for the Petitioner submits that:

� The Petitioner is supplying electricity to its Raigarh-unit by its Raigarh-CGP;

� It has been done through the lines that were constructed and maintained by the Petitioner;

� The notice dated 10.08.2009 issued by the Commission is for the alleged violation for supplying the electricity to itself by using open access, which according to the Commission is violation of section 10(2) as well as section 42(2) of the Act. The Petitioner has not used any open access or any transmission line or any distribution system or any facility associated in such lines. It has used the lines which belong to the Petitioner and there is no violation;

� On the allegations in the notice, at the most the Petitioner has used its electricity produced by itself and the Petitioner cannot be treated to be the consumer qua itself;

� Assuming, though not admitting, that there is some kind of violation for not using 51% of electricity generated by the Petitioner. There was justifiable reason for not doing so. It was because of the Raigarh-unit could not come into full operation due to global recession;

� Ultimately, the excess electricity was utilised for the benefit of the residents of State of Chhattisgarh or outside the State of Chhattisgarh in the country; and

� The default, if any, is merely a technical default for which no penalty should be imposed and the proceeding should be dropped.

It is not necessary for us to decide the points raised by the Petitioner. These objections are to be first decided by the Commission. The Petitioner has been given a show-cause notice. It has already filed its reply. The Petitioner may file additional objections, if it so likes. Thereafter, the Commission, after affording opportunity to the Petitioner may decide the same by a reasoned order.

3rd POINT: LETTER, BILL, DRAFT NOTICE-ILLEGAL

The draft notice for disconnection dated 02.08.2011 issued by the Distribution-Company regarding the Raipur-unit is based upon its bill dated 13.07.2011. The bill in turn is based upon the letter dated 10.06.2011 written by the Commission. In case the letter of the Commission is invalid then the bill as well as draft notice would also be invalid.

In the letter dated 10.06.2011, the Commission has mentioned that the Petitioner has accepted the position that it was not been able to maintain the prescribed norm of 51% of its Raipur-CGP. It is on the basis of this that the bills dated 13.07.2011 and draft notice dated 02.08.2011 for disconnection were issued by the Distribution-Company. In case, letter dated 10.06.2011 is illegal then the bill as well as the draft notice, that are dependent on it, are also illegal.

The Petitioner in paragraph 1 under the heading ''subject matter in brief'' of the second WP as well as in its paragraph 8.5 has alleged that the Commission has wrongly mentioned in its letter dated 10.06.2011 that:

� It has accepted by the Petitioner that it has failed to maintain the prescribed norm; and

� No opportunity was afforded to the Petitioner before writing the letter.

The Commission has filed its counter affidavit in the second WP. However, neither the aforesaid allegations have been denied nor any document has been filed to show that there was any acceptance by the Petitioner. There is also no assertion that any opportunity was afforded to the Petitioner before writing the letter dated 10.06.2011. The letter is against the principles of natural justice.

In view of above, the letter dated 10.06.2011, so far as it relates to the Petitioner as well as the bill dated 13.07.2011 and the draft notice dated 02.08.2011 that are based upon the same, are illegal. They are set aside.

The Commission has passed an order dated 29.09.2006 in Petition No. 16 of 2006 (M), in the matter of review of the order of the Commission dated 06.02.2006. By this order, the Commission has determined that the Chief Electrical Inspector may obtain details of generation, auxiliary consumption and consumption by captive and non-captive users, from all CGPs and submit the same to the Commission, which shall then determine whether the generating unit qualifies as CGP as per the requirement of rule 3 of the Rules or not. That is to say the question whether a power station qualifies as a CGP or not is to be determined by the Commission.

In view of above, the Commission may determine the aforesaid issue after affording reasonable opportunity to the Petitioner and thereafter, in case any action is required to be taken up, may be taken.

Here, we would also like to clarify that in case, the Commission wishes to rely upon any adverse report of the Chief Electrical Inspector against the Petitioner, then a copy of the same must be given to the Petitioner, inviting its objections.

4th POINT: LEFT OPEN

The validity of the regulation 11 (6) (b) (ii) of the 2005-Regulations and regulation 33(6)(b)(ii) of the 2011-Regulations are challenged in the first and second WPs respectively.

The 2005-Regulations were the earlier regulations that have been replaced by the 2011-Regulations. However, they both relate to the subject matter of cross-subsidy.

The counsel for the Petitioner submits that:

� The cross-subsidy is liable to paid by a distribution company, which is supplying electricity to different consumers. However, according to the allegations in the present case the Petitioner has not supplied any electricity to any consumer. It has merely supplied electricity to itself;

� It is neither consumer nor a distribution licensee. In case, it is held that the Petitioner is liable to pay cross-subsidy, then the provisions are ultra vires;

� In order to validate it, the provisions must be read down; and

� It may be held that the impugned regulations do not apply to a case where a company supplies electricity to itself by its own lines.

It is not necessary for us to express any opinion on this question. We have already sent the matter back to the Commission itself. It is always open to the Petitioner to raise the ground that it is not liable to pay any cross-subsidy and the provisions may be read down. However, in case if any adverse order is passed, it will be open to the Petitioner to challenge the same before the appropriate forum. We leave this point unanswered, to be raised by the Petitioner in the subsequent proceeding, if the need be.

CONCLUSIONS

Our conclusions are as follows:

(a) Rule 3(1)(a)(ii) of the Electricity Rules, 2005 is intra vires;

(b) The Petitioner has already filed his objections against the notice dated 10.08.2009. It may file additional objections, if it so desires. Thereafter, the Commission may decide the objections by reasoned order without being influenced by any observations made in this judgment;

(c) The letter of the Commission dated 10.06.2011 is void as no opportunity was afforded to the Petitioner. The bill dated 13.07.2011 as well as the draft notice dated 02.08.2011 issued by the Chhattisgarh State Power Distribution Company Limited are based upon the same. They are set aside. However, it will be open to the Commission to take fresh decision after giving reasonable opportunity to the Petitioner. Thereafter, in case any action is required, that may be taken;

(d) The question regarding validity of regulation 11(6)(b)(ii) of the Chhattisgarh State Electricity Regulatory Commission (Intra-State Open Access in Chhattisgarh) Regulations, 2005 and regulation 33(6)(b)(ii) of the Chhattisgarh State Electricity Regulatory Commission (Connectivity and Intra-State Open Access) Regulations, 2011 are left open at this stage. It will be open to the Petitioner to agitate this point again if the need so arises.

In view of our conclusions, the WP 3140 of 2011 is disposed off and WP 4481 of 2011 is partly allowed.

___________________________________________________________________________________

1 The counsel for the Central Government relied upon the following decisions for upholding validity of rule 3 (1) (a) (ii) of the Rules:

Maharashtra State Board of Secondary and Higher Secondary Education and Another Vs. Paritosh Bhupeshkumar Sheth and Others, St. Johns Teachers Training Institute Vs. Regional Director, National Council for Teacher Education and Another, Government of Andhra Pradesh and Others Vs. Smt. P. Laxmi Devi, PTC India Ltd. Vs. Central Electricity Regulatory Commission thr. Secy.,

Hukam Chand etc. Vs. Union of India (UOI) and Others, Addl. District Magistrate (Rev.) Delhi Admn. Vs. Shri Siri Ram,

3 Narendra Kumar and Others Vs. The Union of India (UOI) and Others, Mrs. Maneka Gandhi Vs. Union of India (UOI) and Another, Article 13, Madhubhai Amathalal Gandhi Vs. The Union of India (UOI), A.K. Gopalan Vs. The State of Madras, Rashid Ahmed Vs. The Municipal Board, Kairana, Tahir Hussain Vs. District Board, Muzaffarnagar, The State of Rajasthan Vs. Nath Mal and Mitha Mal, ; R.M. Seshadri Vs. The District Magistrate, Tanjore and Another, Narendra Kumar and Others Vs. The Union of India (UOI) and Others, Chandrakant Krishnarao Pradhan and Another Vs. The Collector of Customs, Bombay and Others, Kameshwar Prasad and Others Vs. The State of Bihar and Another, P.J. Irani Vs. The State of Madras,

4 ITW Signode India Ltd. Vs. Collector of Central Excise, Now Novva ADS Vs. Secretary, Deptt. of Municipal Administration and Water Supply and Another,

5 Essential legislative functions consist of determining or choosing the legislative policy and formally enacting that policy into a binding rule of conduct. This cannot be delegated. it has been so held in the following cases Harishankar Bagla and Another Vs. The State of Madhya Pradesh, Vasantlal Maganbhai Sanjanwala Vs. The State of Bombay and Others, L.N. Mukherjee Vs. The State of Madras, A.N. Parasuraman Etc. Vs. State of Tamil Nadu, Agricultural Market Committee Vs. Shalimar Chemical Works Ltd., Kunj Behari Lal Butail and Others Vs. State of H.P. and Others, Kiran Gupta and Others Vs. State of U.P. and Others Etc.,

6 Hamdard Dawakhana and Another, Kalipada Deb and Another, Lakshman Shripati Itpure @ Lakshman Shripati Impore and A.B. Choudhri and Another Vs. The Union of India (UOI) and Others, ; Panama Sugar Refining Co. v. Ryan, 293 US 388 440 (Cardozo, J) In Re: The Delhi Laws Act, 1912, the Ajmer-Merwara (Extension of Laws) Act, 1947 and the Part C States (Laws) Act, 1950, Naraindas Indurkhya Vs. The State of Madhya Pradesh and Others,

7 M/s. Khoday Distilleries Ltd. etc. Vs. State of Karnataka and others, State of Kerala and Others Vs. Unni and Another,

8 Rohtak Hissar District Electricity Supply Co. Ltd. Vs. State of Utter Pradesh and Others, Cf. Section 3(2) - 15, Defence of India Act, 1962 and Rule 30 AIR 1945 156 (Privy Council) AIR 1964 SC 264, p. 268 : (1964) 4 SCR 549; Om Prakash and Others Vs. State of U.P. and Others, Shri Sudarshan Mineral Co. Ltd. Bhilwara Vs. Union of India (UOI) and Another, , K. Ramanathan Vs. State of Tamil Nadu and Another, Ajay Canu Vs. Union of India (UOI) and Others,

9 In re. Article 143 In Re: The Delhi Laws Act, 1912, the Ajmer-Merwara (Extension of Laws) Act, 1947 and the Part C States (Laws) Act, 1950, ; St. Johns Teachers Training Institute Vs. Regional Director, National Council for Teacher Education and Another, ; Wayman v. Southard, 10 Wheat 1 (1825), Marshall C J; Kunj Behari Lal Butail and Others Vs. State of H.P. and Others,