Supreme Court on Peak Load Exemption Charge and 'Power Tariff Freeze' Clause - State of Himachal Pradesh v. Gujarat Ambuja Cement

 

State of Himachal Pradesh & Ors. v. Gujarat Ambuja Cement & Ors.

The instant article is on a recent Judgment passed by the Hon’ble Supreme Court of India relating to a dispute between the State and a Private Investor. The core issue involved is that whether the Company (Ambuja Cement) is entitled to the benefit of Power Tariff Freeze which would include the right to reimbursement of all the amounts paid by it on account of Peak Load Exemption Charge or not?

Facts in Brief 

In the instant case, Gujarat Ambuja Cement (The Company) wanted to establish an Industrial Unit for manufacture of Portland Cement in Solan, Himachal Pradesh, for which the approval was accorded by the State Government on 23.01.1990.

The said Industrial Unit was accorded “Prestigious Status” under Revised Rules Regarding Grant of Incentive to Industrial Units in Himachal Pradesh, 1991 (Incentive Rules) to avail various incentives. The Company fulfilled all the relevant criteria in this regard. Under the Incentive Rules, the Company was entitled to a ‘Power Tariff Freeze’ for a period of four years from the date of commencement of commercial production. Such ‘Power Tariff Freeze’ was to be worked out by granting to the Company reimbursement of any increase in Industrial Power Tariff after the date of commencement of commercial production.

However, on 28.01.1994, the State Electricity Board informed the Company that ‘Peak Load Hours Restrictions’ (6 PM to 9 PM during April-October and 5 PM to 9 PM during November to March) shall be imposed. While exercising powers under Section 49 and Section 59 of the Electricity (Supply) Act, 1958, the Board brought into force “Himachal Pradesh State Electricity Board Schedule of Electricity Tariff, 1994 w.e.f. 31.05.1994, which provided that if an Industrial Consumer wants to run its industry during Peak Load Hours, a separate agreement shall have to be entered into with the Board.

On 23.08.1995, the Electricity Board issued an Office Order according sanction in favour of the Company for running the Industrial Unit during Peak Load Hours subject to various conditions.

Subsequently, the Company commenced production on 26.09.1995 under an impression that it is entitled to a ‘Power Tariff Freeze’. However, on 30.10.1995, another Notification was issued by the Board for supply of electricity that contained, among others, two important points: -

a. The Industrial Units shall not be provided electricity during Peak Load Hours and to avail the same, a separate Agreement must be entered with the Board.

b. Industrial Units availing Peak Load Exemption Charge (PLEC) shall be charged an extra Rs. 1/- per Unit over and above the normal tariff.

In the year 1996, the Incentive Rules were again revised and the Rules stated that the Power Tariff to be reimbursed will not include any other   charge/surcharge/peak   load charge/fuel adjustment charge etc. as may be levied by the competent authority.

Issue Involved 

Whether the Company is liable for reimbursement of the Peak Load Exemption Charge (PLEC) in the instant case?

Arguments advanced on behalf of the State of Himachal Pradesh 

a. The Company commenced production on 26.09.1995 and on such date, the PLEC had not come into force.

b. The Company was informed on 28.01.1994 itself that there will be restrictions on availability of power during Peak Load Hours.

c. The Notification dated 30.10.1995 categorically stated that power supply during Peak Load Hours would not be available except in cases of special need and the same would entail an additional charge of Rs. 1/- per unit over and above the Normal Tariff.

d. An Affidavit was filed by the Board before the Court indicating that the power for supply during Peak Load Hours had to be procured by the Board from other sources, thereby indicating that PLEC is not a part of the normal tariff schedule in respect of which there is a promise of reimbursement by way of an incentive in the event of increase of such tariff for a period of four years.

Arguments advanced on behalf of the Company 

a. Tariff   is   not   a   defined expression   either   under   the   Electricity (Supply) Act, 1948 or the Electricity Act, 2003. The dictionary meaning of Tariff is not very helpful either.

b. The Object and Effect Test must, therefore, be applied to hold that PLEC is included within the meaning of electricity tariff. Exclusion of such charges (PLEC) from the expression ‘tariff’ would be counter-productive as the incentive has been offered under the Industrial Policy of the State to attract investments.

c. Any exclusion of PLEC from the expression ‘tariff’ would be to permit the State/Board to destroy the very purpose of the Incentive Scheme in light of the fact that the Notification of 1992 granting the Company the incentive of ‘Power Tariff Freeze’ provided the method of calculation for reimbursement as difference between the Amount actually billed and the Amount that would have been billed as per the tariff in force on the date of commercial production. The said formula would clearly include reimbursement of PLEC within the ambit of the incentive granted.

d. An interpretation that does not include reimbursement of PLEC would enable the State/Board to load the normal tariff with various other additional charges by giving different nomenclatures with a view to distinguish the same from the expression ‘tariff’.

e. The revised Rules of 1996 which specifically excludes PLEC from the Power Tariff makes the position amply clear that PLEC had always been and is a part of the tariff.

Reasoning Adopted by the Court 

a. The Company was informed by the State/Board on 28.01.1994 itself, much prior to commencement of production, that the State is going through a phase of acute shortage of power affecting Peak Load Hour Supply.

b. The Board, on 23.08.1995, accorded sanction for supply of electricity during Peak Load Hours to the Company subject to certain terms and conditions.

c. The Notification dated 30.10.1995 made it amply clear that power during Peak Load Hours was to be provided as a special dispensation for needy industries only. The mode of supply of power was also different as for such needy industries a separate Meter was to be installed.

d. The electricity supply during the Peak Load Hours was obtained from other sources. Thus, the normal supply of electricity was discontinued during the Peak Hours. The normal supply of electricity is distinguishable from the supply of electricity during Peak Load Hours which was an act of special dispensation and upon payment of PLEC.

e. The question to be answered is how the expression ‘tariff’ is to be understood in the context in which such meaning is required to be determined. The meaning assigned must be contextual and PLEC has to be understood keeping in mind that the supply of power during Peak Load Hours was an exception involving a special arrangement.

f. The revised Rules of 1996 are merely clarificatory in nature and will not fundamentally alter the earlier situation.

Held 

The incentive provided under the Incentive Rules would not include PLEC and the Company is not entitled to reimbursement towards the PLEC paid for availing power supply by way of special dispensation. Thus, any reimbursement made to the Company shall be returned to the State/Board with interest @ 6% per annum and the Appeal was allowed.

Opinion 

Looking into the narration of facts and circumstances, in my humble opinion, the instant Appeal ought not to have been allowed by the Hon’ble Supreme Court for the simple reason that once a concession/incentive has been granted to any entity by the State, then the same must be enforced with full force and rigor, unless the same is vitiated by arbitrariness, fraud etc. In the instant case, the Company was under an impression that it will be granted incentive on power supply commenced its production. Now, by way of subsequent Notifications, the State starting imposing onerous conditions such as PLEC etc. Even in cases of International Investment Law, the International Courts and Tribunals have consistently held that once an entity invests in a particular country, the laws applicable at that point of time must be made applicable and any subsequent change in law shall not affect the investment made by the entity. Such a clause is, usually, called as ‘Stabilization Clause’. In the instant case, the ‘Power Tariff Freeze’ is nothing but a sort of stabilization clause, protecting the investor from any subsequent changes in law. 

Further, the Hon’ble Supreme Court has arbitrarily created a distinction between normal supply of electricity and supply of electricity during Peak Hours, whereas the Statute does not provide for any such distinction.

The reasoning of the Hon’ble Supreme Court that the Company was informed in 1994 itself that the State will not be in a position to supply electricity during Peak Hours due to power shortage and thus, the Company knew well in advance about such situation, is an erroneous one. 

Law is not a mistress of convenience that as and when the State feels, it can retract from its promises citing the reasons relating to inconvenience. In the instant case, the State on affidavit stated that it is procuring electricity from other sources for Peak Load Hours. It is humbly stated that it is the choice of the State to procure electricity from whatever sources it so desires or so deems fit. A promise made to an investor cannot be retracted by the State merely because it is inconvenient or not cost efficient. It is unfathomable as to why the needs of a private Investor are given a backseat over the needs of the State. The State is merely a legal construct meant to serve the people including the investors. Once the Officers of the State have made a promise to provide a ‘Power Tariff Freeze’ for a period of four years, the same must be strictly adhered to. It is a settled principle of Contract Law that the words of the Contract/Agreement/Arrangement are to be given primacy over any other tool of interpretation. By giving primacy to subsequent notifications or the needs of the State and reading such notifications and needs into the arrangement is nothing but a mockery of the principles of Contract Law.

Also, merely because the Board accorded sanction for supply of power during Peak Load Hours to the Company on 23.08.1995 subject to terms and conditions, the same cannot be a ground for estopping the Company to raise a dispute relating to earlier conditions. The fact that the Company has challenged the action of the State in not providing reimbursement for PLEC goes to show that the Company was interested in honouring the terms and conditions of the original arrangement. Also, such an action cannot amount to novation of Contract as the surcharge of PLEC was introduced only after commencement of production by the Company. 

I agree with the reasoning of the Hon’ble Supreme Court that the expression ‘tariff’ must be given a contextual meaning. By ‘context’, it is meant that the circumstances of the present case, the present law and the jargon used in Electricity Sector, have to be conjointly understood for ascribing a meaning to the expression ‘tariff’. In the present case, firstly, the circumstances clearly indicate that the State promised ‘Power Tariff Freeze’ for a period of four years and while making such arrangement, the expression ‘tariff’ was not defined which itself indicates that it was not the intention of the parties to include PLEC or any other kind of surcharge within the meaning of the expression ‘tariff’. Had there been an intention to do so, the parties would have expressly mentioned it; secondly, the Statute does not provide for any definition of the expression ‘tariff’; and, lastly, if the State is allowed to impose such surcharges in the Electricity Sector retracting from earlier promises, then the same would be nothing but a colourable exercise of power as by giving different nomenclatures to additional charges and surcharges, the only purpose is to distinguish the same from the expression ‘tariff’ and thereby extract additional money from the private investor which it is otherwise under the terms of the arrangement is not entitled to pay.

 

Lastly, it is also pertinent to note that in order to avail the incentive under the Incentive Rules of 1990, the Company had satisfied all the conditions such as minimum investment of Rs. 50 Crores and guaranteed minimum employment of 200 persons on permanent basis who are bona fide residents of Himachal Pradesh. Thus, even after making substantial investment and performing its end of the bargain, the Company was not granted ‘Power Tariff Freeze’ as was promised. This is clearly a dismal state of affairs and I sincerely hope that such reasoning is not adopted by the Hon’ble Supreme Court in subsequent Judgments.