In a landmark order, the Supreme Court has dismissed Tata Power’s appeal challenging the Maharashtra Electricity Regulatory Commission’s (MERC) order to award a Rs 70 billion high voltage direct current (HVDC) transmission project to Adani Electricity Mumbai Infra Limited (AEMIL) on a nomination basis in place of tariff-based competitive bidding (TBCB). During the course of the proceedings, the apex court took cognisance of the loopholes in the regulatory processes of tariff determination followed by the state regulators and directed all state electricity regulatory commissions (SERCs) to frame appropriate guidelines in accordance with Section 61 of the Electricity Act, 2003 and the National Tariff Policy (NTP), 2016. Renewable Watch presents the key findings from the Supreme Court’s judgment dated November 23, 2022, delivered by a bench led by the Honourable Chief Justice of India…
Case background
The Aarey-Kudus HVDC Transmission Project was conceptualised over a decade ago, when Mumbai was facing severe power shortages. It entails setting up a 1,000 MW voltage source converter-based HVDC link between the 400 kV Kudus and the 220 kV Aarey extra-high voltage substations. After the recent blackout incident in Mumbai (October 12, 2020), the Central Electricity Authority highlighted the need for immediate implementation of the project to reliably increase the load of the Mumbai Metropolitan Region.
The detailed project report for the Aarey-Kudus Transmission Project was submitted by the then Reliance Energy Limited (later acquired by Adani Electricity Mumbai Limited [AEML]) in 2013. However, the
state transmission utility (STU), Maharashtra State Electricity Transmission Company Limited (MSETCL), the nodal agency for all transmission projects in the state, suggested a change in the project’s scope, thus sending it back to the drawing board. After this, it never took off. Subsequently, AEML took over Reliance Energy’s suburban power transmission and distribution business in Mumbai and submitted a revised application to the MERC seeking to revive the project in November 2018. However, the project was referred to the empowered committee (EC), and after several rounds of deliberations, in March 2021, the MERC issued an order granting the transmission licence for the project to AEMIL, with tariff to be determined through the regulated tariff mechanism (RTM) under Section 62 of the Electricity Act, 2003. The commission’s order was based on the following premises:
- The Aarey-Kudus project is essential for strengthening Mumbai’s transmission system, and should be undertaken for execution on an immediate basis;
- The NTP, 2016 mandates that the state commissions must notify a threshold limit to determine the projects that will have to be undertaken through the TBCB route, but the MERC has not notified the threshold yet;
- The Aarey-Kudus project is an “existing project” and not a “new” one, so it does not fall under the Maharashtra’s government resolution dated January 4, 2019, which stipulates that the award of all new intra-state projects that cost over Rs 5 billion should be referred to the EC for consideration for execution under the TBCB route.
Overall, considering the urgency of the scheme, the historical background and the peculiarities associated with it, the MERC decided to award the project on an RTM basis rather than TBCB. The STU had also expressed reservations regarding undertaking the HVDC scheme via the competitive bidding route since it would now take an additional two years for completion. However, Tata Power Company-Transmission (the other transmission licensee operating in Maharashtra) opposed the MERC’s order seeking to award the project through TBCB. After Tata Power’s contention was rejected by the commission, it moved the Appellate Tribunal for Electricity (APTEL), which upheld the MERC’s order in February 2022. Thereafter, Tata Power moved the Supreme Court, urging that the project must be awarded via competitive bidding based on the statutes, statutory policies and guidelines of the central and state governments.
Supreme Court judgment
The pertinent question before the Supreme Court was whether the MERC was right in awarding the transmission project to AEMIL on a nomination basis under Section 62 of the Electricity Act, 2003 (where the commission sets the tariff), and thus departing from competitive bidding under Section 63 (which advocates TBCB) of the act. In addition, the Supreme Court delved into matters such as the obligations of the SERCs to the NTP, the power of the SERCs to prescribe tariff determination modalities under the provisions of the Electricity Act, 2003, and the impact of the Maharashtra government’s resolution on the MERC’s decision in the case.
The Supreme Court concluded that the Electricity Act, 2003 gives enough flexibility to states in regulating the intra-state transmission systems, and SERCs have the power to determine and regulate tariffs. Further, the act does not prescribe one dominant method for determining the tariff. Section 63 is applicable after the bidding process has been conducted and the tariff has already been determined through bidding. In such cases, the SERC has to adopt the determined tariff, and it cannot negate this tariff by using its powers under Section 62. The commission may not adopt the tariff determined through the bidding process only if the bidding process was not transparent or the procedure prescribed by the central government guidelines under Section 63 was not followed. There are no provisions in Sections 62 and 63 that indicate that Section 63 is the dominant route for determination of tariff. Both sections provide alternative modalities through which tariffs may be determined.
The MERC has neither framed regulations nor notified guidelines prescribing the criteria or guidelines for choosing the modalities to determine the tariff. Thus, the MERC shall determine the tariff by exercising its general regulatory powers under Section 86(1)(a) of the act. While doing so, the regulator will be guided by the NTP, 2016. Although NTP 2016 requires intra-state transmission projects above the threshold limit to be allotted through the TBCB route, in the current case, the threshold value has not yet been notified by the MERC. Therefore, it was open to the MERC to allot the HVDC project either under the RTM or the TBCB route. Further, the MERC and APTEL arrived at concurrent findings that the Aarey-Kudus project is an “existing project” and not a “new one”, and therefore the Maharashtra government’s resolution of 2019 does not apply to it. The court pointed out that AEML (or its predecessor, Reliance Infrastructure) has been involved in the execution of the HVDC scheme since the inception of the project in 2009.
Finally, neither the Electricity Act, 2003 nor the NTP, 2016, along with the Maharashtra government’s resolution, has made it binding on the MERC to allot the HVDC project only through the TBCB route. Therefore, the regulator’s decision to grant the project under Section 62 was a reasonable exercise of its powers. Tata Power’s appeal was thus dismissed.
Directives to SERCs
The Supreme Court came down heavily on the ad hoc nature of the functioning of STUs and the inaction of SERCs in framing tariff determination guidelines. The court charged MSETCL with changing its stance on HVDC technology without due procedure, leading to loss of time and investment in transmission while electricity demand continued to increase in the state. It took cognisance of the fact that STUs are affected by factors such as technological uncertainty, high capex requirement, right-of-way issues and regulatory gaps.
The Supreme Court noted that though the central and state governments have framed statutory policies and guidelines regulating the electricity sector, the SERCs have not framed the necessary regulations to put into effect the principles prescribed under the act. It directed all SERCs to frame regulations under Section 181 of the act on the terms and conditions for determination of tariff within three months from the date of the judgment. While framing these guidelines, the SERCs should take into account the principles prescribed in Section 61, which also includes the National Electricity Policy, 2005 and the NTP.
In cases where SERCs have already framed regulations, these need to be amended to include provisions on the criteria for choosing the modalities to determine the tariff. The commissions need to take steps to create a sustainable model of electricity regulation in the states. The commissions should adapt to the specific needs of the state while framing these regulations. Further, the regulations framed must be in consonance with the objective of the Electricity Act, 2003, which is to enhance the investment of private stakeholders in the sector in order to create a sustainable and effective system of tariff determination that is cost efficient so that the benefits reach the end consumers.
Conclusion
The Supreme Court order has far-reaching implications for not just the affected parties but for the electricity sector as a whole, as it provides detailed guidelines for the regulatory commissions’ tariff determination process, which plays a key role in attracting investments into the sector.
By Neha Bhatnagar
