Before the

MAHARASHTRA ELECTRICITY REGULATORY COMMISSION

13^th floor, Centre No.1, World Trade Centre, Cuffe Parade, Mumbai 400 005.

Tel. 22163964 / 22163965, Fax No. 22163976

CASE No. 32 of 2002

In the matter of

Application dated 11.11.2002 filed by M/s Hanil Era Textiles Limited in respect of Transmission Loss and Maximum Demand Charges for wheeling of captive power for third party sale.

Shri P. Subrahmanyam, Chairman

Shri Jayant Deo, Member

Dr Pramod Deo, Member

O R D E R

Dated: June 02, 2003

M/s Hanil Era Textiles Limited (HETL), village Vanivali, Patalganga, Taluka Khalapur, District Raigad 410 220, have sought, under their Petition dated 11^th November 2002, that the Commission:

(a) issue an Order to the Maharashtra State Electricity Board (MSEB) in respect of their existing wheeling agreement to extend determined amount of credit for the Maximum Demand Charges in proportion to the Petitioner’s sale of surplus electricity to M/s Bombay Dyeing or any other (one) industrial unit in any manner whatsoever with effect from August 1998.

(b) declare and determine the amount of line loss being charged, with the same reference period.

2. The Petitioner has approached the Commission on the direction, based on consent terms filed by them and the Respondent (MSEB) in the Court of the Civil Judge, Senior Division, Panvel in Special Suit No. 42 of 2001 filed by the Petitioner. The Court directed HETL to apply to the Commission:

“to determine as to whether the line losses from August 1998 onwards will be 5% as contended by the defendants [MSEB] or will be 1% as contended by the plaintiff [HETL] or any other percentage between 1% and 5%…The rate so fixed by MERC will be binding…and to determine as to what will be the credit that the defendants will have to give to the plaintiff out of the maximum demand charges proportionate to the electric power supplied by the plaintiff to the Bombay Dyeing and Manufacturing Co. Ltd. from August 1998 onwards. The MERC will also decide the rate of credit to be given to the plaintiff for maximum demand charges…The rate so fixed by MERC will be binding on both the parties…”

3. Both parties were heard on 16.1.2003. Shri Mukesh Vashi, Counsel for the Petitioner, submitted that theirs is a 100% Export Oriented Unit manufacturing yarn. In order to avoid damage to the yarn due to voltage fluctuation, HETL sought and were granted permission by MSEB for installation of a Captive Power Plant (CPP) of 17.87 MVA to generate electricity for their own use. Subsequently, in order to put to use the surplus power from their CPP, HETL sought and were granted permission by Govt. of Maharashtra (GoM) to sell power to a third party, namely M/s Bombay Dyeing & Mfg. Co. Ltd. (BDMCL). Accordingly, a tripartite agreement was entered into in 1998 between HETL, BDMCL and MSEB for the sale of HETL’s surplus power upto a maximum of 41.27 lakh units per month to BDMCL through the MSEB grid. The agreement was renewed from time to time.

4. Counsel for the Petitioner stated that the dispute relates to (i) charging by MSEB of transmission loss from HETL at a flat rate of 5% in the slab for losses upto 50 kms., and (ii) levy by them of full maximum demand charges on BDMCL without passing on any share to the Petitioner, although a part of BDMCL’s demand is met by HETL.

5. Petitioner’s Counsel contended that, as implied by the term itself, transmission loss must be charged on the basis of the actual loss occurring while transmitting the power. This actual loss has been computed and certified by the Petitioner's Chartered Engineer as 1%. The appropriate slab for this would be 0.2% per kM and therefore cannot exceed 1%. He submitted that this is a matter of fact which has not been disputed by MSEB in their reply. MSEB's only argument is that the parties are bound by the agreement between them, in which the transmission loss is considered as 5%. Drawing attention to paras 5, 7, 11, and 12 of MSEB's affidavit-in-reply dated 2.1.2003, he stated that the figure of 5% has been arrived at taking into account average losses in the State right from the stage of generation, whereas it should be based on the actual loss in any particular case. In any event, the overall average loss of 39% cannot be the basis on which the actual transmission loss in a particular case can be charged. MSEB cannot make profits taking recourse to the average loss. 5% is to be treated as the upper limit, but the amount charged has to be on the basis of the actual loss if it is lower than this.

6. With regard to the transmission and wheeling charges to be levied, HETL’s Counsel submitted that the concerned Chief Engineer, Kalyan Zone was to determine these charges after ascertaining the actual distance. This is clear from the tripartite agreement, which provides that:

"The wheeling charges and transmission losses in terms of kwh will be in terms of Hanil Era's account. Upto 50 kms distance, the wheeling charges will be 2% of energy received for wheeling and transmission losses will be 5% of energy received for wheeling. Appropriate percentage of wheeling charges and transmission losses will be decided by Sr. Engineer, MSEB and CE, Kolhapur after ascertaining the actual distance of wheeling. Wheeling charges and transmission losses in terms of kWh will be deducted from the units received for wheeling as per Condition No.1 above and balance will be considered as energy to be wheeled to Bombay Dyeing. This energy will be wheeled on 24-hour basis".

The surplus power exported by HETL and received by BDMCL has to be metered, and hence the transmission loss must be charged on the basis of actuals and not with reference to a slab or averages. The only scientific method of calculation of transmission loss would be the difference between the energy accounted for at both the receiving and supply points.

7. Regarding the claim for a share in the Maximum Demand (MD) charges, Counsel for the Petitioner submitted that MSEB is recovering these from BDMCL. However, they have not been passed on to HETL in proportion to the power supplied by them, and for which they are entitled to credit.

8. With regard to the sanctity of the agreement entered into by them, Counsel for the Petitioner stated that the renewed agreements for 2001 and 2002 incorporated a provision that they would be subject to the final decision on the dispute pending in the Civil Court. In accordance with the consent terms filed in Court, that dispute is now before the Commission. The Preamble to the Electricity Regulatory Commissions (ERC) Act, read with Sections 22 and 29, make it clear that these matters are within the Commission's jurisdiction, and also that commercial principles would have to be applied in deciding them in view of the provisions of Sections 22(1)(b) and 29(2). The agreement provisions regarding the matters under dispute are primarily based on Commercial Circulars of MSEB which are required to be, but have not so far been approved by the Commission.

9. Counsel for the Petitioner also argued further that the CPP consent holder is deemed to be a licensee. He cited the Supreme Court judgement in the case of GRIDCO v. ICCL, where ICCL was held to be a licencee by virtue of the permission granted by the Orissa Government for a CPP. Therefore, MSEB’s argument that HETL cannot claim MD charges, not being a licensee, does not hold. These are towards fixed charges, i.e. for providing the infrastructure and making supply available. The fact that a part of the supply to BDMCL is met by HETL justifies their claim for passing on of the MD charges proportionately. It would not be correct to say that the MD charges are levied in the context of MSEB undertaking to meet the contract demand and making it available upto the premises irrespective of whether or not the CPP consent holder is feeding power to the system or not. In this case, the tripartite agreement has been entered into precisely because of MSEB's inability to supply adequate, reliable power. Moreover, MSEB are in any case paid as per the tariff for the sanctioned standby power regardless of whether it is availed of or not.

10. Ms. Deepa Chawan, Counsel for MSEB, submitted that HETL are supplying power to the MSEB grid for BDMCL at 22 KV level, whereas MSEB are supplying power at the much higher level of 220 KV to BDMCL. In addition, MSEB supplies some power independently to BDMCL, who are also their consumer. For the power supplied by HETL to BDMCL through the grid upto the permitted limit, the charges are to be paid by BDMCL and not by MSEB. If HETL were to supply BDMCL directly, they would have been required to step up from 22 to 220 KV.

11. In this background, MSEB Counsel stated that, initially, HETL were permitted a CPP for their own use. In 1998, permission was given for sale to BDMCL also. The arrangement is different when a licensee sells power to a consumer. A licensee is licensed under the Indian Electricity (IE) Act to supply to a particular consumer or area. In this case, HETL are not doing so. They are feeding power to the MSEB grid, and are not licensees. This arrangement is a working solution for the surplus CPP power whereby the supplier is assured of payments from a third party. In fact, in the year 2000, MSEB had suggested that, instead of supplying to BDMCL, HETL could supply to MSEB who would pay them, but they did not agree, and finally the agreement was extended upto 2003 accordingly.

12. Counsel for MSEB also submitted that the tripartite agreement constitutes a contract between the parties, and cannot be challenged on grounds other than those set out in the Indian Contract Act. Moreover, the conditions stipulated in the agreement are not contrary to or inconsistent with any Government policy or Commission directives. Its terms are, therefore, binding on the parties. The terms include payment of prescribed wheeling charges and transmission losses on a distance slab basis.

13. She submitted that there are several difficulties in trying to calculate exact transmission losses in such a wheeling arrangement. Moreover, HETL are supplying at 22 KV, whereas MSEB are doing so at 220 KV. The computations of the Chartered Engineer (who is a Mechanical and not an Electrical Engineer) cited by the Petitioner have overlooked this aspect. MSEB fixed the distance slabs as a matter of policy, on an ascending scale. In fact, at the higher slabs, the actual losses may be even more. This cannot be challenged at this stage, after voluntarily entering into agreement. The tripartite agreement does not say that recovery will be made on the basis of actuals. Ultimately, the transmission losses MSEB would be entitled to charge in future, would be decided by the Commission as and when it decides a policy for CPPs, after considering all the technical details. Moreover, the average loss level in the State grid is to the tune of 39%, whereas a maximum of 10% transmission loss is recovered under the current policy based on the distance slab in this case. Even the Commission, as an interim arrangement, has allowed transmission loss and wheeling charges at 5% and 2% respectively in its Order on non-fossil fuel based co-generation projects.

14. Counsel for MSEB submitted that they also have an independent contract with BDMCL for supply of power. HETL cannot argue on behalf of BDMCL for reduction of contract demand or similar matters which have been determined with MSEB even before the subsequent wheeling arrangements. The agreement shows that, whether or not shut-downs are planned or unplanned, MSEB are obliged to supply power to BDMCL and have to keep their infrastructure in place for the purpose. Clause 11 of the tripartite agreement cannot be challenged by HETL since they do not represent BDMCL. Under this provision, BDMCL cannot reduce their contract demand, and 50% of the contract demand or actual MD recorded (whichever is higher) will be billed as per MSEB's tariff. Any separate arrangement for charges between HETL and BDMCL would be their business. Counsel also drew attention to Clause 14, which provides that the terms and conditions of the existing agreement between MSEB and HETL, and between MSEB and BDMCL for power supply from MSEB shall remain unchanged.

15. MSEB Counsel stated that the consent was originally granted to HETL for installation of a CPP only for their own requirements. Subsequently, the sale of surplus power was allowed so that it is not wasted. The fixed charges incurred for setting up the CPP cannot be recovered from MSEB by asking for a share of MD charges or in any other manner, but has to be built into the costs. This is a bilateral matter between HETL and BDMCL.

16. Counsel for MSEB submitted that a MD charge can only be levied if there is a statutory or contractual right, and the Petitioner has none. The statutory right to recover such a charge is contained in Section 18 of the IE Act, which permits licensees to levy annual charges. The Petitioner is not a licensee within the meaning of the Act, which is restricted to any person licensed to supply energy. Section 3 provides for the grant of licenses, and the State Govt. has not granted any such licence to HETL to supply to BDMCL or to any particular area. Similarly, under Section 28 ,

“No person other than a licensee shall engage in the business of supplying energy to the public except with the previous sanction of the State Government and in accordance with such conditions as the State Government may fix in this behalf, and any agreement to the contrary shall be void.”

In this case also, HETL are not supplying electricity to the public and are not falling within Sec.28. They supply electricity to the MSEB, which is wheeled to BDMCL. Further, under the proviso to S. 22 of the I(E) Act,

“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.”

17. Counsel submitted that, since HETL are not licensees, they do not have a statutory right, and cannot recover MD charges from BDMCL even under any independent agreement. The Supreme Court judgement cited by him relates to arbitration and other matters in the case of a licensee under the provisions of the Orissa Electricity Reform Act, which is not related to the definition under the ERC Act or the IE Act. It is, therefore, not relevant for the purpose of determining whether the Petitioner in the present case can ask for a share in the maximum demand.

18. Counsel for MSEB stated that, although it is true that GoM policy does not stipulate such a restriction, the agreement with the Petitioner subsists on a year-to year basis, and is renewable on mutually agreed terms and conditions so as to enable policy changes to be incorporated. Moreover, the Supreme Court has held that State Govt. directives under Section 78A of the Electricity (Supply) Act are not binding. She submitted that the Commission’s Order in the matter of Sunflag Iron & Steel Industries Ltd. laid down that any change / amendment in an existing Energy Purchase Agreement would require its approval. MSEB are bound to implement these directives, and would approach the Commission in such circumstances unless a general policy directive is issued before this. Counsel also submitted that the Commercial Circular on which the tripartite agreement was based had been issued prior to the constitution of the Commission.

19. In reply, Counsel for the Petitioner submitted that the tripartite agreement would be subject to the Commission's approval under Section 22 of the ERC Act. With regard to MSEB's challenge to the Chartered Engineer's certification, this is a factual matter and has to be rebutted on merits. In their affidavit-in-reply, MSEB have stated nothing to show that, in such an arrangement, the actual transmission loss cannot be ascertained, or what the basis for the slab is. Moreover, with regard to the Petitioner's status, the State Govt. has granted permission to HETL to generate power and supply the surplus to BDMCL. This is an undisputed fact. Under Section 28, the State Govt. gives permission after consulting MSEB. Therefore, MSEB cannot claim that the Petitioner is not a licensee, that he has not been granted permission under Section 28, and that hence is not entitled to a share.

20. The Commission has considered the documents furnished and the written and oral submissions made by both parties. While there is merit in the argument that overall, average loss in the grid alone cannot be the basis on which the actual transmission loss is charged in a particular case, the level of transmission loss at different voltage levels of the transmission network has to be scientifically evaluated. Since the power is not exported through a dedicated line with input and output measurement at both ends, it becomes a part of the larger pool and cannot be demarcated in a distinct manner. In the interim, it would be prudent and practical to go by transmission loss level mandated by the agreement, until it can be provided with a stronger foundation taking into account load flow studies since the loss level can vary depending on factors such as line length, material used, the line network configuration, physical conditions such as temperature, line loading condition, and the state of equipments used at various stages of power conversion from generation to transmission to distribution and, finally, to usage. The distance slab adopted by MSEB in their policy considers that there will be lower losses at shorter distances, all else remaining the same, and has been incorporated by agreement. The provision in the tripartite agreement quoted by Petitioner’s Counsel referring to the distance has to be understood in the context of the slab to be applied to the Petitioner, i.e. if the distance is within 50 kms., then the transmission loss is to be taken as 5%. Another benchmark is also available. The Commission, as an interim arrangement, has allowed transmission loss and wheeling charges at 5% and 2% respectively in its Order dated 16.8.2002 for non-fossil fuel based co-generation projects, which corresponds to the charges agreed to in this case on the basis of the slab system adopted by MSEB through Circulars which pre-date the Commission. Thus, quite apart from the sanctity of the contract represented by the tripartite agreement, the Commission finds that the balance of convenience is in favour of the stand taken by MSEB in this case.

21. Since the introduction of the two-part tariff, the trend has been to move towards a reasonable relationship with the average cost of supply as mandated by the ERC Act. Fixed charges, though still below actual costs, are recovered to meet the fixed costs incurred by the utility to make power available as envisaged in the E(S) Act. In any case, irrespective of whether HETL supplies power or not, MSEB are legally bound to meet the contract demand of BDMCL by virtue of their independent agreement with the latter. BDMCL are free to seek appropriate remedies, e.g. for reduction of their contract demand with MSEB. HETL cannot take up cudgels or speak on behalf of the third signatory to the tripartite agreement, who are a separate entity having an independent agreement with MSEB.

22. The Commission finds no merit in the argument that, by virtue of the tripartite agreement through which it provides a part of BDMCL’s power requirements or permission from the State Government, HETL has the status of a licensee within the meaning of the IE Act, more particularly Sections 3, 18, and 28. Section 28, under which HETL have admittedly been granted permission by the State Government, is intended for parties other than licensees, and no claim is made that they have either acquired or even sought a license under the other applicable provisions. The Supreme Court judgement cited by Petitioner’s Counsel refers to the status of the CPP consent holder as a licencee primarily with reference to Sections 2(e) and (f) read with Chapter VI of the Orissa Reform Act, which has no nexus with the present case. That meaning does not flow from the provisions relating to licences in the IE Act read on its own, or together with the ERC Act. Therefore, as rightly contended by MSEB, the Petitioner, not being a licencee, cannot claim any statutory right or entitlement for a portion of the MD charges under section 22 of the IE Act.

The Commission disposes of the present Petition accordingly.

Sd/-	Sd/-	Sd/-
(Jayant Deo)	(Dr Pramod Deo)	(P. Subrahmanyam)
Member	Member	Chairman, MERC
			Sd/-
			(A.M. Khan)
			Secretary, MERC