CHINNAPPA REDDY - (1.) , J. : - These appeals preferred by the Kerala State Electricity Board raise the question of the extent of the authority of the Board to increase the Electricity Tariff under the Electricity (Supply) Act. The upward revision of tariff made by the Board in 1980, 1982 and 1984 was successfully challenged in the Kerala High Court. The first two revisions were struck down by a Full Bench of three judges by a majority of two to one and, later, all three revisions were struck down by a Full Bench of five judges by a majority of four to one. The principal ground of challenge and that which was accepted by the High Court was that the Kerala State Electricity Board acted outside its statutory authority by formulating a price structure intended to yield sufficient revenue to off set not merely the expenditure properly chargeable to the revenue account for the year as contemplated by S. 59 of the Act but also expenditure not so properly chargeable. Had S. 59 been strictly followed and had items of expenditure not chargeable to the revenue account for the year been excluded, the revised tariff would have resulted in the generation of a surplus far beyond the contemplation of S. 59 of the Act. According to the High Court, in the absence of a specification by the Government the Board was not entitled to generate a surplus at all and it acted entirely outside its authority in generating a surplus to be adjusted against items of expenditure not authorised to be met from the revenue receipts. The notifications prescribing revised tariffs were, therefore, struck down. The view of the High Court, as might be seen, was based primarily on their construction of S. 59 of the Electricity (Supply) Act.
(2.) IN order to understand the questions at issue, it is necessary to set out S. 59 as it stood prior to 1978, as amended by Act No. 23 of 1978, and finally as amended by Act No.16 of 1983 : JUDGEMENT_198_4_1986Html1.htm We may mention here that we are not really concerned with S. 59 as amended by Act No. 16 of 1983 since that came into effect from 1/04/1985 only. We have, however, extracted that provision also for a better understanding of S. 59 as it stood before the 1983 amendment. We consider that for the purpose of understanding and construing S. 59, as it stood before the 1983 amendment, we are entitled to take into consideration the Parliamentary exposition contained in the 1983 amendment. (So we will come back to the question of proper construction of S. 59 later). We think that it is necessary at this stage itself to refer to some of the other important provisions of the Electricity (Supply) Act. Section 18 prescribes the general duties of the Board and, it is as follows :- " 18. General Duties of the Board - Subject to the provisions of this Act, the Board shall be charged with the following general duties, namely :- (a) to arrange, in co-ordination with the Generating Company or Generating Companies, if any, operating in the State, for the supply of electricity that may be required within the State and for the transmission and distribution of the same, in the most efficient and economical manner with particular reference to those areas which are not for the time being supplied or adequately supplied with electricity; (b) to supply electricity as soon as practicable to a lincensee or other person requiring such supply if the Board is competent under this Act so to do; (c) to exercise such control in relation to the generation, distribution and utilisation of electricity within the State as is provided for by or under this Act; (d) to collect data on the demand for, and the use of, electricity and to formulate perspective plans in co-ordination with the Generating Company or Generating Companies, if any, operating in the State, for the generation, transmission and supply of electricity within the State; (e) to prepare and carry out schemes for transmission, distribution and generally for promoting the use of electricity within the State; and (f) to operate the generating stations under its control in co-ordination with the Generating Company or Generating Companies, if any, operating in the State and with the Government or any other Board or agency having control over a power system." Section 49 was not amended either in 1978 or in 1983 and it is as follows :- "49. Provision for the sale of electricity by the Board to persons other than licensees - (1) Subject to the provisions of this Act and of regulations, if any, made in this behalf, the Board may supply electricity to any person not being a licensee upon such terms and conditions as the Board thinks fit and may for the purposes of such supply frame uniform tariffs. (2) In fixing the uniform tariffs, the Board shall have regard to all or any of the following factors, namely - (a) the nature of the supply and the purposes for which it is required; (b) the co-ordinated development of the supply and distribution of electricity within the-State in the most efficient and economical manner, with particular reference to such development in areas not for the time being served or adequately served by the licensee; (c) the simplification and standardization of methods and rates of charges for such supplies; (d) the extension and cheapening of supplies of electricity to sparsely developed areas. (3) Nothing in the foregoing provisions of this section shall derogate from the power of the Board, if it considers it necessary or expedient to fix different tariffs for the supply of electricity to any person not being a licensee, having regard to the geographical position of any area, the nature of the supply and purpose for which supply is required and any other relevant factors. (4) In fixing the tariff and terms and conditions for the supply of electricity, the Board shall not show undue preference to any person." Section 63 enables the State Government, with the approval of the State Legislature, to make subventions to the Board for the purposes of the Act. Section 64 empowers the State Government to advance loans to the Board and S. 65 empowers the Board, with the previous sanction of the State Government, to borrow any sum required for the purposes of the Act by the issue of debentures or bonds or otherwise. Section 66 empowers the Government to guarantee the loans proposed to be raised by the Board. Section 66A authorises the State Government to convert any loan obtained from, the Government by the Board into capital provided by the Board. Section 67 was amended in 1978 and again in 1983. It is useful to set out the section as it stood originally and as amended by the two amendments of 1978 and 1983 : JUDGEMENT_198_4_1986Html2.htm Section 67A which was introduced by Act 16 of 1983 defers payment of interest on loans advanced by the State Government until after all other expenses are met. It is in the following terms : "67A Interest on loans advanced by State Govt. to be paid only After other expenses. Any interest which is payable on loans advanced under section 64 or deemed to have been advanced under section 60 to the Board by the State Government and which is charged to revenues in any year may be paid only out of the balance of the revenues, if any, of that year which is left after meeting all the other expenses referred to in sub-section (1) of section 59 and so much of such interest as is not paid in any year by reason of the provisions of this section shall be deemed to be deferred liability and shall be discharged in accordance with the provisions of this section in the subsequent year or years, as the case may be."
(3.) NOW, a State Electricity Board created under the provisions of the Electricity (Supply) Act is an instrumentality of the State subject to the same constitutional and public law limitations as are applicable to the government including the principle of law which inhibits arbitrary action by the Government. It is a public utility monopoly undertaking which may not be driven by pure profit motive not that profit is to be shunned but that service and not profit should inform its actions. It is not the function of the Board to so manage its affairs as to earn the maximum profit even as a private corporate body may be inspired to earn huge profits with a view to paying large dividends to its shareholders. But it does not follow that the Board may not and need not earn profits for the purpose of performing its duties and discharging its obligations under the statute. It stands to commonsense that the Board must manage its affairs on sound economic principles. Having ventured into the field of commerce, no public service undertaking can afford to say it will ignore business principles which are as essential to public service undertakings as to commercial ventures. If the Board borrows sums either from the Government or from other sources or by the issue of debentures and bonds, surely the Board must of necessity make provision year after year for the payment of interest on the loans taken by it and for the repayment of the capital amount of the loans. If the Board is unable to pay interest in any year for want of sufficient revenue receipts, the Board must make provision for payment of such arrear of interest in succeeding years. The Board is not expected to run on a bare year-to-year survival basis. It must have its feet firmly planted on the earth. It must be able to pay the interest on the loans taken by it; it must be able to discharge its debts; it must be able to give efficient and economic service; it must be able to continue the due performance of its services by providing for depreciation, etc., it must provide for the expansion of its services, for no one can pretend the country is already well supplied with electricity. Sufficient surplus has to be generated for this purpose. That we take it is what the Board would necessarily do if it was an ordinary commercial undertaking properly and prudently managed on sound commercial lines. Is the position any different because the Board is a public utility undertaking or because of the provisions of the Electricity (Supply) Act(?) We do not think that either the character of Electricity Board as a Public Utility Undertaking or the provisions of the Electricity (Supply) Act preclude the Board from managing its affairs on sound commercial lines though not with a profit-thirst. It may be noticed here that S. 18(a) prescribes it as one of the duties of the Board to arrange for the supply of electricity that may be required within the State and for the transmission and distribution of the same, in the most efficient and economical manner and S. 49(2)(b) requires the Board to have regard, in fixing uniform tariffs, the co-ordinated development of the supply and distribution of electricity within the State in the most efficient and economical manner, both with particular reference to those areas which are not for the time being served or adequately supplied with electricity. The principles of efficiency and economy are, therefore, not forsaken but resolutely emphasised. NOW if we turn to S. 59, what do we find? Though at one time it appears to have been thought that it was enough if the Board did not carry on its operations at a loss it was realised that the statutory admonition to the Board should be positive and not negative and that the Board should be given an affirmative and self-assuring direction. So S. 59 was amended in 1978. The Statement of Objects and Reasons says, "3 Section 59 of the Electricity (Supply) Act is proposed to be amended by clause 8 of the Bill to give a positive direction to the Electricity Boards that after meeting all their expenses, there should be provision for a surplus for contribution towards immediate investment needs. A similar amendment is also proposed to be made in regard to the Generating Companies by inserting a new sub-section (3A) in section 75A by clause 18 of the Bill." It was found that the 1978 amendment did not effectively improve matters as many State Government did not specify the quantum of surplus. Parliament had, therefore, to intervene once again to fix a statutory minimum surplus. The Statement of Objects and Reasons relating to the 1983 amendment may also be extracted and it is as follows :- "Though section 59 of the Act, as amended in 1978, casts an obligation on the State Government has so far specified the quantum of any surplus. At present there is no uniformity in the manner of classification and presentation of accounts of the Boards and this renders inter-Board comparison of financial performance difficult. It is also considered necessary to re-arrange the priorities with regard to distribution of revenues of the Boards. It is, therefore, proposed to amend the Act - (a) to provide that each Board shall have a surplus which shall not be less than three per cent, or such higher percentage as the State Government may specify, of the value of the fixed assets of the Board in service at the beginning of the year : (b) to re-arrange the priorities for distribution of revenues of the Boards; (c) to bring the financial reporting system of the Boards in line with commercial accounting practice; and (d) to empower with a view to securing uniformity in the manner of classification and presentation of accounts, the Central Government to prescribe the forms in which the accounts of the Boards and other records in relation thereto may be maintained." ;