Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION World Trade Centre, Centre No.1, 13 th floor, Cuffe Parade, Mumbai 400 005. Tel. No. 022 22163964/65/69 Fax 022 22163976 E-mail mercindia@mercindia.com Website: www.mercindia.com CASE No. 48 of 2003 In the matter of Appointment of Committee for study of subsidy, and related matters. Shri P. Subrahmanyam, Chairman Shri Jayant Deo, Member Dr Pramod Deo, Member ORDER Dated:13th July, 2004 In their Petition dated 11th November, 2003, M/s N.N. Kale & Associates (through Shri N.N. Kale) and Dr. B.R. Sabade have sought the following reliefs: i) To grant stay on the present tariff rise proposal and feature tariff proposal until the subsidy matter is sorted out to the satisfaction of consumers and MERC s with auditors certificates as prayed. ii) To appoint a team to undertake economic study. The task force of MSEB needs to be set to support the team to finish the work in the suitable time frame. iii) There is need to recognize the Subsidy Audit as ongoing exercise and for every tariff rise proposal has certification by independent auditor for subsidy. Order to that effect is prayed for. Discloser standard for subsidy in the tariff rise proposal needs to be spelled out for clearly. iv) Method of arriving at the subsidy amount needs to be agreed by GoM, MSEB and MERC. No adjustment of any payment should be linked with subsidy payments as it puts MSEB in red. Interest needs to be charged to for delayed payments. v) There is need to ensure that subsidy goes to the deserving class and it is not misused. Guidelines to that effect need to be given by the Commission. vi) There is need to direct MSEB to see its own and consumer s interest first and there is need to advice GoM to give instructions to MSEB through MERC only for continuing the supply of electricity to the defaulting consumers. vii) This is clear case of failure of MSEB Board members in their duty. It needs to be clarified to them that their first duty is to see MSEB s and consumer s interest. It is because of their inaction in the matter MSEB has gone in loss. There has to the departmental inquiry by two or more independent High Court judges of the members of the Board and appropriate punishments a need to be given if found guilty. Unless such action is taken it will not be exemplary to MSEB Board members in feature. G:\adn\COMMISSION ORDER\Order-Shri NN Kale-Grant of subsidy [Case No.48 of 2003].doc Page 1 of 7
2. The Petition states, inter alia, that the calculation of the amount of subsidy against tariff received and passed on by Maharashtra State Electricity Board (MSEB) is not being done properly. Hence, it is essential to conduct a subsidy audit for the last 10 years since, in their tariff filings, MSEB have only shown receipts for recent years. This may eventually require review or revision of the tariff Orders passed by the Commission in respect of MSEB. 3. The Petitioners have referred to their letter dated 5th July, 2003, addressed to the Commission prior to publication of MSEB s proposal for increase in tariff of 12.5%, in which it had been stated that MSEB are not handling the matter of subsidy properly. In the tariff proposal, MSEB have not taken into account the amount of subsidy due from or given by Government of Maharashtra (GoM) while working out the tariff increase proposed. In fact, taking into account the subsidy compensation, the increase proposed by MSEB could have been much lower. However, since MSEB are under the influence of GoM, the subsidy figures need to be verified by independent auditors and disclosures be made with all details to arrive at the correct figures. Adjustments are done against Electricity Duty (ED), and interest on the amount is not taken into account. It is essential that MSEB demand advance payment from GoM to the extent of the estimated subsidy requirement since MSEB have already incurred expenses for generation or purchases of power, and interest would have to be charged to GoM. Thus, the calculations set out in the tariff proposal do not reflect the correct position. 4. The Petition further states that subsidy against tariff is a matter of deep concern since it has distorted the tariff structure and affected the financial condition of MSEB. It is, therefore, necessary, before the tariff increase is permitted, to find out correctly whether there is any amount due from GoM to MSEB on account of subsidy. Thus, the tariff proceedings should be stayed until the matter of subsidy in MSEB's proposal and the Commission's earlier Tariff Orders is sorted out. The Petition also states that it is questionable as to whether subsidy is given to the deserving class of consumers, and whether there is a transparent policy in this regard. 5. The Petition also states that adjustments of subsidy amounts against the ED retained by MSEB needs to be stopped since, ultimately, the interest burden falls on MSEB who pass it on to the consumers. At the same time, MSEB must make payment of ED to GoM as and when due. 6. The Petition concludes by stating that under the Electricity Regulatory Commissions (ERC) Act, 1998 (Section 22(1)(a)) the responsibility of fixing the tariff is with the Commission. The legislative intent underlying Sections 65, 62 and 108 of the Electricity Act (EA), 2003 has to be taken into account and needs to be addressed before finalising the MSEB tariff proposal. Thus, a Task Force within MSEB should be set up to collect the correct data for the last 10 years. The Commission should appoint a committee to conduct an economic study of subsidies on electricity tariffs given to different types of consumers, and the total outgo of MSEB revenue as a result. If GoM consider it necessary to give subsidy to certain consumers, then they should financially compensate MSEB. At present, some sections of consumers such as industry are charged at a higher rate and others at a lower rate, and this system of cross subsidy needs to be examined. 7. In their reply dated 9th February, 2004, GoM have stated, inter alia, that MSEB collect ED from their consumers but retain it instead of paying it to GoM. This amount is adjusted against the amount of subsidy compensation to be given to MSEB by GoM. Therefore, the question of charging interest on the amount of subsidy does not arise. The decision to give subsidy against tariff to any class of consumers is a matter of GoM policy. Under the provisions of EA,2003, however, GoM approach the Commission to decide the manner of payment of compensation for such subsidy. The amount required is computed by MSEB. G:\adn\COMMISSION ORDER\Order-Shri NN Kale-Grant of subsidy [Case No.48 of 2003].doc Page 2 of 7
8. In their reply dated 10th February, 2004, MSEB have stated that, prior to the ERC Act, 1998 the authority to determine the tariff was vested with MSEB, and it was the practice to consult GoM before any revision, and their suggestions were taken into account. In case MSEB could not achieve the required revenue surplus thereafter, GoM provided financial assistance to bridge the gap. After the ERC Act came into force, it became mandatory for GoM to provide the required financial assistance to MSEB on account of loss of revenue in case GoM decided to give subsidy to any consumer. In view of this, during the last three years, GoM have provided the required financial assistance, and details have been annexed to MSEB s reply. Thus, in the period prior to May 2000 when the first tariff Order was passed by the Commission under the ERC Act, no direct subsidy was given to any category of consumers. The tariff itself for certain categories of consumers was fixed at a lower level and these categories were, therefore, getting an indirect subsidy in tariff which cannot be quantified for obvious reasons. 9. With regard to objections to GoM s proposal to give subsidy to agricultural and powerloom consumers, which was heard by the Commission on 23rd October, 2003, MSEB s reply states that the proposal was in respect of the year 2002-03 and against the then prevailing tariff, and was not related to the subsequent tariff revision proposal being considered by the Commission. Under the ERC Act, GoM had full authority to decide on the subsidy provided MSEB were suitably compensated, and this has been done. With regard to cross subsidy in tariff, MSEB have submitted that the Commission has taken steps to reduce it through its Tariff Orders. 10. MSEB's reply also sets out the system of internal and independent scrutiny and audit at various levels, particularly in respect of their transactions with GoM, extending up to the Legislature. Thus, the correctness of the subsidy paid or payable to MSEB by GoM is accordingly verified. 11. As far as adjustment of subsidy compensation against ED collected by MSEB from consumers on behalf of GoM is concerned, the MSEB reply clarifies that this amount does not form a part of the revenue of MSEB. Rather than any adverse effect on the cash flow of MSEB, MSEB's reply states that the retention of ED and its subsequent adjustment by GoM toward subsidy compensation helps MSEB to meet their working capital requirements to some extent. 12. At the admissibility hearing held on 27th April, 2004, Shri N.N. Kale, on behalf of the Petitioners, submitted that the provisions of Sections 61 and 65 of the EA 2003 had supremacy over Sections 108 and 181. Section 65 states that the subsidy has to be paid in advance by the State Government. Section 181 states that the Commission is authorized to formulate rules and regulations and, according to him, there was no provision for framing regulations for subsidy under this Section. He also cited Sections 57 and 59 of the Act (regarding Standards of Performance of licensees) as being relevant for the admission of the Petition. Shri Kale then referred to the affidavit of December, 2003 of the GoM in the recent case seeking approval for subsidy under the Krishi Sanjivani Yojana, and submitted that an amount of Rs.3300 crores of GoM is lying with MSEB, apart from ED collected by MSEB from consumers which is due to GoM. GoM s affidavit does not state the purpose for which that amount had been given to MSEB. 13. Shri N.N. Kale quoted from GoM s reply dated 9 th February, 2004 to the present Petition as follows: MSEB collects electricity duty from its consumers, which it has to pay to the Government every month. But instead of paying it to the Govt. MSEB uses this amount for its day to day expenses. This amount is adjusted against the amount of subsidy to be given to MSEB by GOM. Therefore, no question of charging interest on the amount of subsidy arises. G:\adn\COMMISSION ORDER\Order-Shri NN Kale-Grant of subsidy [Case No.48 of 2003].doc Page 3 of 7
In this context, Shri Kale queried as to why MSEB should not open a separate account for the purpose with GoM. MSEB are holding the ED in trust, and must remit the amount that is collected from the consumers to GoM every month. They have no business to use it without GoM's instructions. 14. Shri Kale submitted that MSEB should also open separate subsidy accounts for different levels of subsidy and for various categories of consumers as may be required. Once these subsidy accounts have been created, MSEB could transfer the required amounts from the ED account as instructed from time to time by GoM to the respective subsidy accounts as per the estimated requirements furnished by MSEB. One would then know what amount is outstanding and what additional amount is required in each and every account. This accounting practice is not followed by MSEB. Shri Kale submitted that, if it is estimated that the amount of compensation required for the subsidy will exceed the ED collected from the consumers, then GoM should make the necessary budgetary provision for the balance. 15. Shri Kale submitted that there are various economic implications as between MSEB, the GoM and the consumers that the Commission has to take into consideration with regard to the question of subsidy. Referring again to GoM's affidavit in the case of subsidy for the Krishi Sanjivani Yojana, Shri Kale pointed out that it states that Rs. 3300 crores are lying with the MSEB as loan, the purpose of which is not stated. He submitted that it is not clear how and whether this could be adjusted against the subsidy compensation required. This has also to be seen in the context of the revenue requirement filings made by MSEB from time to time with regard to tariff proposals, and it has to be asked whether this amount was in fact used to meet the revenue expenditure or gap. 16. Dr. Sabade, on behalf of the Petitioners submitted that, under Section 65, (1) the Commission has to decide the quantum of subsidy compensation required and (2) the State Government has to pay in advance to the MSEB before the subsidy scheme is implemented. He submitted that there were differing estimates of the quantum of subsidy compensation required in the filings before the Commission in respect of the Krishi Sanjivani Yojana, or the data is simply not available. 17. Shri Kale pointed out that, in the Commission's subsidy Order dated 21 st November 2003, the adjustment or payment of compensation on account of subsidy should not be on accrual basis but on cash basis, but elsewhere it is on accrual basis. He submitted that the Petition should be admitted so that all the required facts and events could be understood. 18. Shri Gaurav Joshi, Counsel for MSEB submitted that what the Petitioners are seeking is difficult to understand, and queried as to under what provisions of the Act the Petition been filed. Section 65 provides that the amount has to be paid in advance by GoM, and the manner in which it is to be paid is to be specified by the Commission. This has to be read with Section 181(2)(zp) which refers to its powers to make regulations. Counsel for MSEB submitted that, as an interim measure pending Regulations, the manner in which the advance is to be paid has been made clear in the Commission's Order dated 21 st November 2003 as follows: In line with some of the principles set out in the Interim Order dated 26 th August, 2003 in that case, the Commission directs as follows with regard to the payment of subsidy proposed in the present Petition: G:\adn\COMMISSION ORDER\Order-Shri NN Kale-Grant of subsidy [Case No.48 of 2003].doc Page 4 of 7
i) The subsidy amount required to compensate MSEB may be provided in the form of grant or by book adjustment of net dues payable by MSEB to GoM. ii) To the extent to which the subsidy is or will be provided by book adjustment of various dues payable by MSEB to GoM, such adjustment shall be done on the basis of cash in hand with MSEB and not on accrual basis in respect of dues to be collected by MSEB from consumers on behalf of GoM, such as Electricity Duty. Thus, in the case of Electricity Duty, for example, the actual amount collected by MSEB rather than the amount recoverable should be the basis of the dues considered as being available with MSEB for adjustment. The total requirement should be adjusted on this basis before the subsidy can be operationalised and reflected in the bills issued by MSEB to the eligible consumers. iii) In case there is a shortfall in such adjustment and/or actual release of grants, either because of errors in estimation or because of the difference between earlier computations on accrual rather than cash basis, or any other reason, it should be reflected in the billing, and the shortfall distributed on a pro-rata basis as between the concerned consumers until such time as it is reduced or eliminated. In other words, the subsidy would be passed on to eligible consumers only in proportion to the extent to which the total requirement is paid by GoM to MSEB by book adjustment or financial releases. iv) MSEB should refund the subsidy amount (proportionate to the extent actually received/ adjusted as above) to all eligible consumers who have already paid their bills. v) MSEB should clearly indicate in the bill proformae (a) the tariff determined by the Commission, (b) the amount of State Government subsidy and the rate and period thereof, (c) the net amount payable vi) In its Interim Order dated 26 th August, 2003, the Commission had taken the view with regard to GoMs prayer for a standing dispensation that Section 65 of EA, 2003 envisages that the manner of payment be specified by the Commission i.e. by Regulations, and since such Regulations have not been finalised, that matter would be considered thereafter. However, in the circumstances of the present case, and since the Regulations have still not been finalised, the Commission directs that, for the period from 10 th June 2003 (when the provisions of EA, 2003 came into force) onwards until Regulations in this regard are notified, the principles and modalities set out at (i) to (v) above would apply. The absence of Regulations cannot remove the substantive powers of GoM under Section 65 to provide subsidy subject to payment in advance, nor does it bar the Commission from determining the manner in which it shall be paid merely on the ground that Regulations are not yet in place. 19. The Commission observed that, in the context of the above dispensation, Shri Kale is essentially saying that, rather than allowing adjustment of dues, the amount of ED, etc. should have been credited by MSEB to GoM's Consolidated Fund, and should then have been provided to MSEB through the State budget. Counsel for MSEB responded that the point Shri Kale is raising was not in the original Petition. He submitted that, legally, payments could be made by adjustments. Even under the Indian Contract Act, such adjustment is a valid method of payment. While agreeing that the public has a right to know how much subsidy GoM is paying, Counsel for MSEB submitted that the accounting process by which the GoM adjusts its budget is within the latter's jurisdiction. The manner of payment has been stipulated in the Commission's subsidy Order. If the Petitioners want to seek a review of that Order, then an appropriate Petition has to be filed for the purpose citing the grounds and meeting the review requirements of the Conduct of Business Regulations. Counsel for MSEB further submitted that, as long as the method of payment of compensation by GoM is legitimate, it makes no difference whether it is by adjustment or by outright grant. G:\adn\COMMISSION ORDER\Order-Shri NN Kale-Grant of subsidy [Case No.48 of 2003].doc Page 5 of 7
20. Counsel for MSEB submitted that Shri Kale's statement regarding Rs. 3300 crores being replaced as revenue shortfall is not correct. It is not a part of MSEB s revenue shortfall, and the loans were taken from GoM long back at a certain interest rate. The matter of subsidy compensation is something quite different. He submitted that, in the absence of specifics regarding the exact nature of the challenge, he found it difficult to respond, but that there was no reason to review the interim method of payment stipulated in the Commission's subsidy Order. The Commission also observed that it is not the appropriate forum to decide on the Finance Bill, but to stipulate the manner of payment of compensation for subsidy against tariff. 21. Shri Kale submitted that the subsidy account is not a general account or a running account, but a special account. According to him, the subsidy account has been given a special status under the Act because of Section 65. Therefore, whatever rules and regulations are applicable to a general account are not applicable to a subsidy account, because it comes under the purview of the Commission under Section 65 and would follow the discipline that the Commission lays down. As far as whether or not Section 181(2)(zp) envisages framing of Regulations regarding the manner of payment of subsidy is concerned, he submitted that the matter could be referred for the opinion of the Advocate General. 22. Mr. R.N. Ambarit, Deputy Secretary (Energy), GoM, referring to a written brief, submitted that all transactions, and more particularly the transactions of MSEB with GoM, are scrutinized in detail and the audit report is made publicly available after approval of the Accountant General. Similarly, the Legislature also reviews the performance of the MSEB. The outstanding subsidy receivables, if any, from GoM are duly indicated in the Books of Account of MSEB and are reported in the audited Financial Report checked by independent auditors. The subsidy paid or payable to MSEB is also reflected in the Books of Account of GoM and thus gets scrutinized by the Accountant General. Thus, he submitted that the correctness of the subsidy paid or payable by GoM to MSEB is verified by independent and highly competent entities and can, therefore, be relied upon as an authentic and true representation of facts. He further submitted that the financial audit of the Books of Accounts of MSEB adequately covers the accuracy and the disclosure required as per applicable accounting principles. He submitted that the subsidy accounting is also being done as per the applicable accounting policies and regulations and, therefore, a separate audit only with regard to subsidy is not necessary. 23. Subsequent to the hearing, Petitioners have written to the Commission, inter alia on 5 th and 7 th May, 2004, essentially reiterating and elaborating upon their submissions. 24. The Commission notes that Section 29(5) of the erstwhile ERC Act stated that, if the State Government require the grant of any subsidy against the tariff determined by the Commission, they would have to pay compensation to that extent (in this case to MSEB) "in the manner the State Commission may direct. Further, under Section 65 of EA, 2003, the earlier provision has been made more rigorous by requiring GoM to pay the amount of compensation in advance (i.e. neither the Commission nor GoM have any discretion in the matter) and in such manner as may be specified. The definition of the term specified under Section 2(62) read with Section 181(2)(zp) indicates that the Commission can notify Regulations with regard to the manner in which the compensation is to be paid by GoM. 25. Since the coming into force of the EA 2003, the Commission has passed several Orders stipulating the manner of payment of subsidy compensation and related matters on Applications filed by GoM. These stipulations are comprehensively reflected in the Commission's Order dated 21st November, 2003 quoted by MSEB Counsel at para 18 above. It will be seen that the Commission has allowed payment of compensation through adjustment of amounts payable to GoM by MSEB. As G:\adn\COMMISSION ORDER\Order-Shri NN Kale-Grant of subsidy [Case No.48 of 2003].doc Page 6 of 7
far as variations in estimations of how much compensation is required, the Commission in its Orders has also provided due safeguards to ensure that subsidy against tariff is passed on by MSEB to consumers only to the extent of the compensation actually received from GoM, either by budgetary grants or by adjustment of amounts such as ED available with MSEB on a cash basis. These Orders take into account the position under EA, 2003 that, whereas the tariff is determined by the Commission, GoM has the right to provide a subsidy against such tariff to any consumers, provided payment of compensation is made in advance and in the manner specified by the Commission. In its Order, the Commission has also explained why it has stipulated the manner of payment without waiting for finalisation of Regulations. In any event, the Tariff Regulations have now been notified on 10th June, 2004 which include, inter alia, payment of subsidy compensation by adjustment of dues. Had the Petitioners been aggrieved with any of the Commission s Orders with regard to the manner of payment of subsidy compensation, they could have agitated the matter in appeal or review, depending on the nature of the challenge, and not through the present Petition. 26. Similarly, appeal or review could have been filed against the Commission s Tariff Orders in respect of MSEB dated 5th May, 2000 and 10th January, 2002. As regards the subsequent MSEB tariff proposal proceedings which were ongoing when the present Petition was filed, the Commission notes that opportunity was given to the public to file suggestions/ objections, through Public Notices in August, 2003, and hearings were held in various parts of the State in October, 2003. Indeed, Shri N.N. Kale filed written submissions in those proceedings, and was also heard in person during the public hearings. After due consideration and taking into account this public process, the Commission issued the operative part of its Order in that case on 1st December, 2003, and the detailed Order thereafter. In view of the above, the Commission declines to admit the present Petition. Sd/- Sd/- Sd/- (Jayant Deo) (Pramod Deo) (P. Subrahmanyam) Member Member Chairman, MERC Sd/- (A.M. Khan) Secretary, MERC G:\adn\COMMISSION ORDER\Order-Shri NN Kale-Grant of subsidy [Case No.48 of 2003].doc Page 7 of 7