An alternative to the Electricity Contract Enforcement Authority

Published: May 15, 2020 3:30 AM

Mandating commisions to refer contractual disputes for arbitration can overcome states’ opposition to the Electricity Contract Enforcement Authority.

The objection of the state governments is understandable.The objection of the state governments is understandable.

By Pramod Deo & Arijit Maitra
The Draft Electricity (Amendment) Bill 2020 has fuelled controversies among all stakeholders in the power sector. Reportedly, the Telangana state cabinet termed it draconian and decided to strongly oppose it in Parliament. The bill abolishes the state selection committee for appointment of members to the state electricity regulatory commission and proposes their selection by a central government committee. The objection of the state governments is understandable.

Equally controversial is the creation of a new Electricity Contract Enforcement Authority (ECEA) to deal with contractual disputes between the state distribution companies and suppliers of electricity—generators and transmission entities. We propose to address this issue here.

This bill, inter alia, divests the electricity regulatory commissions (ERCs) of their dispute resolution function. The Authority would act as a central body, with exclusive powers and jurisdiction to adjudicate on the performance of obligations under all contracts relating to sale, purchase, or transmission of electricity. ECEA will not have any jurisdiction over any matters related to regulation or determination of tariff, or disputes involving tariff. It will have at least five members of judicial and technical background, appointed by the central government. All orders of the Authority will be executable as a decree of the civil court.

Appeal from its order will lie before the ‘restructured’ Appellate Tribunal for Electricity (APTEL) and, thereafter, a second appeal before the Supreme Court.

One argument in favour of the Authority could be that tariff fixation, a prime function of commissions, is akin to legislative function as has been held by the Supreme Court in a catena of judgments. Commissions also make delegated legislation in the form of regulations on a variety of matters. The basic structure doctrine of our Constitution requires separation of powers. From this angle, the power to legislate and the power to adjudicate on disputes should not be vested in the ERCs as is the case today.

Moreover, it is the perception of private investors in generation and transmission that in adjudication, there is a tendency on the part of state regulators to take a pro-revenue approach when state utilities and state institutions are involved in a contractual dispute. With the combined functions of making legislation and adjudicating disputes, ERCs may assume the role of a judge in their cause. Technically, ERCs can make regulations directly nullifying a decision rendered in a specific dispute. A regulation may also overturn a decision by APTEL. Hence, ERCs can remove the basis of a decision in adjudication by simply making legislation, by altering the general rights of a class. It can be argued that the object of ECEA is, in effect, to prevent abuse of power.

However, dispute on the jurisdiction of the ECEA or an ERC cannot be ruled out. Decisions involving a contractual dispute will receive finality only before the Supreme Court, entailing several years.

As per the Constitution of India, electricity is a subject found as Item 38 on List III of the Seventh Schedule, whereby both the central and state governments have the power to make laws on it. No doubt, the state governments shall view the proposed amendment as violative of the “basic structure” of the Constitution.

What is the way out of this impasse? Whereas the Electricity Act, 2003, itself entitles the commission to either arbitrate itself or refer disputes to arbitration, if it is made mandatory for commissions to refer contractual disputes for arbitration, the objectives of setting up ECEA could be achieved.

The grounds for challenging an arbitral award have been significantly narrowed down in the 2005 Amendment to the Arbitration and Conciliation Act, 1996, and do not entail a review of the merits of the dispute. The mandate of the Supreme Court that there must be a judicial member in the adjudication of disputes can be easily complied with by having a person of legal background or a retired judge in the arbitral panel. The Arbitration Act mandates the passing of the final award within 12 months. The disputing parties are entitled to appoint their nominee, who, in turn, will appoint the presiding arbitrator.

Commissions will also benefit as they will have much more quality time to address the various nuances and obligations of tariff determination, critical questions of cross-subsidy, agricultural metering, and promote the development of a market for ensuring cheaper electricity for consumers. All in all, referral of matters to arbitration will be a win-win situation for all stakeholders in the power sector. This will, no doubt, meet the central government’s principal objective of protecting the interests of generators and transmission providers—payment security.

Deo is Former Chairman, CERC & Maitra is a Lawyer specialising in regulatory matters. Views are personal

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