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Petitioner: FLYING CEMENT COMPANY VS Respondent: FEDERATION OF PAKISTAN and others
Court Name: Lahore High Court Judge(s): Ayesha A. Malik, Syed Mansoor Ali Shah Title: FLYING CEMENT COMPANY vs FEDERATION OF PAKISTAN and others Case No.: I.C.A. No.1068 of 2014 Date of Judgment:2015-05-29 Reported As: PLD 2016 Lahore 35 Result: Appeal allowed
JUDGMENT
JUDGMENT AYESHA A. MALIK J.--Appellants and petitioners ("appellants") have challenged the constitutionality and vires of section 31(5) of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 ("the Act") and the Surcharges levied thereunder. Therefore, this consolidated judgment decides the instant ICA along with connected ICAs (detailed in Schedule 'A') which call into question the judgment of the learned Single Judge dated 26-9-2014, wherein Equalization Surcharge imposed under section 31(5) of the Act was upheld and writ petitions (detailed in Schedule 'B') filed after the impugned judgment, challenging all the Surcharges imposed under the Act. All these cases raise common questions of law and facts. 2. Appellants before this Court are consumers of electricity Who have challenged the vires of section 31(5) of the Act and the following Surcharges levied from time to time since 2008 including:-- (a) Equalization Surcharge ("EQ Surcharge") (subsequently withdrawn vide Notification dated 11-10- 2013; (b) Debt Servicing Surcharge ("DS Surcharge"), (c) Universal Obligation Fund Surcharge ("UOF Surcharge"); and (d) Neelum Jhelum Surcharge ("NJ Surcharge") (b, c and d levied through Notifications dated 3-10-2014 and 1-11-2014, collectively referred to as the "Surcharges"). 3. The impugned judgment has upheld the levy of EQ Surcharge for being a part of the tariff and that the Federal Government enjoys exclusive power to levy a surcharge under Section 31(5) of the Act. While relying on Messrs Gadoon Textile Mills and 814 others v. WAPDA and others (1997 SCM R
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641) ("Gadoon Case"), the impugned judgment declared the EQ Surcharge to be a part of the tariff being cost of electricity. It also finds that the determination of the cost of electricity cannot be "intermingled" with the tariff determined by National Electric Power Regulatory Authority ("NEPRA"). With respect to the vires of section 31(5) of the Act, the impugned judgment holds that the Section neither offends the Constitution of Islamic Republic of Pakistan, 1973 ("Constitution") nor any provisions of the Act. 4. The appellants argued that this is a contradiction in terms as the competent authority under the Act to determine tariff is NEPRA and section 31(5) of the Act allows the Federal Government to levy a surcharge independent of any tariff determination made by NEPRA. The basic issue as argued by the learned counsel for the appellants is the competence of the Federal Government to levy surcharge without any determination from NEPRA given that NEPRA enjoys exclusive power to determine the tariff. It is their case that the Surcharges are unconstitutional as they are compulsory extraction of money from the consumers. The levy of the surcharge has been delegated to the executive without any guidelines, which renders it illegal and contrary to the constitutional mandate. 5. The appellants have argued that determination of tariff is the exclusive function of NEPRA under the Act and once the tariff is determined by NEPRA as per the Act and the National Electric Power Regulatory Authority (Tariff Standards and Procedure) Rules, 1998 ("Tariff Rules"), the imposition of surcharge over and above the tariff, so determined, defeats the independence and autonomy of NEPRA. It also impairs the right to life, property and fair determination of tariff thereby offending Articles 9, 10A, 23 and 24 of the Constitution besides the principles of economic and social justice. It is their case that NEPRA is the regulatory authority which was established to regulate the power sector and for the specialized function of tariff determination. Section 31(5) of the Act allows the Federal Government to bypass the entire process of tariff determination and impose costs which have not been placed before NEPRA and do not conform to the standards and guidelines issued by NEPRA for tariff determination. The appellants argued that the entire purpose and function of NEPRA is defeated when the Federal Government levies a surcharge and deems it as a cost without any scrutiny from the regulator or under the tariff determination process. This according to them amounts to regulatory capture. They submitted that the imposition of Surcharges, considered to be cost incurred by the distribution companies, is in effect compulsory extraction of money, which is not permissible under the Constitution. It was also argued that section 31(5) of the Act amounts to excessive delegation of power to the executive resulting in unguided exercise of power which is also unconstitutional. The appellants argued that the Surcharges have been levied to collect revenue from the consumers to meet costs generated due to inefficiency and financial defaults of the Government, theft and line losses in the power sector and related issues. Instead of addressing the faults and gaps in the system, the Federal Government is bridging the deficit by recovering it under the garb of costs of the system from the consumers. It is their case that the Federal Government has failed in its obligation to provide electricity and has placed an unfair burden on the consumers. This amounts to extortion of money from the public which is illegal and violative of the fundamental rights of the consumers of electricity. 6. Learned Counsel for the Federal Government argued that section 31(5) of the Act has been introduced to harmonize the electricity tariff across the country between different distribution companies. The necessity to impose the Surcharges is that they represent the cost of the system i.e., the cost of transmission, generation and distribution of electric power consumed and includes capital and development costs for future projects to produce electricity. Learned counsel argued that the Surcharges are aimed at ensuring affordable supply of electricity and stability in the power sector. It is contended that Federal Government is not bound to issue the tariff as determined by NEPRA as it has a constitutional duty to ensure social justice and of providing the
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basic utility of electricity at an affordable price. Relying on Gadoon's Case they argued that Surcharges (costs), over and above the tariff are constitutionally permissible and can be imposed by the Federal Government. It is their case that the Federal Government is not raising any revenue by levying Surcharges but in fact simply recovering the cost of electricity to ensure economic and efficient generation, transmission and distribution of electricity. 7. Learned Counsel for NEPRA argued that NEPRA did not recommend the levy of any surcharge challenged before this Court. He contented that Surcharges were levied by the Federal Government without any determination from NEPRA. The only surcharge, NEPRA has determined is late payment surcharge, which is a payment to be made by the consumers over and above the tariff, in case of late payment of the electricity bill. 8. Report and parawise comments have also been filed by the National Transmission and Dispatch Company ("NTDC") and Central Power Purchasing Agency ("CPPA") which state that NEPRA determines tariff rates and charges for its licensees and there is no provision under the Act where NEPRA can determine a cost related to the overall system as they only consider cost in terms of their own regulated standards and procedures. The comments further state that the Government has to ensure sustainability of the power sector and has, therefore, levied Surcharges covering costs which are incurred by the system but are not regulated by NEPRA. The role of NTDC and CPPA is to make payments to the producers of electricity. The amounts received by NTDC/CPPA are subject to audit by the Auditor General of Pakistan. Nothing has been concealed and amounts collected are duly notified by the Government. It has also stated that NTDC/CPPA do not maintain any escrow account but on the other hand have opened specific accounts in its name for payments to be made to the generation companies. 9. Pakistan Electric Power Company ("PEPCO"), in its written comments, supports the stance of the. Federal Government. Learned Deputy Attorneys General explained that the Federal Government has the executive authority to levy the surcharge as it has executive authority over all matters contained in the Federal Legislative List ("FLL") and Electricity falls in Part II, Item 4 of the FLL. The Chief Executive Officer of PEPCO also appeared before the Court to explain the role of PEPCO with reference to the Surcharges. He submitted that PEPCO essentially allocates all the amounts recovered as Surcharges amongst the generation companies. 10. M/s. Khaleeq-uz-Zaman, Waqqas Ahmad Mir, and Wasee-ulHasnain Naqvee, Advocates were appointed as amici curiae who submitted that tariff determination is the exclusive function of NEPRA in exercise of the powers conferred under section 7(3)(a) of the Act read with the Tariff Rules. NEPRA determines tariff after following an elaborate procedure in which costs are claimed by the relevant licensees and are determined by NEPRA on the basis of prudency. Tariff is an all inclusive determination which is issued by NEPRA after careful consideration of numerous factors and all costs prudently incurred by licensees to meet the demonstrated needs of their customers. In this entire process the Federal Government can at best require NEPRA to reconsider the tariff but it cannot impose extraneous costs on the tariff. They submitted that the Surcharges, unless determined by NEPRA as a part of tariff, amounts to unlawful extraction of money from the consumer as it has no nexus with the tariff or electricity consumed and therefore places an unfair burden on the consumer. In their opinion the Surcharges are unconstitutional because the Constitution does not allow the Federal Government to arbitrarily impose surcharges and recover its own costs from the consumer. They argued that the Surcharges do not constitute tax because the money collected instead of being deposited into the Federal Consolidated Fund is being routed to different accounts maintained by various institutions to meet the financial requirements of the Federal Government, hence this extraction of money does not pass for a tax and is, therefore, an impermissible levy which cannot be allowed to stand. Overview of the Power Sector
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11. Prior to 1997 electricity was produced, transmitted and distributed to end consumers by the Water and Power Development Authority ("WAPDA") under WAPDA Act, 1958 and Electricity Act, 1910. Thereafter, the entire power sector went through a major restructuring which resulted in the creation of generation companies, a :ransmission company and nine distribution companies. Generation companies ("GENCOs") include hydropower projects owned by WAPDA, thermal power projects, nuclear power projects, Independent Power Producers ("IPPs") and industrial units with surplus power generation. NTDC is the transmission company. The nine distribution companies are Faisalabad Electric Supply Company ("FESCO"), Gujranwala Electric Supply Company ("GEPCO"), Hyderabad Electric Supply Company ("HESCO"), Islamabad Electric Supply Company ("IESCO"), Lahore Electric Supply Company ("LESCO"), Multan Electric Supply Company ("MEPCO"), Rawalpindi Electric Supply Company ("RESCO"), Quetta Electric Supply Company ("QESCO") and Sukkar Electric Supply Company ("SESCO"), (collectively referred to as "DISCOs"). 12. NEPRA is established under Section of the Act and is referred to as the Authority under the Act. It comprises of five members including a Chairman and four members, one from each Province, all appointed by the Federal Government. NEPRA was established to regulate the generation, transmission and distribution of electric power and matters related thereto. The main functions attributed to NEPRA are the issuance of licenses for generation, transmission and distribution of electric power; the establishment and enforcement of standards to ensure quality and safety in the service of electric power to consumers; and to determine tariff for generation, transmission and distribution of electric power. Essentially NEPRA regulates the power sector to ensure coordinated, reliable and adequate supply of electric power. In doing so, NEPRA is mandated to protect the interest of the consumers and the investors. In terms of Section 7(6) of the Act, in performing its functions NEPRA, as far as practicable, must protect the interest of consumers and the companies providing electric power services in accordance with the provisions of the Act and the guidelines provided by the Federal Government. Section 7 of the Act provides that NEPRA shall determine tariff, rates, charges and other terms and conditions for supply of electric power services and recommend the tariff to the Federal Government for notification. 13. The Electricity Cycle entails electricity being produced by the GENCOs, transmitted across the country through NTDC and distributed to the end consumers by the DISCOs. The consumer pays the cost of electricity to the DISCOs, which then pay the cost of generating and transmitting electricity to NTDC. NTDC is the exclusive company engaged in the business of transmission of electric power through the 500 KV, 220 KV and 132 KV transmission lines. The entire process of making payments to generation companies on behalf of DISCOs for supply of electricity through the network is routed through NTDC, which in turn, has set up CPPA to make payments against the invoices raised by the GENCOs. 14. The Government issues its power policies from time to time to set out its vision and guidelines for the power sector. The National Power Policy, 1998 set out the role of NEPRA as an autonomous regulatory authority to promote the establishment of a competitive and efficient power sector while safeguarding the interests of electricity consumers and power sector investments. The Policy states that NEPRA is to determine the tariff and also set guidelines for tariff determination. In terms thereof tariff has two main components; capacity and energy. Tariff also includes prudent costs related to generation, transmission and distribution of electric power as determined by NEPRA. Under the Policy for Power Generation Projects, 2002, NEPRA was again seen as a friendly regulator to protect the interests of consumers and companies providing electric power in line with the guidelines provided by the Federal Government. In terms of the National Power Policy, 2013 issued by the Government of Pakistan, NEPRA was to be strengthened to create a world class regulatory authority with sophisticated and efficient capacity to establish tariffs and set the foundation for a competitive bidding process. The Policy recognizes that tariff rationalization will minimize or
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eliminate subsidy within the industrial, commercial and bulk consumers. One of the short term objectives set out in this Policy is to harmonize the electricity capacity by rationalizing the tariff. The cost of power generation is to be reduced and efficiency of power generation, transmission and distribution to be increased. The Government of Pakistan also issued the National Power Tariff and Subsidy Policy Guidelines, 2014 with respect to electricity prices and cost allocation so that policy makers, planners, companies, regulators and customers have a concrete picture of the steps required to achieve a sustainable power sector for the country. The policies show that NEPRA is an independent and autonomous regulator of the power sector and enjoys the exclusive responsibility of determining tariff. Scope and Meaning of Tariff 15. Tariff is defined under Rule 2(m) of the Tariff Rules to mean: ' the rates, charges, terms and conditions for generation of electric power, transmission, inter- connection, distribution services and sales of electric power to consumer by a licensee. ' Section 7 of the Act provides for the powers and functions of the Authority and vests exclusive responsibility with NEPRA to determine tariff. The Section is reproduced hereunder for ready reference:-- (1) The Authority shall be exclusively responsible for regulating the provision of electric power services. (2) In particular and without prejudice to the generality of the foregoing power, only the Authority, subject to the provisions in subsection (4), shall - (a) grant licences for generation, transmission and distribution of electric power; (b) prescribe procedures and standards for investment programmes by generation, transmission and distribution companies; (c) prescribe and enforce performance standards for generation, transmission and distribution companies; (d) establish a uniform system of accounts by generation, transmission and distribution companies; (e) prescribe fees including fees for grant of licences and renewal thereof; (0 prescribe fines for contravention of the provisions of this Act; (g) review its orders, decision or determinations; (h) settle disputes between the licensees; (i) issue guidelines and standards operating procedures; and (j) perform any other function which is incidental Or consequential to any of the aforesaid functions. (3) Notwithstanding the provisions of subsection (2) and without prejudice to the generality of the power conferred by subsection (1) the Authority shall- (a) determine tariff, rates, charges and other terms and conditions for supply of electric power services by the generation, transmission and distribution companies and recommend to the Federal Government for notification; (b) review organizational affairs of generation, transmission and distribution companies to avoid any adverse effect on the operation of electric power services and for continuous and efficient supply of such services; (c) encourage uniform industry standards and code of conduct for generation, transmission and distribution companies; (d) tender advice to public sector projects; (e) submit reports to the Federal Government in respect of activities of generation, transmission and distribution companies; and
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(f) perform any other function which is incidental or consequential to any of the aforesaid functions. (4) Notwithstanding anything contained in this Act, the Government of a Province may construct power houses and grid stations and lay transmission lines for use within the Province and determine the tariff for distribution of electricity within the Province. (5) Before approving the tariff for the supply of electric power by generation companies using hydro-electric plants, the Authority shall consider the recommendations of the Government of the Province in which such generation facility is located. (6) In performing its functions under this Act, the Authority shall, as far as practicable, protect the interests of consumers and companies providing electric power services in accordance with guidelines, not inconsistent with the provisions of this Act, laid down by the Federal Government." [emphasis added] ' In terms of section 7(1) of the Act, NEPRA is exclusively responsible for providing electric power services, which means the generation, transmission or distribution of electric power and all other services incidental thereto [section 2(x)] section 7(3)(a) requires NEPRA to determine tariff, rates, charges and other terms and conditions for the supply of electric power services by the generation, transmission and distribution companies and recommend the same to the Federal Government. Section 31 of the Act provides that NEPRA shall determine and prescribe the procedures and standards for determination, modification or revising rates, charges and terms and conditions for generation of electric power, transmission, inter-connection, distribution services and power services to consumers. The required standards and procedures are set out in the Tariff Rules. In terms thereof any licensee, consumer, or person interested in tariff can file a petition with NEPRA for its determination. The Tariff Rules sets out the procedure to be followed for tariff determination and Part HI of the Tariff Rules provide the Standards and Guidelines which are applied when tariff is determined. In terms of Rule 17, NEPRA can issue standards and guidelines from time to time, and can modify, amend or revoke the same. Rule 17(3) sets out the applicable standards currently followed by NEPRA. Since NEPRA determines the tariff for generation, transmission and distribution companies, the petitions are filed by each licensee, separately. The generation tariff is determined for the term of the Power Purchase Agreement executed with the Federal Government, which is reflective of the life of the power project. The tariff is determined at the inception of the project and thereafter monthly adjustments are made by NEPRA to cater for the fuel cost as contemplated under section 31(4) of the Act. Transmission and distribution tariff is determined on an annual basis and is also subject to monthly adjustment under section 31(4) of the Act. 16. NEPRA hears the petitions in terms of the Act and the Tariff Rules and issues its rulings. Under Rule 16(2), a petition is to be decided within four months of the date of its admission. In the event that the tariff requires recalculation a party may move NEPRA for its recalculation and adjustment. NEPRA can also be petitioned for review of the tariff by a party or by the Federal Government. Once the tariff is finalized it has to be notified by the Federal Government in the official gazette and becomes effective on the issuance of the notification. However, the monthly adjustments are notified by NEPRA. 17. Under Rule 17(3)(i) of the Tariff Rules, the tariff should allow the recovery of all costs prudently incurred. 17. Standards and guidelines: (3) Tariffs shall be determined, modified or revised on the basis of and in accordance with the following standards, namely:- (i) tariffs should allow licensees the recovery of any and all costs prudently incurred to meet the demonstrated needs of their customers, provided that, assessments of licensees, prudence may
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not be required where tariffs are set on other than cost - of - service basis, such as formula-based tariffs that are designed to be in place for more than one years;" [emphasis added] The term cost is not defined anywhere in the Act or the Tariff Rules, however, NEPRA has developed a prudency test against which the costs are considered. The Federal Government has justified the Surcharges for being a cost of the system which means the actual cost incurred in the generation, transmission and distribution of electricity and includes future costs for development and costs related to the growth of the system. They have also explained that all costs are directly related to the tariff determined by NEPRA but they were never placed before NEPRA for determination. It is the case of the Federal Government that they are fully competent to levy surcharge on the tariff because they finalize the tariffs. According to them, while NEPRA determines the tariff, its finalization is dependent upon the approval and consequent notification issued by the Federal Government. They argued that the Federal Government has to take into consideration many social and economic conditions related to the power sector and the different classes of consumers. The Government also takes into consideration factors which NEPRA cannot look into as per its standards and guidelines and also has to consider the over-all sector, its stability and growth. In this way the Federal Government can recover the cost of the system in the form of a surcharge on the tariff. The Nature of the Surcharges 18. Before examining the legality and constitutionality of the Surcharges, it is necessary to first understand the nature of the levy. According to the Federal Government, the justification of the Surcharges is as follows: UOF Surcharge The surcharge wIls levied to maintain a uniform tariff which is based on socio economic objective and related budgetary targets, apprclved by the Council of Common Interest ("CCI") and Economic Coordination Committee of Cabinet ("ECC"). The amounts collected under this head are deposited into an account titled Universal Obligation Fund maintained with CPPA. The distribution company sends its demand to the CPPA against its invoice. The demand is forwarded to PEPCO which then allocates amounts amongst the DISCOs. CPPA then releases the funds to the GENCOs as per PEPCO's allocation. DS Surcharge This surcharge is levied to service the mark up due to the IPPs.…
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