Electricity Act | SEZ Developer Not Ipso Facto A 'Deemed Distribution Licensee', Must Apply For Recognition And Be Scrutinized : Supreme Court

The Supreme Court recently held that SEZ developers, though conferred the status of "deemed distribution licensee" under the Electricity Act, must apply in terms of applicable Regulations and be scrutinized. The court further distinguished between regular distribution licensees and deemed distribution licensees to set aside a pre-condition imposed on an applicant requiring infusion of additional capital to be recognized as a "deemed distribution licensee".

"...being a SEZ developer in terms of the 2010 Notification does not ipso facto confer upon the appellant the status of a deemed licensee without any scrutiny and without being under any requirement to apply; it is required to make an application in accordance with the 2013 Regulations...the condition stipulated in rule 3(2) of the 2005 Rules, as imposed by the TSERC with a direction to infuse an additional capital of Rs. 26.90 crore is not justified and contrary to the statutory scheme", said the bench of Justices Sanjiv Khanna and Dipankar Datta.

Facts of the case

The appellant, a 'developer' in terms of the Special Economic Zones (SEZ) Act, 2005, filed an application before the Andhra Pradesh Electricity Regulatory Commission seeking identification as a deemed distribution licensee, in terms of proviso to section 14(b) of the Electricity Act, which was introduced vide a 2010 Notification by the Ministry of Commerce and Industry.

This proviso accorded upon the appellant the status of a deemed distribution licensee. Upon the Andhra Pradesh Reorganization Act, 2014 coming into force, the application was transferred to the Telangana State Electricity Regulatory Commission.

In 2016, TSERC accorded the status of a deemed licensee to the appellant, however, the grant was made conditional upon it satisfying the requirements of rule 3 of the Distribution of Electricity Licence (Additional Requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, 2005. It was stated that the said compliance was mandatory as per Regulation 12 read with Regulation 49 of the Andhra Pradesh Electricity Regulatory Commission (Distribution Licence) Regulations, 2013.

Accordingly, the appellant was directed to infuse an additional capital of Rs. 26.90 crores (30% of the total anticipated investment of Rs.89.53 crores) as equity share capital into its power distribution business.

Claiming that the directions of TSERC were in "excess of jurisdiction", the appellant moved an appeal before the Appellate Tribunal for Electricity (APTEL) under section 125 of the Electricity Act. However, APTEL dismissed the appeal. Aggrieved, the appellant moved the Supreme Court.

Submissions

The appellant argued that under section 14(b) of the Electricity Act, a developer of an SEZ is ipso facto and unconditionally deemed to be a distribution licensee. Thus, there is no need for a separate license application. Further, recognition of the status of a deemed distribution licensee is effected automatically upon fulfilment of conditions laid down in the SEZ Act, independent of Rule 3(2) of the 2005 Rules read with Regulation 12 of the 2013 Regulations.

Another contention raised by the appellant was that Regulation 12 of the 2013 Regulations applies to general applicants seeking a distribution license, requiring compliance with both the 2005 Rules and the procedures prescribed in Regulations 4 to 11. But it cannot apply to a deemed licensee under Regulation 13.

The respondent-authorities, on the other hand, maintained that the 2005 Rules and the 2013 Regulations were applicable to the appellant. They also averred that TSERC was empowered to impose general and specific conditions at its discretion. It was explained that the purpose of requiring the appellant to infuse an additional capital was to assess its credit-worthiness.

Issues

Hearing the parties, the court deliberated upon and rendered decision on the following two issues:

a) Whether the designation of an entity as a SEZ developer by the MoCI ipso facto qualifies the entity to be a deemed distribution licensee, obviating the need for an application under Section 14 of the Electricity Act?

b) Whether Regulation 12 of the 2013 Regulations (and by implication Rule 3(2) of the 2005 Rules) is applicable to a SEZ developer recognized as a deemed distribution licensee under the proviso to Section 14(b) of the Electricity Act read with Regulation 13 of the 2013 Regulations?

Court Observations

On the first aspect, the court observed that the proviso to Section 14(b) confers "deemed licensee status" on SEZ developers. However, the same does not explicitly exclude the need for obtaining a license.

"This lack of specificity, especially when compared with the clear provisions for other entities, suggests that the legislative intent was not to ipso facto grant SEZ developers the status of deemed distribution licensees, thereby obliging them to obtain a license by making an application in terms of regulation 13."

It further opined that TSERC is empowered to scrutinize developers' applications in accordance with law, however, only limited to the provisions which are applicable to deemed licensees.

On the second aspect, the court said that the first proviso to Section 14 does not pertain to deemed licensees and therefore the 2005 Rules did not apply to the appellant.

"The status of a SEZ developer as a deemed licensee emanates from the 2010 Notification, which introduced the proviso to section 14(b), conferring deemed licensee status to SEZ developers. Reading anything beyond this would defeat the very purpose of the proviso and the concept of the deemed licence."

The court did not agree with TSERC on the applicability of Regulation 12 to the appellant for two reasons:

(i) The Electricity Act (primary legislation), through the proviso inserted in section 14(b), confers deemed licensee status upon SEZ developers without imposing any specific conditions; and

(ii) The 2013 Regulations make a clear distinction between an applicant seeking a license [as defined under regulation 2(d)] and a deemed distribution licensee seeking recognition as such [as defined under regulation 2(h)].

Regulation 12 pertains solely to regular distribution licensees as defined under regulation 2(h), not to deemed licensees, the court said.

"...'Reading up' regulation 12 so as to expand its ambit to include within it deemed licensees, especially when the Electricity Act does not stipulate any such inclusion, runs counter to the subsequently inserted proviso to clause (b) of section 14 of the Electricity Act—an exercise which is impermissible and which we cannot approve. Therefore, the recognition of the status of a deemed distribution licensee cannot hinge on compliance with rule 3(2) of the 2005 Rules read with regulation 12 of the 2013 Regulations."

It was concluded that the appellant was governed by Regulation 13, proviso to which specifically states that nothing in regulations 4 to 11 would apply to deemed licensees.

Conclusion

In view of the above, the court concluded that to obtain the status of a deemed licensee, an SEZ developer must of necessity apply in terms of the 2013 Regulations and be scrutinized. It was apprised that on applying in said terms, the appellant's status had been upheld. As such, the issue did not require further consideration.

Insofar as the condition imposed on the appellant regarding infusing of additional capital, the court held that the same was not justified. The orders of APTEL and TSERC were set aside. The order granting status of deemed distribution licensee to the appellant was modified to exclude the condition involving infusing of additional capital.

Case Title: M/s Sundew Properties Limited v. Telangana State Electricity Regulatory Commission & Anr, CIVIL APPEAL NO. 8978/2019

Citation : 2024 LiveLaw (SC) 393

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