SC strikes down two CERC regulations

The Supreme Court has declared unconstitutional two rules under which the Central Electricity Regulatory Commission (CERC) could disqualify companies that trade in power across states.

According to one of these rules, if the company, its promoters, directors or associates are involved in any legal proceedings, and the CERC feels a grant of licence may, therefore, adversely affect the interest of the sector or consumers, it can be denied a licence.

The CERC may also do so if the company is not considered a “fit and proper person” for a licence for any reason to be recorded in writing.

For determining if a company is a “fit and proper person”, the Commission may take into account factors like its financial integrity, competence, reputation, character and its efficiency and honesty.

These rules are found in clauses (b) and (f) of Regulation 6A of the Central Electricity Regulatory Commission (Procedure, Terms and Conditions for Grant of Trading License and other related matters) (Amendment), Regulation 2006.

A two-judge bench of the Supreme Court headed by Justice S B Sinha (partnered by Justice Cyriac Joseph) passed the order in an appeal filed by Global Energy Ltd against CERC for first granting, but later cancelling its licence, invoking the amended regulations. The CERC decision was also upheld by the High Court.

The judgment said involvement in legal proceedings by the company and its directors may not by itself be sufficient to disqualify a company. The commission must be satisfied that grant of licence in the circumstance may adversely affect the interest of the electricity sector or of the consumers.

Commenting on this and the other disqualification criteria, the judgment said these were too vague. “A disqualifying statute, in our opinion, must be definite and not uncertain; it should not be ambiguous or vague. Requisite guidelines in respect thereof should be laid down under the statute itself,” the court emphasised.

Regarding consumer interest and privatisation, the judgment said: “The power of the regulatory commission to impose qualification/restrictions should be read in line with the larger object of the Act. The consumer tariff is to be laid down by the commission.. A trader of electricity does not deal with consumers; he is merely an intermediary between a generating company and a distribution licencee. The tariff that a distribution licencee will charge from its consumers is regulated. Even the margin that a trader can make is regulated. It is, therefore, not correct to contend that Regulation 6A is in consumer interest, as it has not been shown how it will protect the consumer interest.”

Rules framed by the government must be free of uncertainty and arbitrariness, and the two clauses in question fail the constitutional test, held the judges. It struck both down and directed CERC to consider the case afresh as though these two clauses had never been there.