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Tariff determination is a question of policy

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Deepto Roy,

First published on http://www.mylaw.net, July 04, 2011

The Law Ministry has recently given an opinion that the Ministry of Aviation had supremacy over theAirport Economic Regulatory Authority in matters of policy (which includes the determination of tariff).

The Airport Economic Regulatory Authority (“the AERA”) is the independent regulatory authority for the airport sector. In regulatory terms, it is the new kid on the block, following in the footsteps of the established infrastructure regulators such as the Telecom Regulatory Authority of India and the Electricity Regulatory Commissions. It was set up and its powers defined under the Airports Economic Regulatory Authority of India Act, 2008 (“the AERA Act”). Significantly, its powers include the power to determine the tariff for aeronautical services. In doing so, it has to take into consideration several factors, including the capital expenditure incurred in providing or improving airport facilities, the cost of improving efficiency, and the viability of the economic operations of the airport.

he controversy between the AERA and the Ministry of Aviation emerged in relation to the finalisation of the tariff structure for airports. The AERA is in the process of drawing up the tariff structure for several of the country’s key airports, including Delhi, Mumbai, Hyderabad, Bangalore, Chennai, and Kolkata, which will see expected investment in excess of U.S.D. seven billion (Rs. 31,780 crore) until 2012. Consequently, it has published consultation papers in relation to the tariff determination process.

The Hindustan Times has reported that the AERA had previously obtained an opinion from theAdditional Attorney General of India that the powers of the Central Government to issue directions to the AERA were not “unbridled” and were restricted to subjects that were “in the interest of sovereignty and integrity of India, the security of the state, friendly relations with foreign states, public order, decency or morality.”

The Ministry of Aviation on the other hand sought the Law Ministry’s views on “the competence and scope of the policy directions that can be issued to AERA by the central government.” The Law Ministryhas reportedly stated that the AERA Act gives the Government an independent and additional power to issue directions on matters of policy.

Whilst neither the Additional Attorney General’s or the Law Ministry’s opinions are publicly available, it does appear that the questions of whether the Ministry of Aviation can give policy directions to the AERA and the AERA’s obligation to comply with the same, rests on the interpretation of Section 42 of the AERA Act. Section 42 is extracted below.

42. Directions by Central Government.

(1) The Central Government may, from time to time, issue to the Authority such directions as it may think necessary in the interest of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.

(2) Without prejudice to the foregoing provisions, the Authority shall, in exercise of its powers or the performance of its functions, be bound by such directions on questions of policy as the Central Government may give in writing to it from time to time: Provided that the Authority shall, as far as practicable, be given an opportunity to express its views before any direction is given under this sub-section.

(3) The decision of the Central Government whether a question is one of policy or not shall be final.

From the Section, it becomes clear that the Central Government has the power to issue policy directions to the AERA. The Section also makes it difficult to support the Additional Attorney General’s opinion that the scope of directions is limited to issues concerning the sovereignty and integrity of India. Whilst this is undoubtedly true for Section 42(1)Section 42(2) encapsulates a separate, and wider power. It starts with “without prejudice” language, which means that the ambit of the power is not restricted to the events described in Sub-section (1). It then mentions that in case of questions of policy, the AERA will be bound by the directions of the Central GovernmentSub-section (3) clarifies that the decision on whether a particular matter is one of policy or not lies with the Government.

It is useful to look at a similar section in the Electricity Act, 2003Section 75 of the Electricity Act, 2003 is below.

75. Directions by Central Government to Authority

(1) In the discharge of its functions, the Authority shall be guided by such directions in matters of policy involving public interest as the Central Government may give to it in writing.

(2) If any question arises as to whether any such direction relates to a matter of policy involving public interest, the decision of the Central Government thereon shall be final.

A similar power to issue directions is available to the State Government.

The Appellate Tribunal for Electricity (“the APTEL”) examined the ambit of what amounts to a “policy decision” in the case of Small Hydro Power Developers Association v. Andhra Pradesh Electricity Regulatory Commission (an APTEL decision dated June 2, 2006 in Appeal No. 1 of 2005 and Others). This case involved a provision of the Andhra Pradesh Electricity Regulatory Commission Act, which is analogous to Section 75 specified above. The case involved the tariff available to generators using non-conventional energy (“NCE”) and the question before the Tribunal was whether the Andhra Pradesh Electricity Regulatory Commission (“APERC”) had the power and the authority to alter the policy directions issued by the Andhra Pradesh State Government with respect to NCE developers.

The APTEL held that the original tariff for NCE developers had been fixed by the State Government.

As already pointed out, the original fixation of price of energy generated by NCE Developers is in terms of policy direction issued by State Government. Itis not within the jurisdiction or scope of powers conferred under the Andhra Pradesh Reform Act, 1998 on the Regulatory Commission to review or examine the policy direction issued by the State Government.Absolutely Commission has no executive power to lay down the policy and the Commission is bound to exercise its powers only in terms of the Andhra Pradesh Electricity Reform Act, 1998 or the Electricity Act 2003….

….

The Commission is a statutory delegatee of the power of the Government, and Government is the policy maker. The Commission has no power to arrogate or abrogate itself with such absolute power ignoring the provisions of The Act.”

Therefore, clearly, even in case of tariff decisions, the regulator is required to be bound by the directions of the Central Government and the State Government. This dilutes the independence of the regulator and their responsibility to arrive at decision without executive interference. Independence can only be maintained if restraint is observed in the definition of what amounts to “policy”.

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