India: APTEL Rules Out The Scope For Regulatory Intervention Upon The Execution Of A PPA Pursuant To The Bidding Process Under The Electricity Act, 2003

Factual Background

The judgment dated 7 April 2016 delivered by the Hon'ble Appellate Tribunal for Electricity (APTEL) set aside two (2) separate orders dated 21 February 2016, whereby the Central Electricity Regulatory Commission (Central Commission) granted compensatory tariff to Adani Power Ltd (APL) and Coastal Gujarat Power Ltd (CGPL), a wholly-owned subsidiary of Tata Power Ltd. The compensatory tariff thus granted by the Central Commission in exercise of its regulatory powers under Section 79 of the Electricity Act, 2003 (2003 Act), was over and above the tariff already being charged by APL and CGPL under the Power Purchase Agreements (PPAs) executed pursuant to the bidding process under Section 63 of the Electricity Act, 2003 (2003 Act). Hence, the judgment delivered by APTEL assumes significance in circumscribing the limitations of the Central Commission's powers under Section 79 of the 2003 Act, especially with reference to interference with PPAs executed pursuant to the competitive bidding process conducted under Section 63 of 2003 Act.

APTEL treated the appeals being Appeal No 100 of 2013 and Appeal No 98 of 2014 (Uttar Haryana Bijli Vitran Nigam Limited & Anr. v CERC & Ors) (Appeals) both of which were preferred by the two (2) distribution licensees of the state of Haryana (Haryana Utilities) as the "lead matters". For the sake of brevity, only the material facts giving rise to the above Appeals are outlined hereinbefore:-

  1. APL had set up a generating station consisting of four (4) Phases, namely Units 1 to 4 in Phases I and II (4 * 330 MW), Unit Nos 5 and 6 in Phase III (2 * 660 MW), and Unit Nos. 7 to 9 in Phase IV (3 * 660 MW) (Mundra Power Project). The Mundra Power Project was based on a blend of domestic and imported coal in the ratio of 70:30.
  2. APL had entered into two (2) PPAs dated 2 February 2007 and 6 February 2007, both with Gujarat Urja Vikas Nigam Ltd (GUVNL), for the supply of 1,000 MW from Phases I and II, and Phase III of the Mundra Power Project, respectively. Separately, APL had also entered into two (2) PPAs both dated 7 August 2008 with the Haryana Utilities, for the supply of 1,424 MW from Phase IV of its Mundra Power Project. In terms of the PPAs thus entered into, APL had agreed to supply electricity to GUVNL at a levellized tariff of INR 2.3495 / kWh and to the Haryana Utilities, at a levellized tariff of INR 2.94 / kWh.
  3. All the PPAs as referred to hereinbefore, were entered into pursuant to the e-bidding process in accordance with the Guidelines dated 19 January 2005 issued by the Ministry of Power, Government of India, namely "Guidelines for Determination of Tariff by Bidding Process" under Section 63 of the 2003 Act (the Guidelines).
  4. In view of its failure to execute Fuel Supply Agreements within time, APL had entered into a Coal Supply Agreement with its holding company, namely Adani Enterprises Ltd, for procuring imported coal for the Mundra Power Project. In view of coal imported from Indonesia being the cheapest available imported coal, Adani Enterprises Ltd negotiated contracts with Indonesian coal mining companies for procuring coal. It may be noted that ever since the year 1967, all contracts for the export of coal from Indonesia were directly negotiated with the holders of mining permits.
  5. As on 23 September 2010, the Government of Indonesia had notified the Regulation being No 17 of 2010 dealing with Coal Benchmark Export Price (Indonesian Regulations), which was to come into effect as from 1 September 2011. As per Article 2 of the Indonesian Regulations, holders of mining permits were required to sell coals (including to affiliated business entities), by referring to the benchmark price for domestic sales or exports. In terms of Article 11 thereof, the Director-General was required to set the benchmark price of coal based on a formula that refers to the average price index of coal in accordance with the market mechanism and/or the prices generally accepted in the international market.
  6. The Indonesian Regulations required that all direct sales contracts (spot) and term sale contracts (long-term) would be adjusted so as to conform thereto; within 6 months and 12 months, respectively. Any violation of the provisions of the Indonesian Regulations was punishable with, inter alia, revocation of the mining operation permits. Any increased realization upon the promulgation of the Indonesian Regulations was allowed to be retained by the coal exporting companies in Indonesia, except to the extent of a higher percentage of royalty and taxes.
  7. Upon the promulgation of the Indonesian Regulations, APL expressed its inability to perform its obligations under the PPAs, citing commercial unviability. More specifically, APL claimed that it had received coal from domestic sources to the extent of only 54% of its total coal requirement; and therefore, had to import coal for its balance coal requirement.
  8. APL filed a Petition before the Central Commission, being Petition No 155/MP/2012. Vide its order dated 16 October 2012, the Central Commission rejected the challenge to its jurisdiction on the ground that the PPAs constitute a "composite scheme for the generation and sale of electricity" as envisaged under Section 79(1)(b) of the 2003 Act.
  9. As per its order dated 2 April 2013, the Central Commission held that the claims made by APL under the provisions in the PPAs relating to Force Majeure and Change in Law were not admissible. Notwithstanding the same, the CERC deemed it fit to constitute an Expert Committee with the mandate of arriving at a "mutually acceptable solution". The Appeal being Appeal No 100 of 2013 challenges the aforesaid order dated 2 April 2013.
  10. The Expert Committee thus constituted submitted its report to the Central Commission on 16 August 2013. Notably, the report was signed by only its Chairman, Mr Deepak Parekh, and by the financial analyst, Ms Arundhati Bhattacharya from SBI Capital Markets Ltd.
  11. Thereupon, the Central Commission had passed the impugned order dated 21 February 2014; whereby it was pleased to grant compensatory tariff to APL as per the formula provided for therein.

Composite Scheme

On a reading of the Section 79(1)(b) of the 2003 Act, APTEL was of the view that the essential requirements so as to constitute a "composite scheme" as envisaged thereunder, are that (a) the generating company is to "enter into" or "otherwise have" a "composite scheme"; (b) such "composite scheme" must be for the generation and sale of electricity; and (c) such sale of electricity must be in more than one (1) State.

APTEL held that a "composite scheme" comes into existence when the "diverse elements" of generation and sale of electricity are put in a "systematic arrangement" of a "binding nature", for attaining the object of sale of electricity in more than one State. Accordingly, APTEL rejected the submission that sale is inherent in the generation of electricity.

APTEL held that a generating station could enter into a "composite scheme" either at the initial stage, or later on as and when it starts supplying electricity to more than one State. The Central Commission would start to exercise its jurisdiction over such generating company as and when it executes PPAs to supply electricity to more than one State, or undertakes actual supply to more than one State under any other binding arrangement.

APTEL rejected the submission of the procurers that the applicability of Section 79(1)(b) of the 2003 Act is attracted only when there is uniformity of tariff; and common terms and conditions for the generation and sale of electricity. In its view, it is neither feasible nor possible to always have common tariff and/or common terms and conditions. APTEL therefore held that its judgment dated 23 November 2006 in M/s PTC India Ltd v CERC & Ors Appeal Nos. 228 of 2006 and 230 of 2006; and its judgment dated 4 September 2012 in BSES Rajdhani Power Ltd v DERC, Appeal No 94 of 2012; do not lay down the correct law in so far as "uniform tariff" and "common terms and conditions" are not requisites of a "composite scheme" as envisaged under Section 79(1)(b) of the 2003 Act.

APTEL held that the supply of electricity to procurers in more than one State from the same generating station of a generating company would, ipso facto, qualify as a "composite scheme", so as to attract the jurisdiction of the Central Commission under Section 79 of the 2003 Act.

Regulatory Power(s) Of The Appropriate Commission

Two Streams for Tariff-determination

On a conjoint reading of the provisions of the 2003 Act, the National Electricity Policy, the Tariff Policy dated 6 January 2006 notified by the Ministry of Power, and the Guidelines, APTEL took the view that there are two (2) separate streams of tariff-determination; namely, tariff-determination under Section 62 of the 2003 Act, read with Sections 61 and 64 thereof and tariff discovery under Section 63 of the 2003 Act.

In this regard, APTEL took specific note of the non-obstante clause with which Section 63 of the 2003 Act begins, in terms whereof the operation of Section 62 is specifically excluded. Section 64 of the 2003 Act lays down the procedure for tariff-determination under Section 62 thereof. Accordingly, the applicability of Section 64 of the 2003 Act to the tariff-determination under Section 63 is also excluded. In this regard, APTEL specifically observed that sub-sections (2) and (6) of Section 64, which provide for amendment of tariff already determined under Section 62 finds no applicability to the tariff-determination under Section 63 as above.

Very limited role of the Appropriate Commission under Section 63 of the 2003 Act

APTEL rejected the contention that the role of an independent regulator is envisaged at all stages of the bidding process under Section 63 of the 2003 Act, except to ensure that the procedure laid down in the Guidelines is duly followed while discovering the tariff thereunder. It also observed that as and when a petition is filed before the Commission under Section 63 of the 2003 Act, it is either open to the Commission to reject the same if it is found that the bidding is not as per the statutory framework, or to adopt the tariff if the same is discovered as per the procedure laid down in the Guidelines.

APTEL observed that the legislative intent is to let the Central Government have control over the bidding process and therefore, to make Section 63 of the 2003 Act a "code by itself" for the said purpose. Hence, the legislature has deliberately vested in the Central Government the power to make guidelines in accordance with which the tariff is to be discovered. APTEL held that Section 61 of the 2003 Act is not applicable to tariff-determination under Section 63. In this regard, APTEL referred to and relied upon its judgment in Essar Power Ltd v. UPERC, 2012 ELR (APTEL) 182, which in its view squarely covered this issue.

Sanctity of Bidding Process

APTEL emphasised the need to preserve the sanctity of the bidding process under Section 63 of the 2003 Act. It held that the tariff discovered under Section 63 is "sacrosanct"; and cannot be "tampered with". In APTEL's view, any alternate interpretation would only convert the process of tariff-determination under Section 63, into a tariff-determination under Section 62, read with Sections 61 and 64.

APTEL clarified that it is open to a generating company to only seek relief only in the mode prescribed under the PPA, which in its view is the "controlling document". In this regard, APTEL observed that the principle underlying the bidding process under Section 63 of the 2003 Act is transparency, with the bidders being aware at the time of bidding itself as to the benefits/concessions to which they would be entitled. Otherwise, the same would amount to a violation of Article 14 of the Constitution of India.

Findings on the Issue of Regulatory Powers

APTEL held that the Central Commission has no regulatory powers under Section 79(1)(b) of the 2003 Act, so as to vary or modify the tariff; or to otherwise grant compensatory tariff to the generating companies in case the tariff is determined under Section 63 of the 2003 Act. It further held that the Central Commission is only empowered to grant the relief provided for under the PPA in the event that a case of Force Majeure or Change in Law is made out, in exercise of its adjudicatory powers under Section 79(1)(f) of the 2003 Act, read with Article 17.3 of the PPA;.

APTEL further clarified that independent of the provisions relating to Force Majeure and Change in Law in the PPAs, the Central Commission has no power to vary or modify the tariff, or to otherwise grant compensatory tariff to the generating companies in the exercise of its powers under Sections 61, 63 and 79 of the 2003 Act and/or Clause 4.7 and Clause 5.17 of the Guidelines and/or Article 17.3 of the PPA and/or under the adjudicatory powers as per Section 79(1)(f) of the 2003 Act.

Change in Law

APTEL took the view that the term "all laws" provided in the PPAs would only include the laws of India, including electricity-related laws unless any specific reference to foreign laws has been made.

APTEL found that the generators have failed to establish that the conduct of the parties at the time of signing the PPAs was such that it disclosed their intention to include foreign law within the ambit of Article 1.1 as above.

Force Majeure

APTEL has held that upon the promulgation of the Indonesian Regulations, the generators were being forced to pay an exorbitantly high price to import coal from Indonesia; thereby making it commercially impracticable for them to fulfil their obligations under the PPAs. In APTEL's view, the promulgation of the Indonesian Regulations had wiped out the fundamental premise on which the generators had quoted their bids.

APTEL held that the term "Force Majeure", if given its widest meaning, is to save the performing party from the consequences of anything over which it has no control. On a conjoint reading of Articles 12.3, 12.4 and 12.7(a) of the PPA, APTEL arrived at the conclusion that an event constitutes a "Force Majeure Event", if it wholly or partly prevents or unavoidably delays the performance of obligations under the PPA. Such event should neither be within the reasonable control of the Affected Party, whether directly or indirectly; nor could the same have been avoided by the Affected Party, even if it had taken reasonable care.

It held that:

The word "impossible" cannot be interpreted to mean physical or literal impossibility.

The contract would cease to bind the parties thereto only in the event that the basic terms of the contract are "altered or wiped out", resulting in the parties thereto finding themselves in a fundamentally different situation.

Force Majeure causing Hindrance to the performance of the contract

APTEL observed that the escalation in coal prices is not one in which there is only a normal rise in prices; in as much as the Indonesian Regulations is an act of the Government of Indonesia, over which the generators had no control at all and held that the promulgation of the Indonesian Regulations had made it commercially impracticable for the generators to fulfil their obligations under the PPAs.

The generators had continued to supply electricity to the procurers, notwithstanding the occurrence of the Force Majeure Event. APTEL took the view that the promulgation of the Indonesian Regulations had therefore "hindered" the performance of obligations under the PPAs. In arriving at its conclusion, APTEL took specific note of the "extensive correspondence" between the generators and the Ministry of Power, wherein the former referred to "serious difficulties" being faced by them in performing their obligations under the PPAs upon the promulgation of the Indonesian Regulations. Ultimately, however, APTEL examined this case in the light of Article 12.4 of the PPA, which refers to the agreement becoming "onerous" to perform.

Non-Escalable Tariff

APTEL took the view that the generators cannot be denied relief under the provision relating to Force Majeure, merely in as much as the tariff was quoted on a non-escalable basis in the bids preceding the execution of the PPAs. In this regard, APTEL took the view that in the promulgation of the Indonesian Regulations was "totally unexpected" and "abnormal"; and affected the economics of the PPAs to which APL and CGPL were parties. In such a situation, relief available in the PPA can be granted to the generators, on the ground that their case falls in Force Majeure.

Conclusions

APTEL held that tariff discovered through the competitive bidding process under Section 63 of the 2003 Act, cannot be "tampered with", as the same is "sacrosanct". Once tariff is thus discovered, it is not open to the Appropriate Commission to grant compensatory tariff to the generators by invoking its regulatory power under Section 79(1)(b) of the 2003 Act. However, APTEL held that the generators had made out a case of Force Majeure; and were therefore, entitled to relief only to the extent envisaged under the PPA.

It may be noted that both Petitions (Petition No 155/MP/2012 and Petition No 159/MP/2012) were remanded to the Central Commission, so as to assess the extent of the impact of Force Majeure Event on the projects of APL and CGPL, and to grant them such relief as may be available to them under their respective PPAs. APTEL has directed the Central Commission to complete the entire exercise as expeditiously as possible; and at any rate within a period of three (3) months here-from.

Comment

The judgment delivered by APTEL is significant, in as much as it rules out the scope for regulatory intervention upon the execution of a PPA pursuant to the bidding process under Section 63 of the 2003 Act; save and except in the manner provided for in such PPA. While this would result in bidders exercising circumspection prior to submitting their bids as it would not be open to subsequently seek relief de hors the provisions of the PPA, it would also inject an element of certainty into the bidding process. In its analysis, the judgment delivered by APTEL upholds the sanctity of the bidding process under Section 63 of the 2003 Act.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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