India: Rules Of The Game Cannot Be Changed Midway – High Court Holds That Tender Conditions Cannot Be Changed Once The Bidding Process Is Over

Introduction

Ministry of Power (MOP) by its decision dated 15 April 2015 (Impugned Decision) proposed to introduce capping of the fixed charges component of rate of electricity qua the power generating companies that had been declared as successful bidders of coal mines with the specified end-use of "Power". The Impugned Decision was challenged by some of the successful bidders in the High Court of Delhi. On 9 March 2017, the High Court of Delhi in the cases of Monnet Power Company Limited v. Union of India & Ors., Mandakini Exploration Mining Ltd. & Ors. v. Union of India & Ors. and Jaiprakash Power Ventures Limited v. Union of India & ors. upheld the sanctity of the tender process. The High Court of Delhi held that as the decision to put a cap on fixed charges would have had an impact on the bidding process and this was not known to the bidders at the time of bidding, the bidders would be allowed to withdraw from the bids and get refund of the bid security without any penalty.

Main grounds of challenge

  • Capping of fixed/ capacity charges was not contemplated when the petitioners participated in the auction process. The capping alters the basis on which the petitioners bid for the mine, and cannot bind the petitioners;
  • The capping of fixed charges is contrary to the scheme of competitive bidding for procurement of power under Section 63 of the Electricity Act, 2003;
  • Capping of fixed charge curbs competition and is against public interest; and
  • The condition of capping of fixed charge is discriminatory against the successful bidders in the writ petitions as:

    • The power producers who are procuring coal from open market are not being subjected to capping of fixed charges;
    • Future bidders for coal mines, who are aware of capping of fixed charges would be able to factor this into the economics of their bid for the coal mines as against the petitioners who are faced with such condition post winning the coal mine;
    • The existing successful bidders who have already entered into power purchase agreements (PPA) are in a more advantageous position as in their case, there is no review proposed of the fixed charges component of tariff quoted by them.

Government's rebuttal

  • Pre-bid documents clarified to the bidders that the benefit of reduction in Run of Mine (ROM) price of coal discovered in coal auction/allotment is to be passed on to the ultimate consumer and that additional premium quoted in coal auction would not be allowed to be factored in the tariff;
  • The petitioners were therefore always aware that fixed charge is going to be capped and this condition is not retrospective in nature;
  • In the event MOP does not cap the fixed charge component of electricity tariff, there is every possibility that these ineligible components will be loaded on the fixed charge by the bidders, thereby defeating the Government's objective of ensuring that the benefit of lowest bid price of coal is passed onto the consumers;
  • The Government has the power to amend the documents/guidelines for future power procurement from thermal power stations by distribution licensees; and
  • Capping of fixed charge component of electricity tariff is in public interest.

Judgment

  • When the bidders were bidding for the coal mines, which were earmarked for the power sector, they were aware of the restrictions on the pass through in the energy charge component of tariff but were not aware there could be a cap on the fixed charge component of the power tariff. Whether this was ethically or morally correct was not the relevant issue;
  • As the end-use of the coal blocks was restricted to power generation, the bidding process of the coal blocks definitely had an impact on the power tariff;
  • The bidders were obviously calculating their costs and benefits whilst bidding for the coal mines;
  • As the decision to put a cap on fixed charges/capacity charges would have had an impact on the bidding process and this was not known to the petitioners, the petitioners were entitled to withdraw from the bids and seek refund of the bid security without any penalty;
  • The court was not going into the question of whether under the regime of Section 63 of the Electricity Act, 2003, the Government could or could not put a cap on fixed charges/capacity charges.

Khaitan comments

With the end use of the coal blocks auctioned being specified as "power", the auctions for the coal blocks and subsequent power purchase bidding/tenders became intrinsically linked. Therefore, the condition of capping of fixed charges sought to be introduced by MOP after the bidding process was over, definitely had the potential to have a huge impact on the economic feasibility of running the coal mines procured by the successful bidders. The judgment of the High Court of Delhi has therefore brought a huge sigh of relief to the bidders who can now withdraw their bids without any penalty, and bid in future auctions whilst making an informed decision regarding there being a cap on the fixed charge component of the electricity tariff.

However, in our view the court ought not to have shied away from deciding the question of the very power of the Government to put a cap on fixed charges under the Section 63 regime of the Electricity Act, 2003. With there already being restrictions on the pass through allowed in the energy charges, with the fixed charge component also being capped by the Government, the regime under Section 63 is virtually being converted by the Government into a cost plus PPA regime under Section 62 of the Electricity Act, 2003. This is not only against the very spirit and letter of the principles of competitive bidding incorporated in Section 63 but is also ultimately against public interest and competition. The court, in our view, therefore ought to have also addressed this question and thereby protected the sanctity of a competitive bidding process.

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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