India: No Compensatory Tariff for GENCOs after Conclusion of PPA under Section 63, EA

Factual Background

The Hon'ble Supreme Court by way of its judgment dated 11 April 2017 has set aside the common judgment dated 7 April 2016, rendered by Appellate Tribunal for Electricity (APTEL) where APTEL had allowed the claims of Adani Power Ltd. (APL) and Coastal Gujarat Power Ltd. (CGPL), a wholly-owned subsidiary of Tata Power Ltd. to claim compensatory tariff in the wake of change in Indonesian Coal Regulations as 'Force majeure' event envisaged in the Power Purchase Agreement (PPA). Change in Indonesian Coal Regulations had led to increase in cost of production of electricity as APL and CGPL were sourcing coal from Indonesia for producing and supplying to several State distribution companies.

The matter relates back to when APL and CGPL had filed the petitions before the Central Electricity Regulatory Commission (Central Commission) seeking compensatory tariff on account of the impact of change in Indonesian Coal Regulations with respect to their respective PPAs entered into with several State distribution companies under Section 63 of Electricity Act, 2003 (EA-2003) i.e. by succeeding in competitive bidding process. Central Commission, by its order dated 2 April 2013 had:-

  • Concluded that PPAs entered into by APL constituted a composite scheme for generation and sale of electricity as envisaged under Section 79(1)(b) of EA-2003 thereby holding that the Central Commission was the Appropriate Commission for redressal of disputes arising under the PPAs;
  • Held that claims of APL and CGPL on the grounds of force majeure and / or change in law were not admissible, but relief of compensatory tariff could be granted in exercise of the regulatory powers provided under Section 79 of EA-2003, considering the larger public interest. Accordingly, a Committee was constituted to look into the alleged difficulties faced by APL and CGPL and to find an acceptable solution thereto; and
  • Proceeded to grant compensatory tariff to APL and CGPL based on the Committee's report.

Several appeals and cross appeals were filed by the parties before APTEL and finally, APTEL, vide its common Judgement dated 7 April 2016:-

  • agreed with the Central Commission that generation and sale of power by APL to Gujarat Urja Vikas Nigam Ltd. (GUVNL) and Haryana Utilities constituted a composite scheme within the meaning of Section 79(1)(b) of EA-2003 and therefore, the Central Commission would have jurisdiction to proceed further in the matter;
  • concluded, having regard to the law on frustration contained in the Indian Contract Act, 1872 and the relevant provisions of the PPAs, that force majeure was made out on the facts of such cases and reversed the order of the Central Commission on this account;
  • also reversed the Central Commission's order on the issue of exercise of regulatory powers under Section 79, by holding that regulatory powers could not be exercised once there was a PPA executed under Section 63 of EA-2003;
  • held that change in law provisions did not apply to foreign law and, therefore, changes in Indonesian Coal Regulations did not come within the scope of the provisions of PPA; and
  • held that the Government Policies that were relied upon, did not constitute 'law' insofar as changes in Indian law were concerned.

Accordingly, the matter was remanded to the Central Commission to determine the impact of the force majeure event to grant compensatory tariff.  Upon appeals by Energy Watchdog, Prayas (Energy Group), Punjab State Power Corporation Ltd., Ajmer Vidyut Nigam Ltd., Maharashtra State Electricity Distribution Company Ltd., GRIDCO Ltd. and CGPL, Hon'ble Supreme Court vide its Judgement dated 11 April 2017 has decided the issues as under:-

Composite Scheme

Upon reading various provisions of EA-2003, the Hon'ble Supreme Court took the view that the emergent scheme is that the Central Government / Central Commission is involved whenever there is inter-state supply of electricity whereas the State Government / State Commission is involved only in cases of intra-state generation or supply of electricity. Accordingly, the Central Commission would be the 'Appropriate Commission' in terms of provisions of EA-2003 in all cases wherein the generation and sale of power takes place in more than one state. In other words, such scheme for generation and sale of electricity in more than one State would constitute a 'composite scheme'. The Hon'ble Supreme Court further clarified that commonality and uniformity of tariff are not prerequisites for a 'composite scheme'.

The Hon'ble Supreme Court also relied upon the dictionary meaning of the term 'composite', which is defined as 'consisting of at least two elements' to hold in the present case that generation and sale being in more than one state, the same could be referred to as 'composite'.

The Hon'ble Supreme Court viewed the definition of 'composite scheme' in the National Tariff Policy (dated 6 June 2006 as amended on 28 January 2016) as an important aid to the construction of Section 79(1)(b).

It was noted by the Hon'ble Supreme Court that the non-obstante clause at the beginning of Section 64(5) of EA-2003 indicated that in all cases involving inter-State supply, transmission, or wheeling of electricity, the Central Commission would alone have jurisdiction. Thus, Section 64(5) would only apply if the jurisdiction otherwise being with the Central Commission alone, was bestowed upon the State Commission having jurisdiction in respect of the concerned licensee by application of the parties concerned.

Regulatory Power(s) of the Appropriate Commission

The Hon'ble Supreme Court observed that it was clear from Section 63 of EA-2003 that the Appropriate Commission was not a "mere post-office" but that the tariff discovered through the process of bidding could be adopted only if such bidding was conducted in a transparent manner in accordance with the Guidelines issued thereunder.

Further, the view was taken that the regulatory powers of the Central Commission under Section 79(1) being general, the adoption of tariff under Section 63 could not be de hors Section 79(1)(b) of EA-2003. It was held that the non-obstante clause in Section 63 being limited to Section 62, the general powers of the Commission to "regulate" tariff under Section 79(1)(b) were not excluded.

Further, the Hon'ble Supreme Court stated that once the PPA has been concluded after adoption of tariff by the Appropriate Commission in terms of Competitive Bidding Guidelines issued by Central Government under Section 63 of EA-2003, reliefs in exercise of its regulatory power could be granted only in terms of the provisions of PPA.

Change in Law

Change in foreign law

The Hon'ble Supreme Court, in agreement with 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. In this context, the Hon'ble Supreme Court rejected the contention of the generators that in every other clause of the PPA, references had explicitly been made to 'Indian Law' and stated that as such it would be unsafe to rely upon such other clauses of the PPAs.

The Hon'ble Supreme Court further observed that the fact that coal was to be sourced from abroad would not indicate the inclusion of foreign laws under 'change in law' as the meaning of the clause could not be said to change based on the source of coal. Further, merely annexing the Fuel Supply Agreement (FSA) to the PPA did not render either the PPA or the FSA to be read and interpreted in each other's context.

Change in Coal Distribution Policy

It was held by the Hon'ble Supreme Court that the modification of the New Coal Distribution Policy, vide the letter dated 31 July 2013 issued by the Ministry of Power, Government of India did amount to a change in Indian law and would be covered by the 'change in law' clause in the PPAs. Thus, the generators could claim compensatory tariff to the limited extent of the impact of the change in the said Policy.

Force Majeure

The Hon'ble Supreme Court held that upon the promulgation of the Indonesian Coal Regulations, the generators merely had to pay a higher price to import coal from Indonesia. Thus, the doctrine of frustration as envisaged under Section 56 of EA-2003 would not apply as the fundamental basis of the PPAs remained unaltered.

The Hon'ble Supreme Court highlighted the fact that nowhere did the PPAs state that coal was to be procured only from Indonesia at a particular price. In fact, the price payable for the supply of coal was to be borne entirely by the generator and was a risk knowingly undertaken by the generator. The fact that a non-escalable tariff was quoted, is relevant to demonstrate that the generating company bears the risk of supplying electricity at the indicated tariff.

However, the Hon'ble Supreme Court clarified that the mere fact that the bid may be non-escalable does not mean that the generators were precluded from raising the plea of frustration, if the same was otherwise available in law.

While interpreting the terms of the PPAs, the Hon'ble Supreme Court held that the force majeure clause is not exhaustive but ought to be narrowly construed to indicate something that partly or wholly prevents performance of the contract. As alternative modes of performance were available to the generators, albeit at a higher price, the contract could not be said to be frustrated as the fundamental basis of the contract was not displaced.

Khaitan Comment

The judgment delivered by the Hon'ble Supreme Court is quite significant for bringing clarity to certain sectoral issues which have been raised and argued before various fora without any conclusion on correctness of the approach. It has now been held by the Hon'ble Supreme Court that only the Central Commission would have jurisdiction with regard to the generating companies supplying power to more than one State and the option of approaching the State Commission under Section 64(5) of EA-2003 would be available only if the relevant State distribution company along with the generating company made an application before the State Commission.

Further, it has been now settled that the scope for regulatory intervention is not available to the Appropriate Commission upon the execution of a PPA (including the adoption of tariff) pursuant to the bidding process under Section 63 of EA-2003 read with Competitive Bidding Guidelines issued by the Central Government thereunder; save and except in the manner provided for in such PPA.

While the Hon'ble Supreme Court's Judgment may cause short term distress to the generating companies but in the long run would reduce assumptions and make the bidders exercise caution prior to submitting their bids as it would not be open to subsequently seek relief de hors the provisions of the PPA. It will also introduce certainty into the bidding process by diminishing the regulatory information asymmetry.

The judgment delivered by the Hon'ble Supreme Court upholds the sanctity of the bidding process under Section 63 of EA-2003 and allows the generating companies to seek compensatory reliefs on account of changes in Coal Distribution Policy as 'policy' has been held to be covered under the definition of 'Indian law' read with the 'Change in Law' clause of the PPA.

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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