Discoms cannot pull the plug on contracts

By Abhishek Tripathi and Shivika Agarwal, Sarthak Advocates & Solicitors

The appellate bench of the Andhra Pradesh High Court has stepped in to stop the practice of renegotiation of tariffs by power distribution companies (discoms). In the case of Walwhan Renewable Energy Limited v State of Andhra Pradesh and Ors, the high court held that the terms of power purchase agreements (PPA) cannot be renegotiated or altered either by the parties or by a court. The court further held that the financial difficulty of a party cannot be a ground to avoid the contract or reduce the tariff under the concluded PPAs. The court directed the discoms to make payment of all pending and future amounts at the tariffs agreed in the PPAs. The payment of arrears and pending bills were to be made within six weeks of the judgment.

Abhishek Tripathi, Sarthak Advocates & Solicitors,Discoms cannot pull the plug on contracts
Abhishek Tripathi
Managing Partner
Sarthak Advocates & Solicitors

The factual background was that discoms had executed PPAs with wind and solar power generators in 2016 following a request for proposals by the state government of Andhra Pradesh. Under section 63 of the Electricity Act, 2003 (act), the appropriate state electricity regulatory commission has to approve the tariffs for the supply of electricity if such tariffs are determined through a transparent bidding process. In this case, the tariffs under the executed PPAs were approved by the Andhra Pradesh Electricity Regulatory Commission (APERC). However, as the discoms were financially distressed and in order to reduce tariffs, the state government, by its order of 1 July 2019, set up a high-level committee to review the PPAs and to renegotiate the terms of the agreements.

The discoms had then issued a letter dated 12 July 2019 to the generators seeking a reduction of the tariffs with retrospective effect, that is from the dates of the commissioning of the projects, failing which the discoms threatened the generators with termination of the PPAs. The actions of the discoms, the government order and the letter of 12 July 2019, were challenged by the generators in the case of ReNew Power Limited v the State of Andhra Pradesh & Ors. The single judge while granting an order in favour of the generators observed that electricity is a concurrent list subject and that in view of central government legislation, the state government cannot make an order in exercise of its executive powers that is repugnant to the central legislation. The court further observed that the PPAs are agreements concluded between two contracting parties, the generators and the discoms. The state government, being a third party, cannot alter the terms of the PPAs, much less do so unilaterally. However, in disposing of the petitions, the court directed the discoms to make payment of the amounts due at an interim tariff that differed from that set out in the PPAs.

Shivika Agarwal, Sarthak Advocates & Solicitors, Discoms cannot pull the plug on contracts
Shivika Agarwal
Sarthak Advocates & Solicitors

Against this background, a batch of cases was appealed to the appellate bench of the Andhra Pradesh High Court by the generators against the part of the order in which, despite allowing the writ petitions, the court was alleged to have acted beyond its jurisdiction in directing the discoms to clear the amounts owing at the court-determined interim tariff. The appellate bench, in setting aside the order, held that after allowing the petitions, the single judge was not justified in ordering interim relief when none of the parties to the proceedings had appealed for such relief.

The appellate bench further held that, once the terms of PPAs were agreed by the parties and approved by APERC, they cannot be altered either by the parties or by the court. The appellate bench ruled that the financial difficulty of the government or discoms cannot be a ground to avoid the contract or to reduce the tariff. The appellate bench also quashed two petitions pending before APERC on the tariff issue on the basis that it was not open for the parties or the commission to undo tariffs agreed through a competitive bidding process and approved under section 63 of the act.

It is time that state governments realise that the success of public-private partnerships depends on recognising the sanctity of contracts. Unilateral changes to infrastructure contracts stemming from altered state government policies or circumstances deter private parties from participating in long-term projects. In upholding the contractual terms, the high court has sent the right message to state governments and private investors. The state government should not take this fight further.

Abhishek Tripathi is a managing partner and Shivika Agarwal is an associate at Sarthak Advocates & Solicitors.

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