Power sector ‘change in law’ disputes see faster resolution

By Poonam Verma, J. Sagar Associates

The Indian infrastructure story has been a mixed bag in the last five years. While there is a boom in infrastructure projects, private investment in the sector has fallen short of earlier estimates. One of the principal reasons for the shortfall in private investment across the sector was issues in financing of projects. Another possible deterrent was that investments made so far have been marred by disputes. Time and cost overruns in infrastructure projects due to disputes are critically considered in risk assessments done by the lenders.

Poonam VermaPartnerJ. Sagar Associates
Poonam Verma
J. Sagar Associates

One other major issue troubling the power sector specifically is the change in law during the life cycle of a power project. In most infrastructure agreements, a change in law provision exists, which is a standard agreement issued by the Ministry of Power. This provision is important as it deals with changing laws of the country and how it impacts the cost of the power project. If the governing law is amended after the execution of the contract, the parties are obliged to align the contract with the changed law, as held by the Supreme Court in the matter of PTC Ltd v CERC (2010).

Interestingly, the tariff-based competitive bidding guidelines issued by the Ministry of Power on 19 January 2005 (amended from time to time) has an in-built provision for change in law and in agreements where a specific provision is missed, it is read by way of doctrine of incorporation. A change in law is a result of a change in economic, commercial, societal or political circumstances. Hence, the court is required to assess such circumstances within the parameters of applicable framework of law.

Indian courts and regulatory bodies have performed their role in achieving the purpose of law, which is to restitute the affected party to the same economic position as if the event of change in law had not occurred. For the past few years, it has been seen that power generating companies have been affected by several change in law events.

A few instances of such change in law events are levy of goods and services tax, clean energy cess, excise duty, education cess, higher evaluation cess, customs duty, countervailing duty, levy due to change in environmental norms (installation of flue gas desulfurizer), entry tax etc.

As a corrective measure, the government issued several directions and amended the Tariff Policy, 2016, to specifically provide that any change in domestic duties, levies, cess and taxes imposed by any government or governmental instrumentality leading to any change in cost will be treated as change in law and will be allowed as pass through. This relief is subject to approval of the appropriate commission.

The relief of change in law under the power purchase agreement comes under the purview of the appropriate commission [Central Electricity Regulatory Commission (CERC)/State Electricity Regulatory Commission], however, the commissions were unable to decide expeditiously until the Supreme Court in a recent judgment Energy Watchdog v CERC & Ors (2017) held that a change in Indian law/policy, which impacts the projects, will amount to change in law and consequent relief ought to be provided as restitution to the affected party.

The disputes involving change in law were taking a long time to get resolved. Following this judgment, the commissions/regulatory bodies have expedited the process. Another important initiative taken by the Ministry of Power was to issue a policy direction under section 107 of Electricity Act, 2003, on 27 August 2018 directing CERC to issue orders for pass through giving calculation for per unit impact within 30 days of filing of the petition and further directing that the impact of the change in law will be effective from the date of the change in law.

This is a move in the right direction as the delay in decision making was affecting the power sector and was causing severe financial stress, as earlier the decision took about three to four years. This move by the government will help the power projects in early resolution of dues of about ₹180 billion (US$2 billion).

Delay in adjudicating change in law disputes had a spiralling impact on the power companies as the cost kept increasing with each passing year.

In a developing country like India, regulatory certainty is crucial. The law must grow as it cannot afford to be static in a dynamic society. The interpretation of every statutory provision must keep pace with the changing concepts and it must to the extent possible allow adjustments through judicial interpretations to adapt the requirements of recurring changes.

Poonam Verma is a partner at J. Sagar Associates. Views are personal.


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