In two judgments delivered earlier this year, the Supreme Court has settled disputes over the change in law clauses in power purchase agreements that have been on-going between generation companies and distribution companies (DISCOM) for many years.
In Maharashtra State Electricity Distribution Company Limited v Adani Power Maharashtra Limited, the Supreme Court held that the change in law clauses provide that power generating companies are to be restored to the economic position they would have been in if the change in law had not occurred. In this particular dispute, the court further held that generation entities are even entitled to compensation for coal that they are required under the agreement to import or to purchase on the open market, but which they cannot obtain due to the change in the law.
In GMR Warora Energy Limited v Central Electricity Regulatory Commission and Others, (GMR Warora), the Supreme Court upheld the decision of the Central Electricity Regulatory Commission (CERC)/ Appellate Tribunal for Electricity (APTEL) to award compensation to generation companies in respect of busy season surcharges; the notification from the Ministry of Environment and Forests requiring power projects to use beneficiated or clean coal with the ash content below 34%; the shortfall in linkage coal due to changes in the New Coal Distribution Policy made by the Ministry of Coal; the imposition of a forest tax in the State of Chhattisgarh; the add-on premium price; the evacuation facility charge imposed by Coal India Limited, and the carrying cost. The Supreme Court analysed each of these categories and held that they were covered by the definition of the change in law. The court took the opportunity to re-emphasise that it will not interfere with the findings of fact arrived at by expert bodies such as the CERC, the State Electricity Regulatory Commissions and the APTEL unless such findings are perverse, arbitrary and either ignore or are contrary to statutory provisions.
It should be noted that, in paragraph 105 of the GMR Warora judgment, the Supreme Court inadvertently held that the Ministry of Environment and Forests’ draft notification of 2012 also constitutes a change in law. Perhaps a timely clarification of this error will avoid future litigation on this issue as a draft notification published for public comments cannot be said to be an instrument having the force of law.
Apart from the decisions it made, the Supreme Court raised far-reaching policy issues that will have to be addressed by participants in the power sector. The court expressed the view that the objectives behind the enactment of the Electricity Act, 2003, were intended to solve the issues that had long been plaguing the sector. The goal was also to improve private sector participation and entrepreneurship while balancing the interests of end-use consumers.
The court rightly noted that the costs of pursuing multiple appeals by the DISCOMs will ultimately be passed on to end-use consumers. The delay in payment of compensation to the power generating companies while waiting for the appeals to be heard in change in law cases leads to late payment surcharges. These are higher than interest and capital costs, and are passed on to end-use consumers, thus raising the cost of electricity. The Supreme Court drew attention to the fact that the cost of purchasing electricity from state utilities is higher than that from independent power producers. To mitigate some of these issues and to encourage the private sector, the Ministry of Power had already introduced the Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021 (Change in Law Rules).
The Change in Law Rules, in force from 22 October 2021, apply to all the change in law events that occur after that date. The rules not only define in a general manner the term, change in law, in the context of existing tariffs, but also lay down a formula for the future determination of the impact on tariffs or charges due to the change in law events. This will be applied in cases where there is no agreement on this aspect. The Change in Law Rules also set out the method to be adopted for the adjustment of the tariff in such cases. It is to be hoped that, with the introduction of these rules, the scope of disputes will be reduced in the future, directly dealing with the concerns raised by the Supreme Court.
Mani Gupta is the senior partner and Saumya Upadhyay is an associate at Sarthak Advocates & Solicitors
Sarthak Advocates & Solicitors