Supreme Court clarifies “Change in Law” compensation in electricity contracts: GMR Warora Energy vs. CERC (20 April 2023)

Date of the Judgment: 20 April 2023
Citation: Not Available in the provided document.
Judges: B.R. Gavai, J. and Vikram Nath, J.
Can changes in government policies and regulations lead to compensation in electricity contracts? The Supreme Court of India addressed this crucial question in a batch of appeals concerning power purchase agreements (PPAs). The core issue revolved around what constitutes a “Change in Law” event and how such changes should be compensated, impacting both power generators and distribution companies (DISCOMs). This judgment clarifies the scope of “Change in Law” provisions in PPAs and provides much-needed guidance on the calculation of compensation, particularly concerning the rate of carrying cost. The bench comprised Justices B.R. Gavai and Vikram Nath, with the majority opinion authored by Justice B.R. Gavai.

Case Background

GMR Warora Energy Limited (GWEL) and other power generators had entered into long-term PPAs with various DISCOMs, including Maharashtra State Electricity Distribution Company Limited (MSEDCL) and DNH Power Distribution Co. Ltd. (DPDCL). These agreements stipulated that changes in law after a specific cut-off date would trigger compensation for the affected party. Various events occurred after these cut-off dates that the generators claimed were “Change in Law” events, such as changes in coal distribution policies, tax rates, and environmental regulations. GWEL, for instance, established a thermal power station in Warora, Maharashtra, with two units having commercial operation dates (COD) in 2013. They had PPAs with MSEDCL and DNH-DISCOM for power supply. Disputes arose when GWEL claimed compensation for changes in law, some of which were allowed and others disallowed by the Central Electricity Regulatory Commission (CERC). These decisions were further appealed to the Appellate Tribunal for Electricity (APTEL), and then to the Supreme Court.

Timeline

Course of Proceedings

GWEL filed a petition before the CERC seeking relief for “Change in Law” events. The CERC allowed some claims and disallowed others. Both GWEL and DNH-DISCOM filed appeals before the APTEL. The APTEL partly allowed GWEL’s claims, additionally including Busy Season Surcharge, Development Surcharge, MoEF Notification on coal quality, and changes in the New Coal Distribution Policy (NCDP) as “Change in Law” events. Aggrieved by these decisions, both GWEL and the DISCOMs appealed to the Supreme Court.

Legal Framework

The core of the dispute lies in the interpretation of the term “Law” within the PPAs. The PPAs define “Law” as:

“all laws including Electricity Laws in force in India and any statute, ordinance, regulation, Notification or code, rule, or any interpretation of any of them by an Indian Governmental Instrumentality and having force of law and shall further include all applicable rules, regulations, orders, Notifications by an Indian Governmental Instrumentality pursuant to or under any of them and shall include all rules, regulations, decisions and orders of the CERC and the MERC.”

The Supreme Court referred to previous judgments, particularly Energy Watchdog v. Central Electricity Regulatory Commission and others [(2017) 14 SCC 80], which established that changes in Indian law, including notifications and policies issued under Section 3 of the Electricity Act, 2003, constitute “Change in Law” events. The court also noted that Coal India Limited (CIL) is an instrumentality of the government, and its orders regarding fuel prices are binding on its subsidiaries.

The court also referred to Clause 9.0 of the Coal Supply Agreement (CSA), which states:

“9.0 PRICE OF COAL: The “As Delivered Price of Coal” for the Coal supplies pursuant to this Agreement shall be the sum of Base Price, Other Charges and Statutory Charges, as applicable at the time of delivery of Coal.”

This clause clarifies that the price of coal includes the base price, other charges, and statutory charges applicable at the time of delivery.

Arguments

GWEL’s Submissions:

• ✓ GWEL argued that the APTEL erred in disallowing claims related to the withdrawal of deemed export benefits, imposition of crushing/sizing charges, change in coal pricing from Useful Heat Value (UHV) to Gross Calorific Value (GCV), increase in Minimum Alternate Tax (MAT), design changes in Coal Handling Plant, and increase in working capital.
• ✓ GWEL contended that all these changes were due to notifications/orders/circulars issued by government instrumentalities and should be compensated under “Change in Law”.
• ✓ GWEL emphasized the principle of restitution, stating that compensation should restore the party to the same economic position it would have been in had the “Change in Law” not occurred.

DISCOMs’ Submissions:

• ✓ The DISCOMs argued that the APTEL erred in considering Busy Season Surcharge, Development Surcharge, MoEF Notification on coal quality, changes in NCDP, and Carrying Cost as “Change in Law” events.
• ✓ They contended that generators were aware of potential variations in payments when submitting their bids and should not be compensated for these.

Haryana Discoms’ Submissions:

• ✓ The Haryana Discoms argued that the APTEL erred in reversing the CERC’s findings on Busy Season Surcharge and Developmental Surcharge on transportation of coal.

AP(M)L’s Submissions:

• ✓ AP(M)L argued that the Busy Season Surcharge and Developmental Surcharge are revised based on notifications from the Ministry of Railways and should be considered under “Change in Law”.

Rajasthan Discoms’ Submissions:

• ✓ The Rajasthan Discoms argued that clause 10 in the PPA refers only to taxes under Article 268 of the Constitution and that the APTEL erred in allowing “Change in Law” benefits on issues not related to these taxes.

Bihar Discoms’ Submissions:

• ✓ The Bihar Discoms argued that the CERC and APTEL erred in allowing claims on certain components as “Change in Law”.

GKEL’s Submissions:

• ✓ GKEL argued that the APTEL and CERC erred in rejecting claims for compensation due to changes in coal source, mode of transportation, increase in MAT, and interest on working capital.

DNH-DISCOM’s Submissions:

• ✓ The DNH-DISCOM argued that GWEL’s presentation indicated that coal supply would be restricted to 65% and therefore, benefits based on a 100% assurance by CIL were not permissible.

MSEDCL’s Submissions:

• ✓ MSEDCL argued that the Evacuation Facility Charges (EFC) imposed by CIL are not statutory levies and do not have the force of law.
• ✓ MSEDCL also argued that carrying cost should be paid at 9% as per the Adani Rajasthan case.

Rattan India and APML’s Submissions:

• ✓ Rattan India and APML argued that the EFC is mandatory and since CIL is an instrumentality of the government, the order issued by it would amount to a law within the definition of “Law” in the PPA.
• ✓ They further contended that carrying cost should be as per the PPA, as per Article 11.8.3.

Issues Framed by the Supreme Court

The Supreme Court identified the following issues for consideration:

1. Whether Busy Season Surcharge, Development Surcharge, and Port Congestion Surcharge qualify as “Change in Law” events.
2. Whether the MoEF Notification on coal quality constitutes a “Change in Law” event.
3. Whether the shortfall in linkage coal due to changes in the NCDP is a “Change in Law” event.
4. Whether Forest Tax is a “Change in Law” event.
5. Whether Add-on Premium Price is a “Change in Law” event.
6. Whether Evacuation Facility Charges (EFC) are a “Change in Law” event.
7. Whether various taxes/charges imposed by State Governments fall under “Change in Law” events.
8. At what rate should generators be entitled to “carrying cost”.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

The Supreme Court held that various charges and taxes imposed by instrumentalities of the State after the cut-off dates in the PPAs qualify as “Change in Law” events. The court emphasized that compensation should be based on the restitutionary principle, restoring the affected party to the same economic position it would have been in had the “Change in Law” not occurred. The court specifically upheld the APTEL’s findings on the following:

• ✓ Busy Season Surcharge, Development Surcharge, and Port Congestion Surcharge imposed by Indian Railways.
• ✓ MoEF Notification on coal quality mandating the use of beneficiated coal.
• ✓ Shortfall in linkage coal due to changes in the NCDP.
• ✓ Forest Tax levied by the Chhattisgarh State Government.
• ✓ Add-on Premium Price due to cancellation of captive coal blocks.
• ✓ Evacuation Facility Charges (EFC) imposed by CIL.
• ✓ Various taxes/charges imposed by State Governments.

The court also affirmed that carrying cost should be paid at the rate specified for late payment surcharge (LPS) as per the PPAs, rejecting the argument that it should be at a reasonable rate. The Court reiterated that it cannot rewrite the contract and should adhere to the terms explicitly agreed upon by the parties.

How each authority was viewed by the Court?

• ✓ Energy Watchdog v. Central Electricity Regulatory Commission and others [(2017) 14 SCC 80]*: The Court followed this authority to establish that changes in Indian law, including notifications under Section 3 of the Electricity Act, constitute “Change in Law” events.
• ✓ Railway Board, Government of India v. M/s Observer Publications (P) Ltd. [(1972) 2 SCC 266]*: The Court followed this authority to establish that the Railway Board is an instrumentality of the State.
• ✓ Uttar Haryana Bijli Vitran Nigam Limited (UNHVNL) and another v. Adani Power Limited and others [(2019) 5 SCC 325]*: The Court followed this authority to emphasize the restitutionary principle and the need to restore the affected party to the same economic position.
• ✓ Maharashtra State Electricity Distribution Company Limited v. Maharashtra Electricity Regulatory Commission and Others [(2022) 4 SCC 657]*: The Court followed this authority to clarify that LPS is not tariff and is payable when payments are delayed.
• ✓ Uttar Haryana Bijli Vitran Nigam Limited and Another v. Adani Power (Mundra) Limited and Another [(2023) 2 SCC 624]*: The Court followed this authority to reiterate that carrying cost should be calculated on a compound interest basis from the date of the “Change in Law” event.
• ✓ Adani Rajasthan case [2020 SCC Online SC 697]*: The Court followed this authority to reiterate that changes in NCDP amount to “Change in Law”.
• ✓ MSEDCL v. APML & Ors. (Not Available in the provided document)*: The Court followed this authority to reiterate that changes in NCDP amount to “Change in Law”.
• ✓ Ashoka Smokeless Coal India (P) Limited and Others v. Union of India and Others [(2007) 2 SCC 640]*: The Court used this authority to explain that CIL is free to fix the price of coal.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the contractual terms of PPAs while ensuring that the restitutionary principle is applied fairly. The court emphasized that “Change in Law” provisions are meant to protect parties from unforeseen changes in the legal and regulatory landscape. The court also considered the fact that CIL and the Railway Board are instrumentalities of the State, and their orders and notifications have the force of law. The court also aimed to ensure that the generators are compensated fairly for the changes in law, and that the DISCOMS make timely payments to avoid higher carrying costs. The court also considered that the end consumers should not be burdened due to unnecessary litigation.

Logical Reasoning:

The court considered alternative interpretations, but ultimately held that the explicit terms of the contract should be followed, and the restitutionary principle should be applied to restore the affected party to the same economic position. The court rejected the argument that carrying cost should be at a reasonable rate, holding that the PPA provides for LPS as the rate for carrying cost.

The Supreme Court quoted the following from the judgment:

“The object of LPS is to enforce and/or encourage timely payment of charges by the procurer i.e. the appellant. In other words, LPS dissuades the procurer from delaying payment of charges. The rate of LPS has no bearing or impact on tariff. Changes in the basis of the rates of LPS do not affect the rate at which power was agreed to be sold and purchased under the power purchase agreements.”

“The entire concept of restitutionary principles engrained in Article 13 of the PPAs has to be read in the correct perspective. The said principle that governs compensating a party for the time value for money, is the very same principle that would be invoked and applied for grant of interest on carrying cost on account of a change in law event.”

“We find the dilatory conduct of the Haryana Utilities, to delay the implementation of the binding orders concerning compensation on account of coal shortfall and corresponding taxes and duties, detrimental to the interest of end consumers since it burdens the consumers with incremental LPS for delay in making payments to the generator.”

There were no minority opinions in this judgment.

Key Takeaways

• ✓ Changes in government policies, regulations, and notifications by instrumentalities of the State, such as CIL and the Railway Board, can trigger “Change in Law” compensation under PPAs.
• ✓ Compensation for “Change in Law” events should be based on the restitutionary principle, restoring the affected party to the same economic position.
• ✓ Carrying cost should be paid at the rate specified for late payment surcharge (LPS) as per the PPAs.
• ✓ DISCOMs must make timely payments to avoid higher carrying costs and protect end consumers from increased electricity charges.
• ✓ Unnecessary and unwarranted litigation should be avoided to ensure timely payment of dues and protect end consumers.

Directions

The Supreme Court directed the Union of India, through the Ministry of Power, to evolve a mechanism to ensure timely payment by DISCOMs to Generating Companies and to avoid unnecessary litigation.

Development of Law

The ratio decidendi of this case is that any change in law, regulation, notification, etc. by an Indian Governmental Instrumentality after the cut-off date in a PPA is a “Change in Law” event and that the carrying cost should be as per the LPS rate in the PPA. This judgment clarifies the scope of “Change in Law” provisions in PPAs and provides much-needed guidance on the calculation of compensation.

Conclusion

The Supreme Court’s judgment in the case of GMR Warora Energy Limited vs. Central Electricity Regulatory Commission and others clarifies the scope of “Change in Law” provisions in power purchase agreements. The court held that changes in laws, notifications, and regulations issued by Indian Governmental Instrumentalities after the cut-off date constitute “Change in Law” events, triggering compensation based on the restitutionary principle. The court also ruled that carrying costs should be paid at the rate specified for late payment surcharges in the PPAs. This judgment is significant for both power generators and distribution companies, providing clarity on their rights and obligations under PPAs and emphasizing the need for timely payments and the avoidance of unnecessary litigation. All the appeals were dismissed.

Category

Parent Category: Electricity Law

Child Categories: Power Purchase Agreement, Change in Law, Compensation, Carrying Cost, Late Payment Surcharge, Electricity Regulatory Commission, Appellate Tribunal for Electricity

Parent Category: Contract Law

Child Categories: Interpretation of Contracts, Restitution, Privity of Contract

Parent Category: Electricity Act, 2003

Child Categories: Section 3, Electricity Act, 2003, Section 125, Electricity Act, 2003

FAQ

Q: What is a “Change in Law” event in an electricity contract?
A: A “Change in Law” event refers to any alteration in laws, regulations, notifications, or policies by an Indian Governmental Instrumentality after a specific cut-off date in a Power Purchase Agreement (PPA). These changes can include modifications in tax rates, environmental regulations, or coal distribution policies.

Q: What kind of changes are covered under “Change in Law”?
A: Changes covered under “Change in Law” include those made by instrumentalities of the state, such as the Indian Railways, Coal India Limited (CIL), and the Ministry of Environment and Forest (MoEF). These changes must have the force of law.

Q: How is compensation calculated for a “Change in Law” event?
A: Compensation for a “Change in Law” event is calculated based on the restitutionary principle, aiming to restore the affected party to the same economic position it would have been in had the change not occurred. This includes covering the additional costs incurred due to the change.

Q: What is carrying cost, and how is it determined in the context of “Change in Law”?
A: Carrying cost refers to the cost of funds incurred due to delays in receiving payments. In the context of “Change in Law,” it is the interest payable on the delayed compensation amount. The Supreme Court ruled that carrying cost should be paid at the rate specified for late payment surcharge (LPS) in the PPA.

Q: What is the significance of the Supreme Court’s judgment in GMR Warora Energy vs. CERC?
A: The judgment clarifies the scope of “Change in Law” provisions in PPAs, providing much-needed guidance on the calculation of compensation. It establishes that changes made by instrumentalities of the state after a cut-off date constitute “Change in Law” events. It also emphasizes that carrying cost should be paid at the rate specified for late payment surcharge (LPS) as per the PPAs.

Q: What is the role of the restitutionary principle in “Change in Law” compensation?
A: The restitutionary principle aims to restore the affected party to the same economic position it would have been in had the “Change in Law” not occurred. This principle ensures that the affected party is not unduly burdened by unforeseen changes in the legal and regulatory landscape.

Q: What are the key takeaways from this judgment for power generators?
A: Power generators can claim compensation for changes in law made by instrumentalities of the State after the cut-off date in their PPAs. They are also entitled to carrying costs at the rate specified for late payment surcharge (LPS) in the PPA. Generators must also ensure timely submission of their claims.

Q: What are the key takeaways from this judgment for DISCOMs?
A: DISCOMs must make timely payments to generators to avoid higher carrying costs and protect end consumers from increased electricity charges. They should also avoid unnecessary litigation and adhere to the terms of the PPA.

Q: What is the role of the Ministry of Power in light of this judgment?
A: The Ministry of Power has been directed to evolve a mechanism to ensure timely payment by DISCOMs to Generating Companies and to avoid unnecessary litigation.

Q: What are the implications of this judgment for future PPAs?
A: This judgment provides clarity on the interpretation of “Change in Law” provisions and the calculation of compensation, which will be crucial for parties entering into future PPAs. It emphasizes the importance of clear contractual terms and the need to adhere to them.

Q: What is the meaning of ‘instrumentality of the State’?
A: An ‘instrumentality of the State’ refers to an entity or body that is controlled or influenced by the government. In this context, it includes entities like the Railway Board and Coal India Limited (CIL), whose actions and orders have the force of law.

Q: What is the significance of the Late Payment Surcharge (LPS)?
A: The Late Payment Surcharge (LPS) is a penalty for delayed payments. It is not part of the tariff. The Supreme Court held that carrying cost should be paid at the rate specified for LPS in the PPA.

Q: What is the meaning of ‘ratio decidendi’?
A: ‘Ratio decidendi’ refers to the legal principle or rule of law on which a court’s decision is based. It is the binding part of the judgment and serves as a precedent for future cases.

Q: How does this judgment impact the end consumers of electricity?
A: This judgment aims to protect end consumers by ensuring that generators are compensated fairly and that DISCOMs make timely payments. This prevents unnecessary litigation and avoids the burden of increased costs being passed on to the consumers.

Q: What is the meaning of ‘restitutionary principle’?
A: The ‘restitutionary principle’ aims to restore the affected party to the position they would have been in had the “Change in Law” not occurred. It ensures that the affected party is not unduly burdened by unforeseen changes.

Q: What is the difference between ‘carrying cost’ and ‘late payment surcharge’?
A: While both relate to delayed payments, ‘carrying cost’ specifically refers to the cost of funds incurred due to delays in receiving compensation for a “Change in Law” event. The Supreme Court clarified that the rate for carrying cost should be the same as the ‘late payment surcharge’ rate specified in the PPA.