Supreme Court clarifies ‘Change in Law’ compensation in power purchase agreements: GMR Warora Energy Limited vs. Central Electricity Regulatory Commission (20 April 2023)

Date of the Judgment: 20 April 2023
Citation: 2023 INSC 398
Judges: B.R. Gavai, J. and Vikram Nath, J.
Can power generating companies claim compensation for increased costs due to changes in government policies or regulations? The Supreme Court of India addressed this crucial question in a batch of appeals concerning power purchase agreements (PPAs). The court clarified the scope of “Change in Law” provisions in PPAs, ensuring fair compensation for power generators while balancing the interests of consumers. This judgment consolidates various appeals, providing a comprehensive view on what constitutes a ‘Change in Law’ event and how compensation should be calculated.

Case Background

This case involves a series of appeals related to power purchase agreements (PPAs) between various power generating companies and distribution companies (DISCOMs). The core dispute revolves around the interpretation of “Change in Law” clauses in these PPAs. These clauses allow power generators to claim compensation for increased costs resulting from changes in laws, regulations, or government policies after the agreement’s cut-off date. The generators sought compensation for various events, including changes in coal pricing policies, imposition of new taxes, and alterations in environmental regulations. The DISCOMs contested these claims, arguing that some of the changes were not covered under the “Change in Law” provisions or that the compensation was not calculated correctly.

Timeline

Course of Proceedings

GWEL filed a petition before the Central Electricity Regulatory Commission (CERC) seeking relief for various ‘Change in Law’ events. The CERC allowed some claims and disallowed others. Both GWEL and the DISCOMs filed appeals before the Appellate Tribunal for Electricity (APTEL). The APTEL partly allowed GWEL’s claims, leading to further appeals before the Supreme Court by both parties. Similar proceedings occurred in other cases, with various State Electricity Regulatory Commissions (SERCs) and APTEL issuing orders on similar ‘Change in Law’ claims, which were then challenged before the Supreme Court.

Legal Framework

The core of the legal framework 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.”

This definition encompasses not only formal laws but also notifications, orders, and regulations issued by governmental bodies. The Supreme Court has previously held that changes in policies like the New Coal Distribution Policy (NCDP) constitute a ‘Change in Law’ event. The court also emphasized the principle of restitution, which aims to restore the affected party to the same economic position as if the ‘Change in Law’ had not occurred. The Power Purchase Agreements also specify the mechanism for claiming compensation, including supplementary bills and late payment surcharges.

Arguments

Arguments by the Generators:

• The generators argued that various changes, such as the withdrawal of deemed export benefits, imposition of crushing charges, change in coal pricing methodology, increase in MAT, design changes in coal handling plants, and increase in working capital, were all due to notifications or orders by government instrumentalities and should be considered as ‘Change in Law’ events.
• They contended that the principle of restitution requires that they be placed in the same economic position they would have been in had these changes not occurred.
• They argued that the increase in Busy Season Surcharge, Development Surcharge, and Port Congestion Surcharge by Indian Railways, as well as the MoEF notification on coal quality, were also ‘Change in Law’ events.
• They asserted that the Evacuation Facility Charges (EFC) imposed by CIL should be considered a ‘Change in Law’ event since CIL is a government instrumentality.
• They claimed that the carrying cost should be paid at the rate specified for late payment surcharge as per the PPA.

Arguments by the DISCOMs:

• The DISCOMs argued that some of the changes, such as Busy Season Surcharge and Development Surcharge, were foreseeable and should have been factored into the bid price by the generators.
• They contended that the ‘Change in Law’ clause should only apply to taxes under Article 268 of the Constitution of India, and not to other charges.
• They argued that the carrying cost should be a reasonable rate and not the late payment surcharge rate.
• They asserted that the generators were aware of the possibility of changes in coal supply and pricing policies and thus should not be compensated.

Innovativeness of the Argument: The generators innovatively argued that various changes, even those not explicitly termed as “taxes,” should be considered ‘Change in Law’ events if they are mandated by governmental instrumentalities. The DISCOMs, on the other hand, argued for a narrower interpretation of ‘Change in Law’, focusing on taxes and foreseeable changes.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether ‘Change in Law’ relief on account of NCDP 2013 should be on ‘actuals’ or restricted to trigger levels in NCDP 2013.
2. Whether for computing ‘Change in Law’ relief, the operating parameters should be considered on ‘actuals’ or as per technical information submitted in bid.
3. Whether ‘Change in Law’ relief compensation is to be granted from 1st April 2013 or 31st July 2013.
4. Whether Busy Season Surcharge, Development Surcharge, and Port Congestion Surcharge can be considered as ‘Change in Law’ events.
5. Whether MoEF notification on coal quality is a ‘Change in Law’ event.
6. Whether shortfall in linkage coal due to change in NCDP is a ‘Change in Law’ event.
7. Whether Forest Tax is a ‘Change in Law’ event.
8. Whether Add-on Premium price is a ‘Change in Law’ event.
9. Whether Evacuation Facility Charges (EFC) is a ‘Change in Law’ event.
10. Whether various taxes/charges imposed by State Governments would fall under ‘Change in Law’ events.
11. At what rate the Generators would be entitled to ‘carrying cost’.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Court relied on the following authorities:

Judgment

The Supreme Court upheld the decisions of the APTEL, affirming that the following constitute ‘Change in Law’ events:

• Busy Season Surcharge, Development Surcharge, and Port Congestion Surcharge imposed by the Indian Railways.
• MoEF notification mandating the use of beneficiated coal.
• Shortfall in linkage coal due to changes in the NCDP.
• Forest Tax levied by the State Government.
• Add-on premium price for coal.
• Evacuation Facility Charges (EFC) imposed by CIL.
• Various taxes and charges imposed by State Governments after the cut-off date.

The Court also held that the carrying cost should be paid at the rate specified for late payment surcharge in the respective PPAs.

How each authority was viewed by the Court:

• Energy Watchdog v. Central Electricity Regulatory Commission and others [(2017) 14 SCC 80]*: Followed to establish that changes in Indian law, including policy changes, constitute a ‘Change in Law’ event.
• Jaipur Vidyut Vitaran Nigam Ltd. and others v. Adani Power Rajasthan Limited and another [2020 SCC Online SC 697]*: Followed to establish that change in NCDP amounts to ‘Change in Law’.
• Maharashtra State Electricity Distribution Company Limited v. Adani Power Maharashtra Limited & Ors. [2023 SCC OnLine 233]*: Followed to establish that ‘Change in Law’ relief for domestic coal shortfall should be on ‘actuals’.
• Manohar Lal Sharma v. The Principal Secretary & Ors. [(2014) 9 SCC 516 and 2014 (9) SCC 614]*: Referred to in the context of cancellation of coal blocks due to court order.
• Railway Board, Government of India v. M/s Observer Publications (P) Ltd. [(1972) 2 SCC 266]*: Relied upon to establish that the Railway Board is a State within the meaning of Article 12 of the Constitution of India.
• Uttar Haryana Bijli Vitran Nigam Limited and another v. Adani Power Limited and others [(2019) 5 SCC 325]*: Relied upon to establish that restitutionary principles apply to ‘Change in Law’ events.
• Maharashtra State Electricity Distribution Company Limited v. Maharashtra Electricity Regulatory Commission and Others [(2022) 4 SCC 657]*: Relied upon to establish that Late Payment Surcharge (LPS) is not tariff.
• Uttar Haryana Bijli Vitran Nigam Limited and Another v. Adani Power (Mundra) Limited and Another [(2023) 2 SCC 624]*: Relied upon to establish that compound interest is applicable on carrying cost from the date of the ‘Change in Law’ event.
• Ashoka Smokeless Coal India (P) Limited and Others v. Union of India and Others [(2007) 2 SCC 640]*: Referred to in support of the proposition that CIL is free to fix the price of coal.

What weighed in the mind of the Court?

The Supreme Court emphasized the following points in its reasoning:

• Definition of “Law”: The court adopted a broad interpretation of “Law” to include not just formal statutes but also notifications, orders, and regulations issued by governmental instrumentalities. This ensured that changes in policy and pricing by government bodies would be considered as ‘Change in Law’ events.
• Restitutionary Principle: The court stressed that the principle of restitution is paramount in ‘Change in Law’ cases. This principle requires that the affected party (the generator) be placed in the same economic position as if the ‘Change in Law’ had not occurred. This ensures that generators are not unfairly burdened by unforeseen changes in law.
• Instrumentalities of the State: The court consistently held that bodies like the Indian Railways, MoEF, and CIL are instrumentalities of the State. Therefore, any orders, notifications, or circulars issued by them would constitute ‘Law’ and any changes would be considered ‘Change in Law’ events.
• Contractual Obligations: The court upheld the sanctity of contracts, specifically the PPA clauses regarding late payment surcharges and supplementary bills. It emphasized that the carrying cost should be calculated as per the late payment surcharge rate specified in the PPA to ensure fair compensation.
• Expert Bodies: The court acknowledged the expertise of regulatory bodies like CERC and APTEL, and was hesitant to interfere with their concurrent findings of fact unless they were perverse, arbitrary, or in violation of statutory provisions.

The court’s sentiment analysis reveals a strong emphasis on the legal aspects of the case, with a focus on the interpretation of the term “Law” and the application of the restitutionary principle. While factual aspects were considered, the legal framework and principles significantly influenced the court’s decision.

The court rejected alternative interpretations that sought to limit the scope of ‘Change in Law’ to only taxes under Article 268 of the Constitution or to exclude foreseeable changes. The court emphasized that the definition of “Law” in the PPAs was broad enough to include all orders, notifications, and regulations issued by government instrumentalities.

“The term ‘Law’ would also include all applicable rules, regulations, orders, Notifications issued by an Indian Governmental Instrumentality.”

“The compensation on account of the ‘Change in Law’ is based on the principle of restitution so as to put back the party to the same economic position it was in, had the ‘Change in Law’ event not taken place.”

“The explicit terms of a contract are always the final word with regard to the intention of the parties.”

Key Takeaways

• ‘Change in Law’ provisions in PPAs are broadly interpreted to include not only formal laws but also orders, notifications, and regulations issued by government instrumentalities.
• The principle of restitution is central to calculating compensation for ‘Change in Law’ events, aiming to restore the affected party to its original economic position.
• Carrying costs for ‘Change in Law’ claims should be calculated as per the late payment surcharge rate specified in the PPA.
• Concurrent findings of fact by expert bodies like CERC and APTEL are generally upheld unless they are perverse, arbitrary, or in violation of statutory provisions.
• Unnecessary litigation should be avoided to prevent additional costs being passed on to the end consumers.

This judgment has significant implications for future cases involving PPAs. It clarifies the scope of ‘Change in Law’ provisions, ensuring that power generators are fairly compensated for increased costs due to government actions. It also emphasizes the importance of adhering to contractual obligations and avoiding unnecessary litigation.

Conclusion

The Supreme Court’s judgment in the GMR Warora Energy Limited case provides a comprehensive clarification on the interpretation and application of ‘Change in Law’ clauses in power purchase agreements. By adopting a broad definition of “Law” and emphasizing the principle of restitution, the court has ensured that power generating companies are fairly compensated for increased costs due to changes in government policies and regulations. The judgment also underscores the importance of contractual obligations and the need to avoid unnecessary litigation, which ultimately benefits both the power generators and the end consumers.

This landmark decision will likely serve as a guiding precedent for future disputes related to PPAs, promoting a more equitable and predictable environment for the power sector in India.