Supreme Court Clarifies “Change in Law” in Power Purchase Agreements: Jaipur Vidyut Vitran Nigam Ltd. vs. Adani Power Rajasthan Limited (2020)

Date of the Judgment: 31 August 2020

Citation: (2020) INSC 693

Judges: Arun Mishra, Vineet Saran, M.R. Shah

When a power company enters into an agreement to supply electricity, what happens if the government changes the rules about where they get their fuel? The Supreme Court of India recently addressed this question in a case between Jaipur Vidyut Vitran Nigam Limited (a power distribution company) and Adani Power Rajasthan Limited (a power generation company). The core issue was whether a change in the government’s coal policy allowed Adani Power to increase the price of electricity they supplied to Jaipur Vidyut. This case clarifies the meaning of “Change in Law” clauses in power purchase agreements. The bench comprised of Justices Arun Mishra, Vineet Saran, and M.R. Shah.

Case Background

Jaipur Vidyut Vitran Nigam Limited (JVVNL), an electricity distribution company in Rajasthan, entered into a Power Purchase Agreement (PPA) with Adani Power Rajasthan Limited (APRL) on January 28, 2010. This agreement was the result of a competitive bidding process under Section 63 of the Electricity Act, 2003. The PPA specified a tariff for electricity supply, which could only be changed under certain conditions outlined in the agreement.

APRL later claimed an increased tariff under the “change in law” provisions of the PPA, citing changes in coal supply policies. The dispute arose from a series of events, beginning with the selection of Adani Exports Limited as a joint venture partner by Rajasthan Rajya Vidyut Utpadan Nigam Limited (RVUN) on October 23, 2006, for mining and supplying coal.

A Letter of Intent (LoI) was issued to Adani Enterprise Limited (AEL) on August 2, 2007, for developing a coal block, with the coal to be used for projects in Rajasthan. The New Coal Distribution Policy (NCDP) was introduced on October 18, 2007, assuring 100% domestic coal supply to power plants. An MoU was signed between the Government of Rajasthan and AEL on March 20, 2008, for a thermal power project.

APRL requested coal allocation from the Parsa East and Kente Basan coal blocks on May 16, 2008, but was denied due to the requirements of RVUN projects. Despite repeated requests, the state government could not supply coal from these blocks. APRL then sought a long-term coal linkage from South Eastern Coalfields Limited on July 2, 2009.

APRL submitted its bid on August 6, 2009, offering 1200 MW of power, with a levelized tariff of Rs.3.238/KWh for 25 years. The bid was based on domestic coal, with imported coal as a backup. On September 12, 2009, APRL clarified that its bid should be evaluated based on domestic coal, accepting domestic coal escalations during the PPA term.

An LoI was issued to APRL on December 17, 2009, which was unconditionally accepted on December 18, 2009. The PPA was executed on January 28, 2010, with domestic coal as the primary fuel and imported coal as backup.

Timeline:

Legal Framework

The core of this case revolves around Section 63 of the Electricity Act, 2003, which allows for the determination of tariffs through competitive bidding. The PPA between JVVNL and APRL included a “Change in Law” clause (Article 10), which stated that if any new law or changes in existing laws affected the cost of power generation, the tariff could be adjusted.

The relevant portion of Para 3.2(II) of the Guidelines of 2005 framed by the Central Government under Section 63 of the Electricity Act is as follows:

“3.2 (II) In Case-1 procurement, to ensure serious participation in the bid process and timely completion of commencement of supply of power, the bidder, in case the supply is proposed from a station to be set-up, should be required to submit along with its bid, documents in support of having undertaken specific actions for project preparatory activities in respect of matters mentioned in (i) to (v) below.

iv) Fuel Arrangements: (a) In the following cases fuel arrangements shall have to be made for the quantity of fuel required to generate power from the phase of the power station from which power is proposed to be supplied at Normative Availability for the term of the PPA.

✓ In case of domestic coal, the Bidder shall have made firm arrangements for fuel tie up either by way of coal block allocation or fuel linkage

✓ In case of domestic gas, …..

b) Fuel arrangements in the following cases shall have to be made for the quantity of fuel required to generate power from the power station for the total installed capacity.

✓ In case of imported coal, the Bidder shall have either acquired mines having proven reserves for at least 50% of the quantity of coal required OR shall have a fuel supply agreement for at least 50% of the quantity of coal required for a term of at least five (5) years or the term of the PPA, which ever is less. …. ”

The New Coal Distribution Policy (NCDP) of 2007, which assured 100% domestic coal supply, was a key factor. This policy was later modified in 2013, reducing the assured supply and leading to increased reliance on imported coal. The SHAKTI Policy of 2017 was also relevant, as it allowed power generators with PPAs based on domestic coal to participate in auctions for coal supply.

Arguments

The appellants, Jaipur Vidyut Vitran Nigam Limited (JVVNL) and others, argued that:

• APRL could not claim compensation for using imported coal as it was part of their bid and quoted tariff.

• The bid documents and PPA showed that APRL had agreed to use imported coal as a fuel source and quoted the tariff based on it.

• There was no change in law, and APRL was not entitled to compensation. Even if they were, it should be limited to the shortfall after considering the Fuel Supply Agreement (FSA) for imported coal.

• There was no proper computation or methodology for determining the compensation, and APRL cannot unilaterally raise invoices.

• Any compensation would have to be recovered from consumers, affecting public interest.

• The generator cannot raise the invoice, and the liability to make payment does not arise, so there is no question of late payment surcharge.

• The two periods, until the determination of change in law and thereafter, are separate, so late payment surcharge cannot be applied to the first period.

The All India Power Engineers Federation argued that:

• The bid was based on imported coal, not domestic coal, and APRL did not have any firm coal linkage or FSA for domestic coal.

• The MoU between APRL and the Government of Rajasthan was not a firm coal arrangement, and only the Central Government was the deciding authority.

• APRL had entered into a Coal Supply Agreement (CSA) with its own company to qualify for the bid and cannot take a contrary stand now.

• APRL clarified that its bid should be evaluated on the basis of domestic coal tie-up, and an undertaking was given that the payment considering ‘domestic coal escalation’ would be acceptable.

• The NCDP of 2007 did not create a vested right to get domestic coal, and APRL was not entitled to claim compensation.

• The Statutory Guidelines of 2005 required bidders to show ready availability of fuel, and APRL did not have a firm arrangement for domestic coal.

• The SHAKTI Policy did not change the fact that APRL had considered imported coal as other coal for 5 years, so the question of change in law did not arise.

• APRL had done over-invoicing, and an investigation was pending.

Adani Power Rajasthan Limited (APRL) argued that:

• The bid was premised only on domestic coal, and the imported coal agreement was submitted only to show the bidder’s eligibility.

• Non-availability of domestic coal is a change in law event, and the decision in Energy Watchdog applies.

• APRL is entitled to carrying cost from the date the change in law event came into force.

• The bid was submitted as per the linkage coal format applicable to domestic coal, and the Government of Rajasthan made efforts to secure domestic coal linkage.

• The Rajasthan Discoms admitted that non-availability of coal from the Central Government put APRL’s case within the scope of change in law.

• The non-allocation of domestic coal linkage is a change in law event.

• The decision in Energy Watchdog recognized the change in NCDP of 2007 as a change in law event, and it was not necessary to have a linkage/allocation at the time of bid submission.

• APRL has been continuously supplying power, and is entitled to compensation from the change in law.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the bid submitted by APRL was premised on domestic coal or imported coal?
2. Whether the non-allocation of domestic coal linkage to APRL constitutes a “Change in Law” event under the PPA?
3. Whether APRL is entitled to carrying costs from the date the “Change in Law” event came into force?
4. What is the liability of the appellants-Rajasthan Discoms with regard to late payment surcharge?

Treatment of the Issue by the Court:

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Statutory Guidelines of 2005* were considered to understand the fuel arrangement requirements for the bidding process.
• The NCDP of 2007* was considered to understand the policy on which the bid was premised.
• The NCDP of 2013* was considered as the event that triggered the “change in law” clause.
• The SHAKTI Policy of 2017* was considered to confirm that APRL’s PPA was based on domestic coal.
• Energy Watchdog v. Central Electricity Regulatory Commission and Ors., (2017) 14 SCC 80* was followed to determine that changes in domestic coal policy constitute a “change in law” event.
• Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) & Anr. v. Adani Power Limited & Ors., (2019) 5 SCC 325* was followed to establish that carrying costs are payable from the date the change in law has taken place.
• DSR Steel (Private) Ltd. v. State of Rajasthan and Ors., (2012) 6 SCC 782*, Tamil Nadu Generation and Distribution Corporation Limited v. PPN Power Generating Company Private Limited, (2014) 11 SCC 53* and Wardha Power Company Limited v. Maharashtra State Electricity Distribution Company Limited and Anr., (2016) 16 SCC 541* were followed to note that the scope of appeal under Section 125 of the Electricity Act is similar to Section 100 of the CPC, and concurrent findings of fact cannot be disturbed.
• Suzuki Parasrampuria Suitings Private Limited v. Official Liquidator of Mahendra Petrochemicals Limited (in Liquidation) and Ors., (2018) 10 SCC 707* and R.N. Gosain v. Yashpal Dhir, (1992) 4 SCC 683* were followed to note that parties are not permitted to approbate and reprobate at different stages.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following factors:

The court emphasized that the bid was evaluated based on domestic coal, not imported coal. This was supported by the bid documents, clarification letters, and the PPA itself. The court also noted that the change in NCDP of 2007 constituted a “change in law” event, as it reduced the assured supply of domestic coal. The principle of restitution was also a major factor, ensuring that APRL was placed in the same economic position as if the change in law had notoccurred. The court also gave weightage to the concurrent findings of fact by the Rajasthan Electricity Regulatory Commission (RERC) and the Appellate Tribunal for Electricity (APTEL), and the SHAKTI policy was also considered to confirm that APRL’s PPA was based on domestic coal.

Flowchart

Conclusion

The Supreme Court’s judgment in Jaipur Vidyut Vitran Nigam Ltd. vs. Adani Power Rajasthan Limited provides significant clarity on the interpretation of “Change in Law” clauses in Power Purchase Agreements (PPAs). The court emphasized that the bid was premised on domestic coal, and the change in the New Coal Distribution Policy (NCDP) constituted a “Change in Law” event. This decision reinforces the principle of restitution, ensuring that power generators are not unfairly burdened by changes in government policy. The court also clarified that carrying costs are payable from the date the change in law has taken place, and reduced the late payment surcharge to a reasonable rate. This case is a landmark decision that affects the energy sector, providing guidance on how to interpret and apply “Change in Law” clauses in PPAs.