Supreme Court clarifies coal cost calculation in Power Purchase Agreement: Nabha Power Ltd. vs. Punjab State Power Corporation Ltd. (2017)

Date of the Judgment: 05 October 2017

Citation: 2017 INSC 878

Judges: Rohinton Fali Nariman, J., Sanjay Kishan Kaul, J.

Can a power company claim the cost of washing coal and its transportation to the project site, even if the agreement doesn’t explicitly mention it? The Supreme Court of India recently addressed this crucial question in a dispute over a Power Purchase Agreement (PPA). This case clarifies how costs related to coal should be calculated under such agreements. The bench, comprising Justices Rohinton Fali Nariman and Sanjay Kishan Kaul, delivered the judgment.

Case Background

In 2009, the Punjab State Electricity Board (PSEB) initiated an international competitive bidding process. The goal was to select a developer for a power station at Village Nalash, Rajpura, Punjab. This project was a Case-2 bid, according to the guidelines under Section 63 of the Electricity Act, 2003. PSEB incorporated Nabha Power Limited (NPL) as a special purpose vehicle (SPV) on 9 April 2007. The successful bidder would acquire 100% of NPL’s shares and sign a 25-year Power Purchase Agreement (PPA) with PSEB.

Punjab State Power Corporation Limited (PSPCL) became the successor entity to PSEB after its unbundling in 2010. The Punjab State Electricity Regulatory Commission (PSERC) is the second respondent in this case. On 10 June 2009, a Request for Qualification (RFQ) and a Request for Proposal (RFP) were issued. These documents invited proposals to supply 1200 MW of power from the Rajpura Thermal Power Project. The RFQ stated that land acquisition, environmental clearance, fuel arrangements, and water arrangements were already in place.

The RFP specified that coal would come from South Eastern Coalfields Limited (SECL). The Railways had also assured transportation of coal from SECL over a distance of 1600 km. The bidding document was issued on 16 September 2009. Clarifications were issued to queries raised by prospective bidders. SECL would supply Grade ‘F’ coal from Korba/Raigarh field, with a Gross Calorific Value (GCV) of 3900 to 4260 Kcal/kg. The successful bidder would arrange for the washing of coal. M/s. L&T Power Development Limited (L&T PDL) was declared the successful bidder. A Letter of Intent was issued on 19 November 2009. A Share Purchase Agreement (SPA) was signed on 18 January 2010. Simultaneously, the PPA was signed between PSEB and NPL. Contractual obligations then began.

Timeline:

Course of Proceedings

NPL filed Petition No. 52 of 2014 before the State Commission under Section 86(1)(b) & (f) of the Electricity Act, 2003. NPL sought relief due to wrongful deductions from monthly tariffs by PSPCL. The State Commission dismissed the petition on 1 February 2016. NPL then filed Appeal No. 64 of 2016 before the Appellate Tribunal (AT). The AT rejected the appeal on 14 December 2016, except for the non-payment of capacity charges. The dispute primarily concerned the interpretation of the PPA dated 18 January 2010.

Legal Framework

The case is governed by the Electricity Act, 2003, specifically Section 63. Section 63 states:

“Section 63. Determination of tariff by bidding process. – Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government.”

This section allows the determination of tariffs through a bidding process, as opposed to the usual tariff regulations under Section 62 of the Electricity Act, 2003. The bidding process followed the “Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licensees, 2005.” These guidelines have a statutory flavor under Section 63 of the Electricity Act, 2003. The guidelines outline two routes for competitive bidding: Case-1 and Case-2. This case was a Case-2 bid.

Para 2.2 of the Guidelines states:

“2.2. The guidelines shall apply for procurement of base-load, peak-load and seasonal power requirements through competitive bidding, through the following mechanisms: (i) Where the location, technology, or fuel is not specified by the procurer (Case 1); (ii) For hydro power projects, load center projects or other location, specific projects with specific fuel allocation such as captive mines available, which the procurer intends to set up under tariff based bidding process (Case-2).”

Para 3.2(i) of the Guidelines specifies the project preparatory activities for Case-2 projects:

“3.2 (i) In order to ensure timely commencement of supply of electricity being procured and to convince the bidders about the irrevocable intention of the procurer, it is necessary that various project preparatory activities are completed in time. For long term procurement for projects for which pre-identified sites are to be utilized (Case-2), the following project preparatory activities should be completed by the procurer, or authorized representative of the procurer, simultaneously with bid process adhering to the milestones as indicated below: (i) Site identification and land acquisition: If land is required to be acquired for the power station, the notification under section 4 of the Land Acquisition Act, 1894 should have been issued before the publication of RFQ. The notification under section 6 of the Land Acquisition Act, 1894 should have been issued before the issue of RFP. If the provisions of section 17 of the Land Acquisition Act, 1894 regarding emergency have not been applied, the Award under the Land Acquisition Act should have been declared before the PPA becomes effective. (ii) Environmental clearance for the power station: Rapid Environmental Impact Assessment (EIA) report should be available before the publication of RFQ. Requisite proposal for the environmental clearance should have been submitted before the concerned administrative authority responsible for according final approval in the Central/State Govt., as the case may be, before the issue of RFP. Environmental clearance should have been obtained before PPA becomes effective. (iii) Forest Clearance (if applicable) for the land for the power station: Requisite proposal for the forest clearance should have been submitted before the concerned administrative authority responsible for according final approval in the Central/State Govt., as the case may be, before the issue of RFP. (iv) Fuel Arrangements: If fuel linkage or captive coal mine(s) are to be provided, the same should be available before the publication of RFQ. In case, bidders are required to arrange fuel, the same should be clearly specified in the RFQ. (v) Water linkage: It should be available before the publication of RFQ. (vi) Requisite Hydrological, geological, meteorological and seismological data necessary for preparation of Detailed Project Report (DPR), where applicable. These should be available before the issue of RFP. The bidder shall be free to verify geological data through his own sources as the geological risk would lie with the project developer. The project site shall be transferred to the successful bidder at a price to be intimated at least 15 days before the due date for submission of RFP bids.”

Arguments

Appellant (NPL) Arguments:
✓ The bidding process was under the “Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licensees, 2005,” having statutory backing under Section 63 of the Electricity Act, 2003.
✓ Case-2 projects involve fuel-specific procurement with a pre-identified site. PSPCL arranged fuel linkage from SECL, Chhattisgarh, and specified the site.
✓ The bidder’s responsibility included design, engineering, procurement, construction, testing, commissioning, financing, operation, and maintenance of the power station.
✓ The energy charges were designed to vary with the actual cost and quality of coal. NPL took the risk only of project efficiency, not coal cost or GCV.
✓ PSPCL disclosed coal quality in pre-bid clarification, specifying coal with more than 34% ash.
✓ MoEF Notification of 1997 mandated washing of coal for projects over 1,000 km from the mine. PSPCL required the successful bidder to arrange coal washing.
✓ The reference to coal in the PPA must refer to washed coal. The actual cost of purchasing, transporting, and unloading coal must refer to washed coal.
✓ The cost of unwashed coal procured by NPL from SECL, including losses from washing, and washing charges should be included in the energy charges.
✓ The operation cost mentioned in the RFP referred only to the cost of operating and maintaining the power plant, not the cost of coal.
✓ The principle of ‘business efficacy’ and the maxim ‘Reddendo Singula Singulis’ should be used to interpret the PPA terms.
✓ The GCV of coal should be measured at the project-end (washed coal), not the mine-end (unwashed coal). The formula for FCOALn refers to the actual cost of transporting coal to the project.
✓ NPL should be reimbursed for the first and last mile transportation costs of coal.
✓ Transit and handling charges, third-party testing charges, and liaising charges should be reimbursed.
✓ Interest should be paid on disputed energy charges under Article 11.3.4 read with Article 11.6.8 of the PPA.

Respondent (PSPCL) Arguments:
✓ Claims related to coal must fall under Clause 1.2.3 of Schedule 7 of the PPA, which recognizes only three components: purchase, transportation, and unloading.
✓ The cost of coal is payable to SECL on an actual basis. The obligation of washing was on the appellant.
✓ The definition of ‘fuel supply agreement’ refers to the agreement between NPL and SECL. The purchase in Clause 1.2.3 of Schedule 7 refers to this agreement.
✓ There is no separate agreement for ‘washing’ included in the list of “Project Documents.”
✓ The delivery point under the fuel supply agreement is the loading end of the colliery. The purchase is complete there.
✓ NPL should have raised a specific query if they had any doubt about bearing the cost for washed coal.
✓ Clause 2.7.1.4 provides for the quoted tariff to be an ‘all-inclusive tariff’ with no exclusions.
✓ The washing of coal and related activities are included in the quoted tariff.
✓ The cost of usable fuel should not be included, only the purchase cost.
✓ SECL is overstating the GCV of coal supplied. This issue should be raised with SECL.
✓ The formula for energy charges uses the expression “to the project,” which is different from “to and at the project.”
✓ Transportation through Railways was envisaged in the RFP. The land for the railway siding was to be acquired by the bidder.
✓ Interest was not claimed and should not be granted.

Innovative Argument:
✓ NPL innovatively argued that the term “coal” in the PPA should be interpreted as “washed coal” due to the mandatory washing requirement, thereby including washing costs in the energy charges. This interpretation was crucial for their claim.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. What is the correct interpretation of the Power Purchase Agreement (PPA) regarding the calculation of energy charges, specifically the cost of coal?
2. Whether the cost of washing coal should be included in the energy charges?
3. Whether the Gross Calorific Value (GCV) of coal should be measured at the mine-end or the project-end?
4. Whether transportation costs, including the first and last mile, should be reimbursed?
5. Whether transit and handling charges, third party testing charges, and liaising charges should be reimbursed?
6. Whether interest should be paid on disputed energy charges?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• The Moorcock (1889) 14 PD 64 (Court of Appeal): Established the principle of giving “business efficacy” to contracts.
• Shirlaw v. Southern Foundries (1926) L.D. (1939) 2 KB 206 (Court of Appeal): Introduced the “officious bystander” test for implied terms.
• Reigate vs. Union Manufacturing Co. (Ramsbottom) Ltd. [1918] 1 K.B. 592 (Court of Appeal): Discussed the necessity of implied terms for business efficacy.
• Liverpool City Council vs. Irwin (1976) Q.B. 319 (Court of Appeal): Discussed the circumstances when a contractual term could be implied.
• Liverpool City Council vs. Irwin [H.L. (E.)] (1976) 2 WLR 562 (House of Lords): Clarified that the touchstone for interpreting commercial documents is “necessity,” not “mere reasonableness.”
• Shell U.K. Ltd. vs. Lostock Garage Ltd. (1976) 1 WLR 1187 (Court of Appeal): Summarized the law on implied terms.
• B.P. Refinery (Westernport) Proprietary Limited vs. The President Councillors and Ratepayers of the Shire of Hastings [1977] UKPC 13 (Privy Council): Laid down five conditions for the implication of terms in a contract.
• Investors Compensation Scheme Ltd. vs. West Bromwich Building Society (1998) 1 All ER 98 (House of Lords): Summarized the principles for construing contractual documents.
• Attorney General of Belize and Ors. vs. Belize Telecom Ltd. and Anr. (2009) 1 WLR 1988 (Privy Council): Dealt with implied terms in the context of a company’s Articles of Association.
• M/s. Dhanrajamal Gobindram vs. M/s. Shamji Kalidas and Co. (1961) 3 SCR 1020 (Supreme Court of India): Emphasized giving meaning to commercial documents.
• The Union of India vs. M/s. D.N. Revri & Co. and Ors. (1976) 4 SCC 147 (Supreme Court of India): Stressed interpreting contracts to give them efficacy.
• Satya Jain (Dead) Through LRs. and Ors. vs. Anis Ahmed Rushdie (Dead) Through LRs. and Ors. (2013) 8 SCC 131 (Supreme Court of India): Elucidated the business efficacy test.
• Life Corporation of India & Anr. vs. Dharam Vir Anand (1998) 7 SCC 348 (Supreme Court of India): Construing a particular clause of the contract and giving effect to the terms used therein.
• Koteswar Vittal Kamath v. K. Rangappa Balia & Co. (1969) 1 SCC 255 (Supreme Court of India): Referred to Black’s Interpretation of Laws to define the expression “Reddendo Singula Singulis”.

Books:

• Francis Bennion – Statutory Interpretation (Butterworths – 1984, London): Cited for the principle of Reddendo Singula Singulis.
• Principles of Statutory Interpretation by Justice G.P. Singh (former Chief Justice M.P. High Court) Fourth Edition 1988: Cited for the principle of Reddendo Singula Singulis.

Legal Provisions:

• Section 63 of the Electricity Act, 2003: Determination of tariff by bidding process.
• “Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licensees, 2005”: Statutory guidelines for tariff determination.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

The Supreme Court held that the Power Purchase Agreement (PPA) should be interpreted to include the cost of washed coal, not just the cost of unwashed coal. The court emphasized that the reference to “coal” in the PPA must be understood as “washed coal” due to the mandatory requirement of washing coal for power plants located over 1000 km from the mine. This interpretation was based on the principle of giving “business efficacy” to the contract. The court also ruled that the Gross Calorific Value (GCV) of coal should be measured at the project-end, not the mine-end. This decision was based on the fact that the formula for energy charges refers to the GCV of coal “delivered to the Project.” The court further held that transportation costs, including the first and last mile, should be reimbursed. The court rejected the claim for transit and handling losses, third-party testing charges, and liaising charges as those were not part of the formula for energy charges. The court also rejected the claim for interest on the disputed energy charges, as no such claim was made at any stage of the proceedings. The Court relied on the principle of “Reddendo Singula Singulis” to interpret the formula for energy charges, ensuring that each part of the formula was given its due weight.

Treatment of Authorities:

The Supreme Court relied on various authorities to support its interpretation of the PPA. The principle of “business efficacy” was drawn from cases like The Moorcock and Shirlaw v. Southern Foundries. The court also considered the “officious bystander” test for implied terms. The court referred to Liverpool City Council vs. Irwin to clarify that the touchstone for interpreting commercial documents is “necessity,” not “mere reasonableness.” The Court relied on B.P. Refinery (Westernport) Proprietary Limited vs. The President Councillors and Ratepayers of the Shire of Hastings for the conditions for the implication of terms in a contract. The principles for construing contractual documents were taken from Investors Compensation Scheme Ltd. vs. West Bromwich Building Society. The Court also relied on various Indian cases, including M/s. Dhanrajamal Gobindram vs. M/s. Shamji Kalidas and Co., The Union of India vs. M/s. D.N. Revri & Co. and Ors., and Satya Jain (Dead) Through LRs. and Ors. vs. Anis Ahmed Rushdie (Dead) Through LRs. and Ors., to emphasize the importance of giving meaning to commercial documents and interpreting contracts to give them efficacy. The Court also referred to Life Corporation of India & Anr. vs. Dharam Vir Anand to construe a particular clause of the contract and giving effect to the terms used therein. The principle of “Reddendo Singula Singulis” was taken from Koteswar Vittal Kamath v. K. Rangappa Balia & Co. and cited from various legal texts.

Flowchart of the Decision-Making Process

Conclusion

The Supreme Court’s judgment in Nabha Power Ltd. vs. Punjab State Power Corporation Ltd. (2017) provides significant clarification on the interpretation of Power Purchase Agreements (PPAs), particularly concerning the calculation of energy charges related to coal. The court’s emphasis on the principle of “business efficacy” and the mandatory requirement of coal washing for certain power plants sets a precedent for future disputes. The court’s decision ensures that the actual cost of coal, including washing and transportation to the project site, is considered while determining energy charges. This judgment also clarifies that the Gross Calorific Value (GCV) of coal should be measured at the project-end, reflecting the actual quality of coal used for power generation. This case underscores the importance of carefully drafting PPAs to avoid ambiguity and ensures that the parties involved share the risks and costs fairly. The judgment also highlights the importance of considering the context and purpose of contractual terms when interpreting commercial agreements.