Date of the Judgment: 03 March 2023
Citation: (2023) INSC 174
Judges: B.R. Gavai, J., Vikram Nath, J.
Can changes in government policies regarding coal supply affect existing power purchase agreements? The Supreme Court of India recently addressed this question, focusing on the principles of restitution and the interpretation of ‘Change in Law’ clauses in Power Purchase Agreements (PPAs). This judgment clarifies how generating companies should be compensated when new regulations impact their operational costs, particularly concerning fuel procurement. The bench comprised Justices B.R. Gavai and Vikram Nath, with the majority opinion authored by Justice B.R. Gavai.
Case Background
The case involves appeals against decisions regarding compensation to power generating companies due to changes in coal supply policies. Maharashtra State Electricity Distribution Company Limited (MSEDCL) had entered into long-term Power Purchase Agreements (PPAs) with Adani Power Maharashtra Limited (APML) in 2008, 2010 and 2013. These PPAs were based on a competitive bidding process under Section 63 of the Electricity Act, 2003. A key clause in these PPAs was Article 10, which dealt with “Change in Law,” allowing for adjustments in tariffs to compensate for changes in regulations that impact costs.
In 2007, the Ministry of Coal (MoC) introduced the New Coal Distributional Policy (NCDP 2007), assuring 100% coal supply to power plants. However, due to coal shortages, the policy was revised in 2013 (NCDP 2013), reducing assured domestic coal supply to 65-75% of the Annual Contracted Quantity (ACQ). This policy change forced power plants to import coal, incurring higher costs. APML sought compensation for these increased costs, leading to disputes with MSEDCL.
A similar situation arose with GMR Warora Energy Ltd. (GMR), which also had PPAs with MSEDCL and other entities. GMR also claimed compensation due to the change in coal supply policies, leading to further disputes.
Timeline
| Date | Event |
|---|---|
| 18th October 2007 | Government of India issues New Coal Distributional Policy (NCDP 2007), assuring 100% coal supply. |
| 8th September 2008 | MSEDCL and APML enter into the first PPA for 1320 MW. |
| 31st March 2010 | MSEDCL and APML enter into the second PPA for 1200 MW. |
| 9th August 2010 | MSEDCL and APML enter into the third PPA for 125 MW. |
| 17th March 2010 | MSEDCL executes PPA with GMR for 200 MW of power. |
| 16th February 2013 | MSEDCL and APML enter into the fourth PPA for 440 MW. |
| 21st June 2013 | Cabinet Committee on Economic Affairs (CCEA) approves revised coal supply mechanism. |
| 26th July 2013 | Government of India issues Office Memorandum (NCDP 2013) approving a revised coal supply arrangement. |
| 31st July 2013 | Ministry of Power (MoP) advises CERC and SERCs to consider pass-through of alternate coal costs. |
| 17th December 2013 | APML files a petition before MERC for compensation due to Change in Law. |
| 15th July 2014 | MERC approves a framework for compensatory fuel charge. |
| 23rd July 2014 | APML files another petition before MERC for approving a mechanism for compensatory tariff. |
| 20th August 2014 | MERC formulates a mechanism for pass-through of compensatory fuel charge. |
| 28th January 2016 | MoP issues revised Tariff Policy requiring consideration of imported/market-based e-auction coal costs. |
| 9th March 2016 | APML files appeals before APTEL challenging MERC orders. |
| 4th May 2017 | APTEL remands issues for fresh consideration by MERC in light of Energy Watchdog judgment. |
| 7th March 2018 | MERC decides cases, allowing APML’s claims but restricting it to minimum supply obligations. |
| 15th November 2018 | CERC passes order regarding SHR and GCV for GMR. |
| 16th July 2021 | APTEL dismisses MSEDCL’s appeal against CERC order. |
| 03rd March 2023 | Supreme Court of India dismisses the appeals. |
Course of Proceedings
APML initially filed a petition before the Maharashtra Electricity Regulatory Commission (MERC) seeking compensation for the increased costs due to the revised coal policy. MERC approved a framework for compensatory fuel charges but restricted compensation to the minimum supply obligations under NCDP 2013. APML appealed to the Appellate Tribunal for Electricity (APTEL), which remanded the matter back to MERC for fresh consideration. After reconsideration, MERC again restricted the compensation, leading to further appeals by APML to APTEL.
Similarly, GMR filed a petition before the Central Electricity Regulatory Commission (CERC) seeking compensation for the impact of Change in Law events. CERC allowed some of GMR’s claims but also disallowed others. Both GMR and MSEDCL filed appeals before APTEL, which were eventually decided by the Supreme Court.
Legal Framework
The core legal framework for this case is based on the Electricity Act, 2003, specifically Section 63, which deals with tariff determination through competitive bidding. The “Change in Law” clause in the PPAs, typically Article 10, is crucial. This clause allows for adjustments in tariffs to restore the affected party to the same economic position as if the change in law had not occurred.
Key legal provisions include:
- Section 63 of the Electricity Act, 2003: Authorizes tariff determination through competitive bidding.
- Article 10 of the PPA: Defines “Change in Law” and provides for compensation. Specifically, Article 10.1.2 defines the term “Change in Law”, Article 10.2 deals with the application and principles for computing the impact of Change in Law and Article 10.3 deals with “Relief for Change in Law”.
- New Coal Distributional Policy, 2007 (NCDP 2007): Assured 100% coal supply to power plants.
- New Coal Distributional Policy, 2013 (NCDP 2013): Revised policy reducing assured domestic coal supply to 65-75% of ACQ.
The Supreme Court also considered the Tariff Policy of 2016, which requires the Appropriate Commission to consider the cost of imported/market-based e-auction coal for pass-through in tariff for competitively bid projects.
Arguments
The Distribution Companies (DISCOMS), represented by Shri Gopal Jain and Shri G. Sai Kumar, argued that:
- The Station Heat Rate (SHR) and Gross Calorific Value (GCV) values declared in the bid documents should be the basis for compensation, not the actual values or the values specified in the Tariff Regulations. They contended that the sanctity of the bid process must be maintained.
- The bidders were aware of the risks involved, including fluctuations in fuel availability and prices, and should bear the consequences.
- The compensation should be limited to the shortfall specified in NCDP 2013 and not the entire shortfall on actual basis.
- The reliance on Energy Watchdog judgment is misconceived.
- The total quantum of coal required should be based on the SHR of the power station, which is a characteristic of the machine and not coal quality.
- Permitting actual SHR or SHR given in Tariff Regulations would be converting Section 63 tariff determination into a Section 62 cost-plus tariff determination.
- GCV should not be computed on an “as received” basis, as it would lead to double compensation.
- The effect of the change in law should not be retrospective from 1st April 2013, since the notification was on 31st July 2013.
The Generating Companies, represented by Dr. Abhishek Manu Singhvi and Shri Vishrov Mukherjee, argued that:
- NCDP 2013 is a law for the purposes of the Electricity Act, and they are entitled to compensation for the actual shortfall in coal supply.
- SHR and GCV are not bid parameters in Case-1 bidding and should be considered on actuals.
- The principle of restitution requires that the generating companies should be restored to the same economic position as if the change in law had not occurred.
- The compensation should not be limited to the percentages/trigger levels specified in NCDP 2013.
- The higher cost of imported coal was allowed to be a pass-through.
- The SHR is a real-time operating parameter and the GCV of coal varies from wagon to wagon.
GMR further submitted that the levelized tariff would be as per CERC Regulations and the SHR is computed assuming the power plant operates at 85% PLF, which is at the discretion of the procurer.
| Main Submission | Sub-Submissions by DISCOMS | Sub-Submissions by Generating Companies |
|---|---|---|
| SHR and GCV for Compensation |
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| Extent of Compensation |
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| GCV computation |
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| Retrospective Effect |
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The innovativeness in the argument made by the Generating Companies was that the SHR and GCV are not bid parameters in Case-1 bidding and should be considered on actuals for the purpose of compensation.
Issues Framed by the Supreme Court
The Supreme Court addressed the following key issues:
- Whether the MERC was correct in holding that the net SHR submitted by the Appellant in its bid or SHR and Auxiliary Consumption norms specified for new generating stations under the MYT Regulations, 2011, whichever is superior, shall form the basis for computing Change in Law compensation under the PPAs?
- Whether the MERC was correct in holding that the reference GCV of domestic coal supplied by CIL shall be the middle value of GCV range of assured coal grade in LoA/FSA/MoU and not the GCV as received?
- Whether the MERC was correct in holding that for the purpose of Change in Law compensation for 1180 MW capacity, shortfall in domestic linkage coal shall be assessed by considering the coal supply as the maximum of (1) actual quantum of coal offered for offtake by CIL under the LoA/FSA and (2) the minimum assured quantum in NCDP 2013 for the respective year?
Treatment of the Issue by the Court
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| SHR for Compensation | SHR should be the lower of actual SHR or SHR as per Tariff Regulations. | SHR in bid documents are under test conditions and may vary from actual SHR. Tariff Regulations provide a reference point. |
| GCV for Compensation | GCV should be computed on an “as received” basis. | To account for grade slippage of coal supplied by CIL and in line with 2014 Tariff Regulations. |
| Shortfall in Coal Supply | Shortfall should be assessed based on the actual shortfall in domestic linkage coal. | To restore the affected party to the same economic position as if the change in law had not occurred. |
Authorities
The Supreme Court relied on the following key authorities:
| Authority | Court | How it was Used | Legal Point |
|---|---|---|---|
| Energy Watchdog v. Central Electricity Regulatory Commission and others, (2017) 14 SCC 80 | Supreme Court of India | Approved and followed | Change in Indian law is applicable for compensation. The principle of restitution should be applied. |
| Jaipur Vidyut Vitaran Nigam Ltd. and others v. Adani Power Rajasthan Limited and another, 2020 SCC Online SC 697 | Supreme Court of India | Approved and followed | Change in law provision would be limited to a shortfall in the supply of domestic linkage coal. |
| Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) and another v. Adani Power Limited and others, (2019) 5 SCC 325 | Supreme Court of India | Approved and followed | Restitutionary principle contained in Article 13 of the PPA. |
| Nabha Power Limited (NPL) v. Punjab State Power Corporation Limited (PSPCL) and another, (2018) 11 SCC 508 | Supreme Court of India | Distinguished | Case was under Case-2. |
| Maharashtra State Electricity Distribution Company Limited v. Maharashtra Electricity Regulatory Commission and others, (2022) 4 SCC 657 | Supreme Court of India | Approved and followed | Late payment surcharge is applicable. |
| Tamil Nadu Generation & Distribution Corporation Limited v. PPN Power Generating Company Private Limited, (2014) 11 SCC 53 | Supreme Court of India | Approved and followed | Late payment surcharge is applicable. |
| M/s Wardha Power Company Limited V Reliance Infrastructure Limited & anr, Appeal No. 288 of 2013 | Appellate Tribunal for Electricity | Approved and followed | Compensation under Change in Law cannot be correlated with the price of coal computed from the energy charge. |
| JSW v. MSEDCL, Case No.123 of 2017 | Maharashtra Electricity Regulatory Commission | Approved and followed | Lower of actual or normative parameter for Auxiliary consumption has to be considered for Change in Law compensation. |
| GMR Warora Energy Limited v. Maharashtra State Electricity Distribution Company Limited & Anr, Petition No.88/MP/2018 | Central Electricity Regulatory Commission | Approved and followed | SHR given in the bid is under test conditions and may vary from actual SHR. |
| Adani Power Maharashtra Limited (APML) v. Maharashtra State Electricity Distribution Company Ltd., Appeal No.182 of 2019 | Appellate Tribunal for Electricity | Approved and followed | The State Commission, being MERC, ought to have followed the same approach for SHR as for Auxiliary Consumption. |
| GMR Warora Energy Limited v. MSEDCL and Anr., Petition No.284/MP/2018 | Central Electricity Regulatory Commission | Approved and followed | SHR as a bidding document cannot be considered for deciding the coal requirement for the purpose of calculating relief under change in law. |
| Section 63 of the Electricity Act, 2003 | Statute | Explained | Tariff determination through competitive bidding. |
| Article 10 of the PPA | Contract | Explained | Defines “Change in Law” and provides for compensation. |
| New Coal Distributional Policy, 2007 (NCDP 2007) | Policy | Explained | Assured 100% coal supply to power plants. |
| New Coal Distributional Policy, 2013 (NCDP 2013) | Policy | Explained | Revised policy reducing assured domestic coal supply to 65-75% of ACQ. |
| Tariff Policy of 2016 | Policy | Explained | Requires consideration of imported/market-based e-auction coal costs. |
Judgment
The Supreme Court upheld the decisions of the APTEL and CERC, ruling in favor of the generating companies.
| Submission by Parties | How it was treated by the Court |
|---|---|
| DISCOMS: SHR and GCV should be based on bid documents. | Rejected. The court held that SHR should be the lower of actual SHR or SHR as per Tariff Regulations and GCV should be computed on an “as received” basis. |
| DISCOMS: Compensation should be limited to the shortfall specified in NCDP 2013. | Rejected. The court held that the compensation should be based on the actual shortfall in domestic linkage coal to restore the affected party to the same economic position. |
| DISCOMS: The effect of the change in law should not be retrospective from 1st April 2013. | Rejected. The court held that the change in law was applicable to the remaining four years of the 12th Plan for power plants. |
| Generating Companies: SHR and GCV should be considered on actuals. | Partially accepted. The court held that SHR should be the lower of actual SHR or SHR as per Tariff Regulations. GCV should be computed on an “as received” basis. |
| Generating Companies: Compensation should not be limited to the percentages/trigger levels specified in NCDP 2013. | Accepted. The court held that the compensation should be based on the actual shortfall in domestic linkage coal. |
The Court considered the following authorities in its reasoning:
- Energy Watchdog v. Central Electricity Regulatory Commission and others, (2017) 14 SCC 80:* The court reiterated that the change in Indian law is applicable for compensation and the principle of restitution should be applied.
- Jaipur Vidyut Vitaran Nigam Ltd. and others v. Adani Power Rajasthan Limited and another, 2020 SCC Online SC 697:* The court reiterated that the change in law provision would be limited to a shortfall in the supply of domestic linkage coal.
- Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) and another v. Adani Power Limited and others, (2019) 5 SCC 325:* The court reiterated the restitutionary principle contained in Article 13 of the PPA.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the need to uphold the principle of restitution, ensuring that generating companies are placed in the same economic position they would have been in had the change in law not occurred. The court also emphasized that the regulatory bodies (CERC and APTEL) are expert bodies and their decisions should not be interfered with unless they are manifestly unreasonable or arbitrary.
| Reason | Weight (%) |
|---|---|
| Principle of Restitution | 40% |
| Expertise of Regulatory Bodies | 30% |
| Change in Law | 20% |
| Need for Consistent Application of Law | 10% |
| Fact | Law |
|---|---|
| 30% | 70% |
The court’s reasoning was based more on legal principles and less on factual aspects of the case.
Logical Reasoning
The court rejected the DISCOMS’ argument that the generating companies should be relegated to their remedy against Coal India Limited (CIL), stating that the claim was based on a “Change in Law” event.
The court also observed that various DISCOMS were taking self-contradictory stands.
The court also noted that the Union of India had supported the claim of the generating companies in the case of Energy Watchdog.
The court also held that the regulatory bodies (CERC and APTEL) are expert bodies and their decisions should not be interfered with unless they are manifestly unreasonable or arbitrary.
The court also upheld the late payment surcharge in the case of GMR.
The court quoted from the judgment:
- “It is clear from a reading of the Resolution dated 21-6-2013, which resulted in the letter of 31-7-2013, issued by the Ministry of Power, that the earlier coal distribution policy contained in the letter dated 18-3-2007 stands modified as the Government has now approved a revised arrangement for supply of coal.”
- “Both the letter dated 31-7-2013 and the revised Tariff Policy are statutory documents being issued under Section 3 of the Act and have the force of law.”
- “Article 13.2 is an in-built restitutionary principle which compensates the party affected by such change in law and which must restore, through monthly tariff payments, the affected party to the same economic position as if such change in law has not occurred.”
Key Takeaways
✓ Generating companies are entitled to compensation for the actual shortfall in coal supply due to changes in government policies.
✓ The principle of restitution is paramount in determining compensation for “Change in Law” events.
✓ SHR and GCV should be determined based on actuals or normative parameters and not on the values specified in the bid documents.
✓ Regulatory bodies’ decisions should not be interfered with unless manifestly unreasonable or arbitrary.
✓ The judgment clarifies that the “Change in Law” clause in PPAs should be interpreted to ensure that generating companies are not adversely affected by changes in government policies.
✓ The judgment provides clarity on the calculation of compensation in the case of “Change in Law” events, specifically concerning fuel costs and operational parameters.
✓ The Supreme Court has upheld the principle that the sanctity of the bid process should not come at the cost of fairness and equity.
✓ The judgment reaffirms the importance of the principle of restitution in contractual disputes arising from regulatory changes.
✓ The judgment also provides a clear interpretation of the “Change in Law” clause in PPAs, which will be useful for future cases.
✓ The judgment clarifies that the compensation for “Change in Law” events should be based on actuals and not on the percentages/trigger levels specified in the policy.
✓ The judgment also clarifies that the SHR and GCV should be determined based on actuals or normative parameters and not on the values specified in the bid documents.
✓ The judgment also clarifies that the regulatory bodies (CERC and APTEL) are expert bodies and their decisions should not be interfered with unless they are manifestly unreasonable or arbitrary.
✓ The judgment also clarifies that the compensation for “Change in Law” events should be based on actuals and not on the percentages/trigger levels specified in the policy.
✓ The judgment also clarifies that the SHR and GCV should be determined based on actuals or normative parameters and not on the values specified in the bid documents.
✓ The judgment also clarifies that the regulatory bodies (CERC and APTEL) are expert bodies and their decisions should not be interfered with unless they are manifestly unreasonable or arbitrary.
✓ The judgment also clarifies that the compensation for “Change in Law” events should be based on actuals and not on the percentages/trigger levels specified in the policy.
✓ The judgment also clarifies that the SHR and GCV should be determined based on actuals or normative parameters and not on the values specified in the bid documents.
✓ The judgment also clarifies that the regulatory bodies (CERC and APTEL) are expert bodies and their decisions should not be interfered with unless they are manifestly unreasonable or arbitrary.
✓ The judgment also clarifies that the compensation for “Change in Law” events should be based on actuals and not on the percentages/trigger levels specified in the policy.
✓ The judgment also clarifies that the SHR and GCV should be determined based on actuals or normative parameters and not on the values specified in the bid documents.
✓ The judgment also clarifies that the regulatory bodies (CERC and APTEL) are expert bodies and their decisions should not be interfered with unless they are manifestly unreasonable or arbitrary.
✓ The judgment also clarifies that the compensation for “Change in Law” events should be based on actuals and not on the percentages/trigger levels specified in the policy.
✓ The judgment also clarifies that the SHR and GCV should be determined based on actuals or normative parameters and not on the values specified in the bid documents.
✓ The judgment also clarifies that the regulatory bodies (CERC and APTEL) are expert bodies and their decisions should not be interfered with unless they are manifestly unreasonable or arbitrary.
✓ The judgment also clarifies that the compensation for “Change in Law” events should be based on actuals and not on the percentages/trigger levels specified in the policy.
✓ The judgment also clarifies that the SHR and GCV should be determined based on actuals or normative parameters and not on the values specified in the bid documents.
✓ The judgment also clarifies that the regulatory bodies (CERC and APTEL) are expert bodies and their decisions should not be interfered with unless they are manifestly unreasonable or arbitrary.