Supreme Court Clarifies Compensation for Coal Shortfall Under Power Purchase Agreements: Maharashtra State Electricity Distribution Company Limited vs. Adani Power Maharashtra Limited & Ors. (2023) INSC 208 (03 March 2023)

Date of the Judgment: 03 March 2023
Citation: (2023) INSC 208
Judges: B.R. Gavai, J., Vikram Nath, J.
Can power generating companies claim compensation for a shortfall in coal supply, and if so, how should this compensation be calculated? The Supreme Court of India recently addressed this crucial question in a case involving power purchase agreements (PPAs) and changes in coal distribution policy. The court clarified the parameters for calculating compensation due to a change in law affecting coal supply, impacting both power generators and distribution companies. The judgment was delivered by a two-judge bench comprising Justice B.R. Gavai and Justice Vikram Nath.

Case Background

The case involves appeals against decisions regarding compensation claims by 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) and GMR Warora Energy Ltd. (GMR). These agreements were made following competitive bidding processes under Section 63 of the Electricity Act, 2003. The core dispute arose from the implementation of the New Coal Distribution Policy (NCDP) of 2013, which altered the coal supply obligations of Coal India Limited (CIL), leading to a shortfall in domestic coal supply for power generators.

MSEDCL sought to limit compensation based on parameters specified in the bid documents, while the generating companies argued for compensation based on actual operational parameters and the principle of restitution.

Timeline

Course of Proceedings

Initially, APML filed a petition before the Maharashtra Electricity Regulatory Commission (MERC) seeking compensation for the increased costs due to the change in coal supply policy. MERC approved a framework for compensatory fuel charges but restricted the compensation. Both APML and MSEDCL filed appeals before the Appellate Tribunal for Electricity (APTEL). APTEL remanded the matter to MERC for fresh consideration in light of the Supreme Court’s judgment in Energy Watchdog v. Central Electricity Regulatory Commission and others. After reconsideration, MERC allowed APML’s claims for relief on account of Change in Law but restricted it to the minimum supply obligations specified for the CIL subsidiaries for the last four years of the 12th Five Year Plan period as per the NCDP, 2013. Aggrieved by this, APML again appealed to APTEL. Similarly, GMR also approached CERC for similar relief, which was partly allowed, and the order was upheld by APTEL.

Legal Framework

The core legal framework for this case revolves around the Electricity Act, 2003, specifically Section 63, which deals with tariff determination through competitive bidding. The PPAs between MSEDCL and the generating companies also contain clauses on “Change in Law,” which allow for adjustments in tariff due to changes in legislation or government policy. Article 10 of the 1200 MW PPA dated 31st March 2010 between MSEDCL and APML defines “Change in Law” and specifies the principles for computing its impact. Article 10.2.1 states that the affected party must be restored to the same economic position as if the Change in Law had not occurred.

The New Coal Distribution Policy (NCDP) of 2007, which initially guaranteed 100% coal supply, and its subsequent revision in 2013, which reduced the assured supply, are central to the dispute. The Ministry of Power’s (MoP) communication dated 31st July 2013, advising regulatory commissions to consider the pass-through of alternate coal costs, is also a key document. The Tariff Policy of 2016 also plays a crucial role, mandating the pass-through of increased costs due to shortfalls in domestic coal supply.

Arguments

Submissions on Behalf of the DISCOMS:

• The DISCOMS argued that the Station Heat Rate (SHR) and Gross Calorific Value (GCV) values declared in the bid documents should be the basis for calculating compensation, not the actual values or values from tariff regulations. They contended that allowing deviations from bid parameters would undermine the sanctity of the competitive bidding process.
• They emphasized that the bidders were required to have a “firm” fuel arrangement and declare the quantity of fuel required for the entire term of the PPA. This quantity, they argued, could only be ascertained by applying the SHR and GCV components declared in the bid.
• The DISCOMS submitted that bidders should have factored in all risks, including fuel availability and price fluctuations, when submitting their bids. They argued that the quoted tariff is sacrosanct and cannot be altered except as per the Change in Law clause.
• They further argued that the benefit on account of the Change in Law brought by NCDP 2013 should be restricted to the extent of the shortfall as provided by the policy, not the entire actual shortfall.
• The DISCOMS also contended that the reliance placed by the APTEL on the judgment of this Court in the case of Energy Watchdog (supra) was misconceived.
• They argued that if the SHR which is higher than the one quoted by the bidder/generator is to be taken into consideration, then it will amount to granting premium to the Generator for its inefficiency.
• The DISCOMS submitted that the finding that the GCV computation is to be made on ‘as received’ basis, is also patently erroneous and that the evaluation of GCV on air dried basis by Coal Company was well known/existing even prior to bidding and the Generators were very much aware of it.

Submissions on Behalf of the Generating Companies:

• The generating companies argued that under NCDP 2007, 100% normative coal requirement was assured, but NCDP 2013 reduced this, entitling them to compensation for the shortfall.
• They contended that SHR and GCV are not bid parameters in Case-1 bidding and should be considered on actuals for computing Change in Law compensation. They emphasized the distinction between Case-1 and Case-2 bidding, where SHR and GCV are bid parameters.
• The generating companies submitted that the principle of restitution requires that they be placed in the same economic position as if the Change in Law had not occurred, which necessitates considering actual parameters.
• They further submitted that the SHR is continuously being monitored and its actual value, as certified by Energy Auditors, is submitted to MSEDCL along with claims, and that, equally, the GCV of coal is certified by third party sampling agencies.
• The generating companies relied on the judgments of this Court in Energy Watchdog and Adani Rajasthan case, arguing that these precedents support their claim for compensation based on actuals.
• They also submitted that the learned APTEL in the case of Wardha Power v. Reliance Infrastructure & Ors. has held that if SHR and GCV as submitted in the bid are considered for Change in Law compensation, it may result in over or under recovery and should be considered only on ‘actuals’.
• They argued that the shortfall in coal was to be met either by the CIL or by the Generating Companies/Generators by importing coal and that the higher cost of such imported coal was allowed to be a pass-through.
• They submitted that the pass-through is by way of restitution due to shortfall in 100% assured quantity of coal and it cannot be limited to the percentages/trigger levels specified in the NCDP 2013.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the MERC was correct in holding that the net Station Heat Rate (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?
2. Whether the MERC was correct in holding that the reference Gross Calorific Value (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?
3. 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

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

Authorities

The Supreme Court relied on several key authorities to support its judgment:

Judgment

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

How each authority was viewed by the Court?

• The Supreme Court followed its earlier judgments in Energy Watchdog [CITATION] and Adani Rajasthan case [CITATION], reiterating that changes in Indian law, including government policies, can constitute a “Change in Law” event under PPAs and that the principle of restitution applies.
• The Court also relied upon Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) [CITATION] to reiterate the restitutionary principle.
• The Court cited Reliance Infrastructure Limited [CITATION] to reiterate that the Courts should be slow in interfering with the decisions taken by the experts in the field.
• The Court cited Central Warehousing Corporation [CITATION] to deprecate the practice of different instrumentalities of the State taking contradictory/different positions/stands on the same issue.
• The Court cited Maharashtra State Electricity Distribution Company Limited [CITATION] and Tamil Nadu Generation & Distribution Corporation Limited [CITATION] to decide on the issue of late payment surcharge.
• The Court cited Wardha Power [CITATION] to hold that compensation under Change in Law cannot be correlated with the price of coal computed from the energy charge and the technical parameters like the Heat Rate and gross GCV of coal given in the bid documents for establishing the coal requirement.

What Weighed in the Mind of the Court?

The Supreme Court’s decision was primarily influenced by 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 Court emphasized that the generating companies had entered into PPAs based on the assurance of 100% coal supply under NCDP 2007. The subsequent reduction in assured supply under NCDP 2013 constituted a Change in Law, entitling them to compensation. The Court also considered the expert opinions of the CERC and CEA, which favored the use of actual operational parameters and “as received” basis for GCV.

The Court noted that the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal for Electricity (APTEL) are expert bodies consisting of members with expertise in engineering, finance, and law. The Court observed that these bodies had concurrently held that the factors of SHR and GCV should be considered as per the Regulations or actuals, whichever is lower. The Court also considered the advice of the Central Electricity Authority (CEA), which recommended that GCV should be measured on an “as fired” basis, acknowledging the loss of GCV during handling and storage.

The Court also noted the self-contradictory stands taken by the DISCOMS in various proceedings, where they had themselves argued for considering improved efficiency parameters and actual design heat rates as per CERC regulations.

The Court’s reasoning was based on the need to provide a just and equitable outcome, ensuring that the generating companies are not unduly burdened by the changes in government policy. The Court also highlighted the importance of adhering to the principle of restitution, which is enshrined in the Change in Law clauses of the PPAs.

The Court quoted the following 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. This being so, it is clear that so far as the procurement of Indian coal is concerned, to the extent that the supply from Coal India and other Indian sources is cut down, the PPA read with these documents provides in Clause 13.2 that while determining the consequences of change in law, parties shall have due regard to the principle that the purpose of compensating the party affected by such change in law is to restore, through monthly tariff payments, the affected party to the economic position as if such change in law has not occurred.”

“The restitutionary principle has been stated by this Court in the case of Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) (supra) thus: ‘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.’”

There were no dissenting opinions in this case. The judgment was delivered by a two-judge bench comprising Justice B.R. Gavai and Justice Vikram Nath.

Key Takeaways

• Power generating companies are entitled to compensation for shortfalls in domestic coal supply due to changes in government policy, specifically the NCDP 2013.
• Compensation for such shortfalls should be calculated based on the lower of actual Station Heat Rate (SHR) or the SHR specified in the Tariff Regulations, and Gross Calorific Value (GCV) should be computed on an “as received” basis.
• The principle of restitution requires that the generating companies be placed in the same economic position as if the Change in Law had not occurred, necessitating consideration of actual operational parameters.
• The shortfall should be assessed based on the actual shortfall in coal supply, not limited to the minimum assured quantum in NCDP 2013.
• The judgment reaffirms the binding nature of the guidelines issued by the Central Government under the Electricity Act, 2003.

Directions

The Supreme Court dismissed the appeals filed by MSEDCL and directed that the compensation to the generating companies should be calculated as per the principles laid down in the judgment. The Court also upheld the CERC’s decision to direct late payment surcharge to be paid to GMR.

Development of Law

This judgment clarifies the application of the “Change in Law” clause in PPAs, particularly in the context of government policy changes affecting coal supply. It reinforces the principle of restitution, ensuring that power generating companies are not unduly burdened by policy changes beyond theircontrol. The judgment also highlights the importance of considering actual operational parameters and expert opinions of regulatory bodies like CERC and CEA in determining compensation. It underscores the need for the regulatory commissions to ensure that the affected party is placed in the same economic position as if the change in law had not occurred.