Supreme Court Clarifies Electricity Tariff for Inadvertent Drawal in Open Access Agreements: Ajmer Vidyut Vitran Nigam Ltd. vs. Hindustan Zinc Ltd. (2022)

Date of the Judgment: February 17, 2022
Citation: 2022 INSC 170
Judges: Justice Ajay Rastogi and Justice Abhay S. Oka

Can changes in electricity tariffs for inadvertent drawal under open access agreements be applied retrospectively? The Supreme Court of India recently addressed this question in a dispute between Ajmer Vidyut Vitran Nigam Limited (AVVNL) and Hindustan Zinc Limited (HZL). The core issue revolved around whether a change in tariff for excess electricity consumption, termed “inadvertent drawal,” could be applied retroactively to an existing agreement. This case clarifies the extent to which regulatory changes can affect existing contractual obligations in the power sector.

Case Background

Hindustan Zinc Limited (HZL) operates a captive power plant in Chanderia, Rajasthan, generating electricity for its units in Debari, Agucha, and Dariba. HZL uses the distribution system of Ajmer Vidyut Vitran Nigam Limited (AVVNL) to transport this electricity. This arrangement is known as “open access,” and HZL is considered an “open access consumer.” The Rajasthan Electricity Regulatory Commission (the Commission) established regulations for open access, including pricing for unscheduled interchange (mismatch between scheduled and actual electricity drawal).

On September 22, 2006, AVVNL and HZL entered into an agreement for short-term open access and standby supply. This agreement defined how billing would occur, particularly for standby supply and payments. The agreement stipulated that standby supply would be charged at temporary supply rates when the generating unit was out of service. It also addressed inadvertent drawal of electricity, which was to be billed at temporary supply tariff.

The Commission later issued a standard format agreement on January 3, 2007, which included a clause (29(1)(f)) regarding inadvertent drawal. However, this clause was different from the original agreement. AVVNL sought clarification on this discrepancy, leading the Commission to review the matter. On September 15, 2007, the Commission modified the standard agreement, stating that inadvertent drawal would be billed at regular supply rates instead of temporary supply rates. This change became the central point of contention.

Timeline

Course of Proceedings

After the Commission’s order on September 15, 2007, AVVNL issued revised bills for the period from June 2006 to February 2008, applying the new tariff for inadvertent drawal retroactively. HZL appealed to the Appellate Tribunal for Electricity, arguing that the changes were substantial and should only apply prospectively. The Appellate Tribunal ruled in favor of HZL, stating that the changes were indeed substantial amendments to the agreement and could not be applied retroactively. AVVNL then appealed to the Supreme Court of India.

Legal Framework

The case is primarily governed by the Electricity Act, 2003, particularly Section 125, which provides for appeals to the Supreme Court, and Section 42 read with Section 181, which empowers the Commission to frame regulations regarding open access. The Rajasthan Electricity Regulatory Commission (Terms and Conditions for Open Access) Regulations, 2004, and its 3rd Amendment in 2006, provide the framework for open access agreements.

Key provisions include:

• Regulation 2(c) of the Regulations, 2004 defines an “Open Access Customer” as “a person using or intending to use the transmission system or the distribution system or both of the licensees in the state for transmission or wheeling of electricity in the State.”
• Regulation 12 of the Regulations, 2004 states that “An open access customer shall enter into commercial agreements with the transmission and distribution licensees…for use of their transmission and distribution systems.”
• Regulation 20 of the Regulations, 2004 provides that “The payment for mismatch between the schedule and the actual drawal shall be governed by the pricing mechanism as specified by the Commission for the State from time to time.”

These regulations allow for open access agreements and provide a mechanism for pricing and billing of electricity.

Arguments

Appellant (AVVNL)’s Submissions:

• AVVNL argued that the changes made by the Commission on September 15, 2007, were in line with the open access regulations.
• They contended that the parties had agreed to abide by any changes notified by the Commission, thus the changes should be incorporated into the agreement from its inception.
• AVVNL asserted that the Commission’s order was a clarification of the existing regulations, not a substantial change.
• They argued that since the parties had agreed to abide by any change in the terms and conditions of the open access agreement, all alterations by the Commission should be considered part of the agreement from its start.

Respondent (HZL)’s Submissions:

• HZL argued that the Commission’s order of September 15, 2007, made substantial changes to the open access agreement.
• They contended that the original agreement clearly stated that inadvertent supply would be charged at temporary supply tariff during outages, which was altered by the Commission.
• HZL asserted that such substantial changes could not be applied retroactively without causing financial prejudice.
• They argued that the changes were not a mere clarification but a substantial alteration, and therefore, should only apply prospectively.
• HZL highlighted that the conditions of the open access agreement were in compliance with the Regulations 2004 and its 3rd Amendment 2006, and the tariff for inadvertent drawal from temporary supply was permissible.

The innovativeness of the argument from HZL lies in the fact that they were able to convince the court that the change in tariff from temporary to regular was a substantial change and not a mere clarification, and therefore, should not be applied retrospectively.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the Order dated 15th September, 2007, of the Commission is a mere interpretation/clarification of the standard format agreement, or whether the order changes the position substantially, thereby having prospective effect for raising future bills.

Treatment of the Issue by the Court

Authorities

The Court considered the following legal provisions and regulations:

• Section 125 of the Electricity Act, 2003: This section provides for appeals to the Supreme Court.
• Section 42 read with Section 181 of the Electricity Act, 2003: These sections empower the Commission to frame regulations regarding open access.
• Rajasthan Electricity Regulatory Commission (Terms and Conditions for Open Access) Regulations, 2004: These regulations provide the framework for open access agreements.
• Rajasthan Electricity Regulatory Commission (Terms and Conditions for Open Access) (3rd Amendment) Regulations, 2006: This amendment further modified the open access regulations.

The court did not rely on any case laws in this judgment.

Authorities Table

Judgment

The Supreme Court upheld the Appellate Tribunal’s decision, ruling that the Commission’s order of September 15, 2007, was a substantial change to the agreement and not a mere clarification. The court held that the change in tariff for inadvertent drawal from temporary supply rate to regular supply rate was a significant alteration and could not be applied retrospectively.

Treatment of Submissions

Treatment of Authorities

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle that substantial changes to a commercial agreement should not be applied retrospectively if they are prejudicial to the parties involved. The court emphasized that while parties may agree to abide by regulatory changes, such changes must not unfairly impact existing contractual rights.

The Court also took note of the fact that the original agreement was in compliance with the existing regulations, and the change in tariff from temporary to regular supply was a significant alteration, not a mere clarification. The Court was also concerned about the financial prejudice that would be caused to HZL if the changes were applied retrospectively.

Sentiment Analysis Table

Fact:Law Ratio Table

Logical Reasoning

The Court considered the argument that the parties had agreed to abide by any changes in the terms and conditions of the open access agreement notified by the Commission. However, the Court held that this did not mean that every change notified by the Commission would relate back to the effective date of the agreement. The Court stated that every change could only have prospective effect.

The Court also considered the argument that the Commission’s order was a mere interpretation of the existing regulations. However, the Court held that the order had substantially altered the position by changing the tariff for inadvertent drawal from temporary to regular supply. The Court noted that the new sub-clause made no reference to the outage of generating units or of unscheduled interchange, which was a departure from the original agreement.

The Court noted that the conditions of the open access agreement were in compliance with the Regulations 2004 and its 3rd Amendment 2006, and the tariff for inadvertent drawal from temporary supply was permissible.

The Court also considered the argument that the substantial changes which had been made could not be read as prejudicial to the interest of the parties. However, the Court held that the changes were indeed prejudicial to the interests of the respondents, as they would have to pay a higher tariff for inadvertent drawal.

The Court stated that while unintentional omissions or mistakes can be corrected, substantial amendments to the conditions of the agreement should not be given retrospective effect if they are prejudicial to the rights of the parties.

The Court observed that “the substantial change/modification which has been given effect to by the Commission under its order dated 15th September, 2007 under Clause 29(1)(f) effecting the tariff for inadvertent drawal from temporary supply rate to regular supply rate is indeed a substantial change in the condition of the agreement and prejudicial to the interest of the parties (respondents herein) and cannot be read to apply retrospectively from the date of agreement executed between the parties.”

The Court also noted that “if any modification, that too substantial is being permitted to be altered under the agreement executed between the parties at a later stage with retrospective effect even by the statutory authority in the garb of correction or mistake or any typographical error , if any, that may, if prejudicial to the interest of the parties inter se in law be neither permissible nor advisable to give effect anterior to the date of modification/altercation in terms and conditions of the agreement.”

The Court concluded that “the order dated 15.09.07 has to be read as an order amending the standard format issued on 01.03.07 and therefore can be given effect to only from 15.09.07.”

Key Takeaways

• Regulatory changes that substantially alter existing agreements, especially in commercial contracts, cannot be applied retrospectively if they are prejudicial to the parties involved.
• Electricity regulatory bodies must ensure that changes in tariffs or billing mechanisms are applied prospectively to avoid disrupting existing contractual obligations.
• The distinction between a “clarification” and a “substantial change” is crucial, and regulatory bodies must be transparent about the nature and impact of their orders.
• Parties entering into open access agreements should be aware that while they may agree to abide by regulatory changes, such changes will not be applied retrospectively if they are prejudicial to their interests.

Directions

The Supreme Court directed that the money deposited by HZL be adjusted against future bills to be raised by AVVNL, as agreed by the parties.

Development of Law

The ratio decidendi of this case is that substantial changes to a commercial agreement, particularly those affecting financial obligations, cannot be applied retrospectively if they are prejudicial to the parties involved. This judgment clarifies that while parties may agree to abide by regulatory changes, such changes must not unfairly impact existing contractual rights. This ruling reinforces the principle that regulatory changes should not disrupt existing contractual arrangements without clear justification and prospective application.

Conclusion

The Supreme Court dismissed the appeal filed by AVVNL, affirming the Appellate Tribunal’s decision that the changes to the open access agreement were substantial and should be applied prospectively. This judgment provides clarity on the application of regulatory changes to existing contracts, particularly in the electricity sector, and emphasizes the need to protect the contractual rights of parties involved in commercial agreements.