Supreme Court deems Inter-Plant Transfer of Coal as ‘Change in Law’ in Power Supply Agreements (20 April 2023)

Introduction

Date of the Judgment: 20 April 2023
Citation: Civil Appeal No. 2908 of 2022
Judges: B.R. Gavai, J. and Vikram Nath, J.

Can a change in policy regarding coal transfer between power plants be considered a ‘Change in Law’ that affects power purchase agreements? The Supreme Court of India recently addressed this question, focusing on whether a communication from Coal India Limited (CIL) allowing Inter-Plant Transfer (IPT) of coal qualifies as a ‘Change in Law’ event. This ruling has significant implications for power generating companies and distribution utilities, particularly concerning the costs associated with coal transportation.

The core issue revolves around a dispute between Uttar Haryana Bijli Vitran Nigam Limited and Dakshin Haryana Bijli Vidyut Nigam Limited (Haryana Utilities) and Adani Power (Mundra) Limited (AP(M)L). The dispute arose after CIL issued a communication allowing IPT of coal, which AP(M)L argued was a ‘Change in Law’ entitling them to compensation. The Supreme Court, in this judgment, clarified the definition of ‘Law’ within the context of PPAs and its implications for the power sector.

The judgment was delivered by a bench comprising Justice B.R. Gavai and Justice Vikram Nath. The majority opinion was authored by Justice B.R. Gavai.

Case Background

Adani Power (Mundra) Limited (AP(M)L) established a power generating station at Mundra, Gujarat, with a total capacity of 4620 MW. AP(M)L entered into Power Project Agreements (PPAs) with Uttar Haryana Bijli Vitran Nigam Limited and Dakshin Haryana Bijli Vidyut Nigam Limited (Haryana Utilities) on 7th August 2008, for the supply of 1424 MW of power from Phase IV of their generating station.

Initially, AP(M)L claimed compensation for certain ‘Change in Law’ events, which the Central Electricity Regulatory Commission (CERC) allowed on 6th February 2017. Subsequently, based on a Supreme Court judgment in Energy Watchdog v. Central Electricity Regulatory Commission and Others, AP(M)L filed another petition claiming compensation due to changes in the New Coal Distribution Policy, 2007. Haryana Utilities contested this, arguing that AP(M)L had not considered the benefits they received from Inter-Plant Transfer (IPT) of coal, which was allowed by CIL’s communication dated 19th June 2013.

Haryana Utilities unilaterally reduced payments to AP(M)L, asserting that the benefits from IPT should be factored into the compensation. AP(M)L contended that CERC had already rejected this argument in an earlier order. Consequently, AP(M)L filed a petition before CERC seeking clarification on the applicability of CERC’s earlier findings regarding IPT to the compensation for taxes and duties and seeking payment of the deducted amounts.

Timeline

Course of Proceedings

The Central Electricity Regulatory Commission (CERC) initially addressed the matter in Petition No. 269/MP/2018, filed by AP(M)L. CERC held that the dispute was maintainable and that its earlier findings on IPT were applicable to the compensation for taxes and duties. CERC also stated that the transfer of coal under the IPT policy affects other generating stations and distribution companies, but did not deal with the issue as they were not parties to the proceedings. CERC determined that the shortfall of domestic coal should be calculated based on the Assured Coal Quantity (ACQ) and the actual supply by coal companies.

Aggrieved by CERC’s order, Haryana Utilities appealed to the Appellate Tribunal for Electricity (APTEL). APTEL upheld CERC’s decision on calculating the ‘Change in Law’ compensation based on ACQ minus actual supply, relying on the Supreme Court’s judgment in Energy Watchdog. However, APTEL held that the communication dated 19th June 2013, allowing IPT, was not a ‘Change in Law’ event. This led to the present appeal before the Supreme Court.

Legal Framework

The core of the legal framework in this case lies in the definition of “Law” as outlined in the Power Purchase Agreement (PPA) and the implications of the communication issued by Coal India Limited (CIL) regarding Inter-Plant Transfer (IPT) of coal.

The PPA defines “Law” as:

“Law means, in relation to this Agreement, all laws including Electricity Laws in force in India and any statute, ordinance, regulation, notification or code; rule, or any interpretation of any of them by an Indian Governmental Instrumentality and having force of law and shall further include all applicable rules, regulations, orders, notifications by an Indian Governmental Instrumentality pursuant to or under any of them and shall include all rules, regulations, decisions and orders of the Appropriate Commission.”

This definition is broad, encompassing not only statutes but also rules, regulations, orders, and notifications by governmental instrumentalities. This definition is crucial for determining whether the CIL communication qualifies as a ‘Change in Law’.

The communication dated 19th June 2013, issued by CIL, allows for the Inter-Plant Transfer of coal under certain conditions. It states:

“Sub: Modification in Model FSA applicable for New Power plants in respect of “Interplant transfer of coal”
A proposal for allowing inter power plant transfer of coal from one Power Plant to another under the modified FSA applicable for New Power Plants (for both PSU/Govt. PUs and Private PUs ) was placed before the 298th CIL Board in its Meeting held on 27.5.13.
The CIL Board while approving to the proposal allowed such dispensation subject to the following conditions which stand as below after legal vetting.
a)Transfer of coal shall be allowed only between the power plants wholly owned by the Purchaser or its wholly owned subsidiary. No transfer of coal shall be allowed for a JV company of the Purchaser. The supply of coal, shall for all commercial purpose under the FSA remain unchanged and on account of the original Power Plant.
b)Both the Power Plants should have executed FSA in the modified FSA Model applicable for new power plants and not having any supplies linked to coal blocks. In case of IPPs both the plants must have valid long term PPAs with DISCOMS.
c)In no case the transferred quantity to a plant together with the quantity supplied under the applicable FSA shall exceed the ACQ of the Transferee Plant for a particular year which is proportional to the long term PPA with DISCOMS.
d)Transfer of coal will not be allowed to those plants who are allotted coal blocks under this arrangement.
e)In case of change in the ownership and no environmental clearance of the plant this facility shall stand withdrawn, and
f)Penalty/ incentive under this arrangement would be considered in terms of (a) above.
A statement showing the modification in the FSA models applicable for New Power plants (for both PSU/ Govt. PUs and Private PUs) is enclosed.”

This communication allows coal transfer between power plants owned by the same company or its subsidiary, provided certain conditions are met. The key condition is that the supply of coal remains unchanged for commercial purposes under the Fuel Supply Agreement (FSA) and is accounted for by the original power plant.

Arguments

Appellants’ (Haryana Utilities) Arguments:

• Shri Shubham Arya, the learned counsel for the appellants, argued that the communication dated 19th June 2013, issued by CIL, should be considered “Law” as per the definition in the PPA.
• He contended that the CERC had not addressed the issue of IPT properly, and APTEL erred in ruling that it was not a ‘Change in Law’ event.

Respondents’ (AP(M)L) Arguments:

• Dr. A.M. Singhvi, the learned Senior Counsel for the respondents, argued that the communication dated 19th June 2013, was merely an inter-departmental communication and could not be considered a ‘Change in Law’.

Sub-Submissions Categorized by Main Submissions:

Innovativeness of the Argument: The appellants’ argument that the CIL communication should be considered “Law” based on the broad definition in the PPA is a key point of innovation. They are challenging the traditional view that only formal statutory instruments qualify as “Law”.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether ‘Change in Law’ relief on account of NCDP 2013 should be on ‘actuals’ viz. as against 100% of normative coal requirement assured in terms of NCDP 2007 OR restricted to trigger levels in NCDP 2013 viz. 65%, 65%, 67% and 75% of Assured Coal Quantity (ACQ)?
2. Whether for computing ‘Change in Law’ relief, the operating parameters be considered on ‘actuals’ OR as per technical information submitted in bid?
3. Whether ‘Change in Law’ relief compensation is to be granted from 1st April 2013 (start of Financial Year) or 31st July 2013 (date of NCDP 2013)?
4. Whether the communication dated 19th June 2013, providing for IPT, amounts to a ‘Change in Law’?
5. If IPT is considered a ‘Change in Law’, what should be the treatment of Inter-Plant Transfer of Coal?
6. What should be the basis for calculating shortfall of domestic coal?

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities in its judgment:

Legal Provisions Considered:

• Definition of “Law” in the PPA: The Court emphasized the broad definition of “Law” in the PPA, which includes rules, regulations, orders, and notifications by governmental instrumentalities.

Judgment

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

How each authority was viewed by the Court?

• Energy Watchdog v. Central Electricity Regulatory Commission and Others [(2017) 14 SCC 80]:* The court followed this authority and used it to determine that the shortfall of domestic coal should be calculated based on ACQ minus the actual supply.
• Rattan India Power Limited v. Maharashtra Electricity Regulatory Commission and Another [Appeal Nos. 118 of 2021 and 40 of 2022 dated 22nd March 2022]:* The court noted that this case took a contrary view on the definition of “Law” and disagreed with the view taken by APTEL in the present case.
• Maharashtra State Electricity Distribution Company Limited v. Adani Power Maharashtra Limited and Others [2023 SCC OnLine SC 233]:* The court followed this authority to decide the three common issues related to ‘Change in Law’ relief.
• Kusum Ingots & Alloys v. Union of India [(2004) 6 SCC 254]:* The court followed this authority to support that executive instructions without statutory backing can be considered as “law”.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the broad definition of “Law” in the PPA and the fact that the CIL communication was a decision of a governmental instrumentality. The court emphasized that the communication was not merely an administrative instruction but a decision that had a significant impact on the commercial aspects of the FSA. The court also considered the need to pass on the benefits of reduced transportation costs to the DISCOMS and ultimately to the consumers.

Fact:Law Ratio

The court’s reasoning was primarily legal, focusing on the interpretation of the PPA and the nature of the CIL communication. While the factual context of the case was considered, the legal interpretation played a dominant role in the decision.

Logical Reasoning

The Court considered the argument that the CIL communication was merely an administrative instruction, but rejected it. The Court emphasized that the communication had a direct impact on the commercial aspects of the FSA and therefore qualified as a ‘Change in Law’.

The Supreme Court partly allowed the appeal, setting aside the APTEL’s finding that the communication dated 19th June 2013 was not a ‘Change in Law’. The court held that IPT amounts to a ‘Change in Law’ and remitted the matter to CERC to calculate the benefits arising from the change, after hearing all parties involved, including MSEDCL and Rajasthan DISCOMS.

The court’s reasoning included the following points:

• The definition of “Law” in the PPA is broad enough to include the CIL communication.
• The CIL is a governmental instrumentality, and its decisions have the force of law.
• The IPT has a direct impact on the cost of transportation and must be considered for compensation.

The court stated, “We find that APTEL has failed to take into consideration that CERC had not decided the said issue, inasmuch as the decision on the said issue would have affected the other two DISCOMS, i.e., MSEDCL and Rajasthan DISCOMS.”

The court also stated, “As such, prior to the IPT being permitted, AP(M)L was bound to utilize the linkage coal from MCL Coal Mine, Talcher, only for the purpose of its original power plant, i.e., AP(M)L. Only on account of the IPT would it be in a position to utilize the coal from MCL Coal Mine, Talcher either for its plant in Maharashtra or in Rajasthan.”

The court further stated, “We, however, find that the changes occurring on account of permitting IPT would affect AP(M)L as well as the appellants and two other DISCOMS, i.e., MSEDCL and Rajasthan DISCOMS.”

There were no dissenting opinions in this judgment.

Key Takeaways

• The Supreme Court has clarified that communications from governmental instrumentalities, like CIL, can be considered ‘Law’ under PPAs, even if they are not formal statutory instruments.
• Inter-Plant Transfer (IPT) of coal is now recognized as a ‘Change in Law’ event, which can trigger compensation clauses in PPAs.
• Power generating companies and distribution utilities need to account for the cost savings from IPT and pass on the benefits to end consumers.
• The Central Electricity Regulatory Commission (CERC) has been directed to calculate the benefits of IPT, ensuring a fair distribution of costs and savings among all stakeholders.
• The decision emphasizes the importance of a broad interpretation of “Law” in contractual agreements, especially in the context of the power sector.

Directions

The Supreme Court directed the Central Electricity Regulatory Commission (CERC) to:

• Work out the effect of the ‘Change in Law’ resulting from IPT.
• Give notice to MSEDCL and Rajasthan DISCOMS.
• Hear all parties, including the appellants and respondents.
• Calculate the benefits that would accrue to any of the parties within a period of six months.

Development of Law

The ratio decidendi of this case is that a communication from a governmental instrumentality like Coal India Limited (CIL), which allows Inter-Plant Transfer (IPT) of coal and affects the commercial aspects of Fuel Supply Agreements (FSAs), constitutes a ‘Change in Law’ event under Power Purchase Agreements (PPAs). This decision clarifies that the definition of “Law” in such agreements is not limited to formal statutory instruments but includes decisions and notifications by governmental bodies that have a significant impact on the parties involved.

This ruling marks a departure from a narrower interpretation of “Law” and aligns with a more expansive view that considers the practical implications of governmental decisions on contractual obligations. It also underscores the importance of considering the economic impact of policy changes on all stakeholders, including power generating companies, distribution utilities, and end consumers. The judgment ensures that benefits from policy changes, such as reduced transportation costs due to IPT, are passed on to the appropriate parties, promoting fairness and transparency in the power sector.

Conclusion

In conclusion, the Supreme Court’s judgment in Uttar Haryana Bijli Vitran Nigam Limited and Another vs. Adani Power (Mundra) Limited and Another has significant implications for the power sector. The Court held that the communication dated 19th June 2013, issued by Coal India Limited (CIL), allowing Inter-Plant Transfer (IPT) of coal, constitutes a ‘Change in Law’ event under the Power Purchase Agreements (PPAs). This decision mandates that the benefits arising from IPT, particularly reduced transportation costs, must be calculated and passed on to the appropriate distribution companies and ultimately to the consumers. The matter has been remitted to the Central Electricity Regulatory Commission (CERC) to ensure a fair and transparent implementation of the ruling.