Supreme Court settles Fixed Cost Recovery in Power Purchase Agreement Disputes: Haryana Power Purchase Centre vs. Magnum Power Generation Limited (2020)

Introduction

Date of the Judgment: 21 January 2020

Citation: (2020) INSC 39

Judges: Rohinton Fali Nariman, J., V. Ramasubramanian, J.

Can a power generator claim fixed costs under a Power Purchase Agreement (PPA) even when the buyer does not purchase any power due to regulatory restrictions? The Supreme Court of India addressed this question in a dispute between Haryana Power Purchase Centre and Magnum Power Generation Limited. The core issue revolved around whether the generator was entitled to its fixed costs despite not supplying power, due to a tariff order that disallowed power procurement from the generator in the interest of consumers. The two-judge bench, comprising Justice Rohinton Fali Nariman and Justice V. Ramasubramanian, delivered the judgment.

Case Background

On 12 August 1998, Haryana State Electricity Board (HSEB), now Haryana Power Purchase Centre (the appellant), and Magnum Power Generation Limited (the respondent) entered into a Power Purchase Agreement (PPA). The PPA stipulated that the respondent would sell power generated from its power plant to the appellant. The agreement was to last for 15 years from the synchronization date of the last unit, with a provision for extension. The PPA detailed terms for company default, HSEB default, operational procedures, and tariff determination.

The PPA specified that the appellant was to make available the contracted energy and operating characteristics of each unit to HSEB. The agreement also included a formula for calculating the contracted electrical output and the annual plant load factor (PLF). The tariff was set at Rs. 2.40 per KWH up to 75% PLF, with Rs. 1.29 as the constant component and Rs. 1.11 adjustable. The dispatch procedure required the respondent to submit an Availability Declaration daily, and HSEB was to issue a Generation Schedule.

In 2003, the Haryana Electricity Regulatory Commission (HERC) issued a Tariff Order which disallowed the procurement of power from the respondent due to its high cost, but acknowledged that the fixed cost of Rs. 1.29 per unit must be paid to the generator regardless of whether energy was purchased or not. Despite this, the appellant did not pay the fixed costs to the respondent.

Timeline

Course of Proceedings

The Haryana Electricity Regulatory Commission (HERC) dismissed the appellant’s appeal filed under Section 86(1)(f) of the Electricity Act. The HERC directed the calculation of dues and payment in installments. However, it specified that the amount would not be reimbursed through Fuel Surcharge Adjustment (FSA), as the respondents had already claimed FSA for Magnum under “Deemed Generation Charges.” The HERC also suggested a revival of the plant and a fresh PPA.

The Appellate Tribunal for Electricity upheld the HERC order, stating that the appellant was obligated to ensure the plant’s availability at 75% Plant Load Factor (PLF). The Tribunal interpreted the PPA as requiring the appellant to declare annual availability of the plant to achieve a 75% PLF.

Legal Framework

The case primarily revolves around the interpretation of the Power Purchase Agreement (PPA) and the Tariff Order issued by the Haryana Electricity Regulatory Commission (HERC).

Relevant clauses of the PPA include:

• Clause 5.1: Stipulates the term of the agreement as 15 years from the Synchronization Date of the last Unit, with a provision for extension.
• Clause 8.2: Outlines the operational aspects, including the issuance of daily dispatch instructions by HSEB to the Company.
• Schedule 3: Provides the formula for calculating Contracted Electrical Output and Annual Plant Load Factor (PLF).
• Schedule 4: Details the tariff determination, setting a rate of Rs. 2.40 per KWH up to 75% PLF, with a fixed component of Rs. 1.29.
• Schedule 6: Specifies the dispatch procedure, including the Availability Declaration by Magnum and the Generation Schedule by HSEB.

The Haryana Electricity Regulatory Commission’s (HERC) Tariff Order dated 12.08.2003, stated that while no power was to be sourced from Magnum, the fixed cost of Rs. 1.29 per unit was to be allowed. The order recognized that the fixed cost had to be paid to the generator irrespective of whether any energy was purchased or not.

Arguments

Appellant’s Arguments:

• The appellant contended that the HERC order of 12.08.2003 clearly stated that while the appellant’s power was not to be tapped, the appellant was still entitled to recover its fixed costs.
• The appellant argued that the HERC order was in the consumer’s interest, as the appellant’s power was expensive.
• The appellant submitted that Clause 8.2 of the PPA should not be interpreted to mean that supply at 75% PLF was a condition precedent for claiming fixed energy charges.
• The appellant stated that the PPA made it clear that once the power project was set up, the fixed energy cost had to be paid.

Respondent’s Arguments:

• The respondent argued that a proper reading of Article 8.2 would make it clear that it would become operative only when declared availability is more than 75% of the Plant Load Factor.
• The respondent supported the judgments of the Commission and the Tribunal.

The innovativeness of the argument by the appellant lies in its emphasis on the specific language of the HERC order, which acknowledged the fixed cost payment irrespective of power purchase, and in arguing that the PPA’s operational clauses should not negate this entitlement.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the appellant was entitled to fixed costs under the Power Purchase Agreement (PPA) despite not supplying power, given the Haryana Electricity Regulatory Commission’s (HERC) Tariff Order of 12.08.2003.

Treatment of the Issue by the Court

Authorities

The Court primarily relied on the Haryana Electricity Regulatory Commission’s (HERC) Tariff Order dated 12.08.2003. The Court noted that this order, which was binding on both parties, explicitly stated that the fixed costs must be paid to the generator, regardless of whether any power was purchased.

Judgment

The Court relied on the HERC Tariff Order of 12.08.2003, which stated that fixed costs must be paid regardless of power purchase. The Court noted that the fixed cost demanded by the appellant had been collected from consumers but not paid to the appellant.

The Court stated:

“the Commission’s Tariff Order of 12.08.2003 had made it clear that fixed costs during the currency of the agreement for generating electricity must be paid despite no supply having been made because the tariff order itself interdicted such supply in consumer interest.”

The Court also observed:

“We have also noted that for the years in question it is clear that the fixed cost that has been demanded by the appellant from the respondent has in fact been collected from the consumer but not paid over to the appellant, which would result in an unjust windfall for the respondent.”

What weighed in the mind of the Court?

The Court was primarily influenced by the explicit direction in the HERC Tariff Order of 12.08.2003, which mandated the payment of fixed costs regardless of whether power was purchased. The Court also considered the fact that the fixed costs had already been recovered from consumers, and not paying the appellant would result in an unjust enrichment for the respondent. The Court’s reasoning emphasized the binding nature of the tariff order and the principle of fairness in contractual and regulatory matters.

Logical Reasoning:

Key Takeaways

• A power generator is entitled to fixed costs under a Power Purchase Agreement (PPA) even if no power is purchased, if a regulatory order mandates such payment.
• Regulatory orders, such as tariff orders, are binding on all parties and must be adhered to.
• If fixed costs have been recovered from consumers, they must be passed on to the generator to prevent unjust enrichment of the buyer.
• The interpretation of contractual clauses must be consistent with regulatory pronouncements.

Directions

The Supreme Court directed the respondent to pay the appellant the demanded amount towards the fixed cost of running their unit at Rs. 1.29 per unit within three months. The Court also ordered simple interest at 3% per annum, which would increase to 6% per annum if payment was not made within the stipulated time.

Development of Law

The ratio decidendi of this case is that a regulatory order mandating the payment of fixed costs in a Power Purchase Agreement (PPA) must be followed, even if no power is purchased. This judgment clarifies that fixed costs, when mandated by a regulatory body, are not contingent on actual power supply and must be paid to avoid unjust enrichment. This ruling reinforces the importance of regulatory compliance and fairness in contractual relationships within the power sector.

Conclusion

The Supreme Court’s judgment in Haryana Power Purchase Centre vs. Magnum Power Generation Limited settles the dispute by upholding the principle that fixed costs must be paid as mandated by regulatory orders, irrespective of whether power is purchased. The Court’s ruling underscores the binding nature of regulatory decisions and the importance of preventing unjust enrichment.