Supreme Court Settles Tariff Dispute: Karnataka Power vs. JSW Energy (2022)

LEGAL ISSUE: Whether a binding contract existed between Karnataka Power Transmission Corporation Limited and JSW Energy Limited regarding electricity tariff before the enactment of the Karnataka Electricity Reforms Act, 1999.
CASE TYPE: Electricity Regulatory/Contract Law
Case Name: Karnataka Power Transmission Corporation Limited vs. JSW Energy Limited
[Judgment Date]: 22 November 2022

Introduction

Date of the Judgment: 22 November 2022
Citation: (2022) INSC 1038
Judges: K.M. Joseph, J., Aniruddha Bose, J., and Hrishikesh Roy, J.

Did a binding agreement on electricity tariffs exist before the Karnataka Electricity Reforms Act of 1999 came into effect? The Supreme Court of India recently addressed this crucial question in a dispute between Karnataka Power Transmission Corporation Limited (KPTCL) and JSW Energy Limited. The core issue was whether a series of communications and a government order constituted a legally binding contract, exempting the parties from the regulatory oversight of the Karnataka Electricity Regulatory Commission.

Case Background

In March 1994, the Government of Karnataka (GoK) permitted JSW Energy Limited (then known as Jindal Thermal Power Company Limited) to establish a 2×130 MW thermal power plant in Bellary. The plant was primarily intended to supply power to Jindal Vijayanagar Steel Limited (JVSL). The Central Electricity Authority granted technical and economic clearance in March 1996. Initially, the plant was approved for 300 MW, later reduced to 260 MW.

Karnataka State Electricity Board (KEB) and JTPCL entered into a heads of terms agreement on 30 September 1995, which included a clause for KEB to purchase excess power from JTPCL, subject to price negotiation. A wheeling and banking agreement followed on 23 January 1996. In 1998, JTPCL sought to sell power to KEB, proposing a tariff based on Government of India norms, with certain exclusions for taxes, inflation, and foreign exchange variations.

Further negotiations led to JTPCL offering to supply 50 MW from Unit 1 and 100 MW from Unit 2 at a rate of Rs. 2.90/KWh, excluding certain costs. KEB expressed willingness to purchase this surplus power in December 1998. KEB then proposed to GoK to purchase power from JTPCL at Rs. 2.60 per unit, with a 5% annual escalation. GoK directed KEB to negotiate a fixed tariff for five years. JTPCL proposed a fixed tariff of Rs. 2.60 per unit with a 5% annual escalation, subject to certain conditions.

On 12 May 1999, GoK issued an order permitting KEB to finalize a power purchase agreement (PPA) with JTPCL at a rate of Rs. 2.60 per unit with a 5% annual increase for five years. The Karnataka Electricity Reforms Act, 1999 came into force on 1 June 1999.

Timeline

Course of Proceedings

The Karnataka Electricity Regulatory Commission (Commission) treated a letter from KPTCL as an application for approval of the PPA. JSW Energy contended that the Commission lacked jurisdiction as a contract was already concluded before the Act’s commencement. The Commission held that no concluded contract existed, and directed KPTCL to negotiate a fresh proposal based on a revised tariff. The Commission approved a draft PPA with modifications, reducing the tariff to Rs. 2.36 per unit for the first 657 MU and Rs. 1.88 per unit for excess energy.

JSW Energy challenged the Commission’s orders before the High Court, which set aside the orders, holding that a binding contract existed before the Act’s commencement. The High Court directed KPTCL to comply with the tariff specified in the GoK order dated 12 May 1999.

Legal Framework

The case primarily revolves around the interpretation of Section 27(2) of the Karnataka Electricity Reforms Act, 1999, which deals with tariffs. The proviso to this section states that contracts concluded by the Government of Karnataka or the KEB with generation and transmission companies before the Act’s commencement are deemed approved and must be given effect by the Commission.

Other relevant sections include Section 17, which regulates generating companies and stations, and Section 19, which deals with the grant of licenses by the Commission. Section 14 outlines the reorganization of the Karnataka Electricity Board and the transfer of its assets and liabilities.

Arguments

KPTCL argued that no concluded contract existed before the Act’s commencement because:

• The offer by JTPCL was subject to approval by its Board and lenders.
• There was no formal acceptance by KPTCL.
• Essential clauses like escrow, deemed generation, and auxiliary consumption were not agreed upon.
• The GoK order was merely an internal approval, not a statutory one.
• The tariff of Rs. 2.60 was indicative, not final.

JSW Energy contended that a binding contract existed based on the GoK order dated 12 May 1999, which specified the tariff, quantity, and tenure. They argued that the proviso to Section 27(2) protected agreements on tariff made prior to the Act’s commencement. JSW Energy also argued that the PPA was not a pre-condition and that their conduct demonstrated a concluded contract.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. Whether a binding contract existed between KPTCL and JSW Energy on tariff prior to the commencement of the Karnataka Electricity Reforms Act, 1999.
2. Whether the status of JSW Energy is that of an IPP or CPP.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered various cases and legal provisions including:

• India Thermal Power Ltd. v. State of M.P. and others [ (2000) 3 SCC 379 ] – Supreme Court of India
• All India Power Engineer Federation and others v. Sasan Power Ltd. and others [ (2017) 1 SCC 487 ] – Supreme Court of India
• K.P. Chowdhary v. State of Madhya Pradesh and others [ (1966) 3 SCR 919 ] – Supreme Court of India
• West Bengal Electricity Regulatory Commission v. CESC Ltd. [ (2002) 8 SCC 715 ] – Supreme Court of India
• Ram Narain Sons Ltd. v. Asstt. Commissioner of Sales Tax and others [ AIR 1955 SC 765 ] – Supreme Court of India
• Dwarka Prasad v. Dwarka Das Saraf [ AIR 1975 SC 1758 ] – Supreme Court of India
• Mackinnon Mackenzie & Co. Ltd. v. Audrey D’Costa and another [ (1987) 2 SCC 469 ] – Supreme Court of India
• Alexander Brogden and others and the Directors, & c., of the Metropolitan Railway Company [L.R.] 2 App. Cas. 666 – House of Lords
• Kollipara Sriramulu (Dead) by His Legal Representative v. T. Aswatha Narayana (Dead) by His Legal Representatives and others [ AIR 1968 SC 1028 ] – Supreme Court of India
• The Indian Contract Act, 1872
• The Karnataka Electricity Reforms Act, 1999
• The Electricity (Supply) Act, 1948

Judgment

The Supreme Court viewed the authorities as follows:

• India Thermal Power Ltd. v. State of M.P. and others [ (2000) 3 SCC 379 ]: The Court used this case to support its view that the parties intended to have a formal PPA.
• All India Power Engineer Federation and others v. Sasan Power Ltd. and others [ (2017) 1 SCC 487 ]: The Court relied on this to emphasize that waiver must be clearly demonstrated, especially in contracts with public interest.
• K.P. Chowdhary v. State of Madhya Pradesh and others [ (1966) 3 SCR 919 ]: The Court used this case to support its view that State Government cannot be bound by an implied contract.
• West Bengal Electricity Regulatory Commission v. CESC Ltd. [ (2002) 8 SCC 715 ]: The Court referred to this case in the context of cross-subsidization, but did not find it directly applicable.
• Ram Narain Sons Ltd. v. Asstt. Commissioner of Sales Tax and others [ AIR 1955 SC 765 ]: The Court cited this case to emphasize the importance of interpreting words in context.
• Dwarka Prasad v. Dwarka Das Saraf [ AIR 1975 SC 1758 ]: The Court used this case to explain the interpretation of provisos in statutes.
• Mackinnon Mackenzie & Co. Ltd. v. Audrey D’Costa and another [ (1987) 2 SCC 469 ]: The Court cited this case to emphasize the importance of interpreting words in context.
• Alexander Brogden and others and the Directors, & c., of the Metropolitan Railway Company [L.R.] 2 App. Cas. 666: The Court distinguished this case, holding that the facts were different and the parties contemplated a written PPA.
• Kollipara Sriramulu (Dead) by His Legal Representative v. T. Aswatha Narayana (Dead) by His Legal Representatives and others [ AIR 1968 SC 1028 ]: The Court distinguished this case, holding that the facts were different and the parties contemplated a written PPA.

What Weighed in the Mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The clear intention of both parties to execute a formal Power Purchase Agreement (PPA).
• The absence of agreement on essential terms beyond tariff, quantity, and tenure, such as penalty clauses, grid support charges, and other operational details.
• The statutory mandate of the Karnataka Electricity Reforms Act, 1999, which aimed to regulate tariffs through an independent commission.
• The need to balance consumer interests with the need for fair charges for electricity supply.
• The fact that the parties were not ad idem on several aspects, and these issues were expressly left for negotiations as indicated in letter dated 23.04.1999.

The Court reasoned that while a formal PPA was not explicitly required by the proviso, the conduct of the parties and the correspondence showed that they intended to be bound by a written agreement, which included essential terms that were not agreed upon before the Act came into force. The Court emphasized that the proviso to Section 27(2) protected contracts where parties were ad idem on all essential terms, which was not the case here.

The Court made the following key observations:

• “The proviso to Section 27(2), does not use the words ‘power purchase agreement’.”
• “The parties clearly contemplated that there should be a PPA whereupon alone a concluded contract would emerge.”
• “The correspondence in this case establish a completely different factual matrix. Both before 01.06.1999 and thereafter, the parties clearly contemplated the execution of the PPA.”

Key Takeaways

The Supreme Court’s judgment has several practical implications:

• Contracts related to electricity tariffs must be clearly concluded with all essential terms agreed upon before the enactment of relevant legislation to be protected under the proviso to Section 27(2) of the Act.
• The intention of the parties, as evidenced by their conduct and correspondence, is crucial in determining the existence of a binding contract.
• The regulatory oversight of the Karnataka Electricity Regulatory Commission cannot be circumvented by claiming a contract, unless all the essential terms are clearly agreed upon before the Act’s commencement.
• The mere agreement on tariff, quantity and tenure is not enough to constitute a concluded contract.

Directions

The Supreme Court directed JSW Energy to pay Rs. 50 crores to KPTCL within eight weeks. The final disbursement of this amount will depend on the High Court’s decision after reconsideration. The High Court was directed to reconsider the issues relating to the status of JSW Energy as an IPP or CPP and the perversity of the Commission’s orders.

Development of Law

The ratio decidendi of the case is that a contract, to be protected under the proviso to Section 27(2) of the Karnataka Electricity Reforms Act, 1999, must be fully concluded with all essential terms agreed upon before the Act’s commencement. The Court clarified that the mere agreement on tariff, quantity, and tenure is insufficient, and the parties’ intention to execute a formal PPA must be considered. The Court also held that the parties were not ad idem on all aspects and these issues were expressly left for negotiations as indicated in letter dated 23.04.1999. This ruling clarifies the scope of “concluded contracts” under the Act and emphasizes the importance of formal agreements in such complex transactions. This ruling also sets aside the High Court’s view that a contract could be concluded even without a formal PPA.

Conclusion

The Supreme Court partly allowed the appeal, setting aside the High Court’s judgment that a concluded contract existed between KPTCL and JSW Energy before the enactment of the Karnataka Electricity Reforms Act, 1999. The Court emphasized the need for a formal PPA and the agreement of all essential terms. The case was remitted to the High Court for reconsideration of the status of JSW Energy as an IPP or CPP and the perversity of the Commission’s orders.