Supreme Court Upholds Change in Law Claim Under SHAKTI Policy in Power Purchase Agreement Dispute: Uttar Haryana Bijli Vitran Nigam Limited vs. Adani Power (Mundra) Limited (2023) INSC 347 (20 April 2023)

Date of the Judgment: 20 April 2023
Citation: (2023) INSC 347
Judges: B.R. Gavai, J. and Vikram Nath, J.
Can a change in government policy regarding coal allocation be considered a “Change in Law” that justifies a tariff revision in a power purchase agreement? The Supreme Court of India recently addressed this question, upholding the Appellate Tribunal for Electricity’s (APTEL) decision that a shortfall in coal supply under the SHAKTI Policy constitutes a “Change in Law,” entitling Adani Power (Mundra) Limited (AP(M)L) to compensation. This judgment reinforces the principle of restoring affected parties to their original economic position when a change in law impacts their contractual obligations. The bench comprised Justices B.R. Gavai and Vikram Nath, with the judgment authored by Justice B.R. Gavai.

Case Background

Haryana Utilities, namely Uttar Haryana Bijli Vitran Nigam Limited and Dakshin Haryana Bijli Vitran Nigam Ltd., entered into Power Purchase Agreements (PPAs) with Adani Power (Mundra) Limited (AP(M)L) on 7th August 2008. These agreements were for a contracted capacity of 1424 MW from AP(M)L’s generating units in Gujarat. The PPAs were a result of a competitive bidding process under Section 63 of the Electricity Act, 2003.

Initially, AP(M)L filed a petition (Petition No. 155/MP/2012) on 5th July 2012, seeking an increase in tariff. The Central Electricity Regulatory Commission (CERC) issued orders on 2nd April 2013 and 21st February 2014, which were challenged before the APTEL. The matter eventually reached the Supreme Court in Civil Appeal Nos. 5399-5400 of 2016. The Supreme Court’s judgment in Energy Watchdog v. Central Electricity Regulatory Commission and Others, dated 11th April 2017, clarified that changes in Indian law could qualify as a “Change in Law” under the PPA, entitling affected parties to compensation.

Following this, AP(M)L filed Petition No. 97/MP/2017 before the CERC, claiming relief due to a “Change in Law.” The CERC allowed this petition on 31st May 2018. A review petition by Haryana Utilities was rejected on 3rd December 2018, and the subsequent appeal to APTEL was also dismissed on 3rd November 2020.

Meanwhile, the Ministry of Coal (MoC) introduced the SHAKTI Policy on 22nd May 2017, which altered coal allocation. Under this policy, projects approved under the old regime were entitled to 75% of their Assured Coal Quantity (ACQ) even after 31st March 2017. AP(M)L contended that it did not receive the 75% ACQ and filed Petition No. 251/MP/2018, claiming relief for this shortfall as a “Change in Law.” The CERC allowed this claim on 13th June 2019, a decision upheld by APTEL on 30th June 2021, leading to the present appeal by Haryana Utilities.

Timeline

Course of Proceedings

The Central Electricity Regulatory Commission (CERC) initially passed orders on AP(M)L’s petition for a tariff increase, which were then challenged before the Appellate Tribunal for Electricity (APTEL). The Supreme Court, in Energy Watchdog v. Central Electricity Regulatory Commission and Others, clarified the interpretation of “Change in Law” clauses in PPAs. Following this, AP(M)L filed a petition before the CERC, which was allowed. Haryana Utilities’ review petition was rejected by the CERC, and the subsequent appeal before APTEL was also dismissed.

AP(M)L then filed another petition claiming relief for a shortfall in coal supply under the SHAKTI Policy, arguing it was a “Change in Law.” The CERC allowed this claim, and APTEL upheld the decision. The present appeal before the Supreme Court is against the APTEL’s order.

Legal Framework

The case revolves around the interpretation of “Change in Law” clauses within the Power Purchase Agreements (PPAs) and the Electricity Act, 2003. The Supreme Court’s judgment in Energy Watchdog v. Central Electricity Regulatory Commission and Others, clarified that changes in Indian law could qualify as a “Change in Law” under the PPA, entitling affected parties to compensation.

The relevant clause in the PPA, as interpreted by the Supreme Court in the Energy Watchdog case, states 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 SHAKTI Policy, introduced by the Ministry of Coal, is also a key part of the legal framework. This policy modified the coal allocation regime, entitling projects approved under the old regime to 75% of their Assured Coal Quantity (ACQ) even after 31st March 2017.

The Electricity Act, 2003, particularly Section 63, provides the framework for tariff-based competitive bidding and the regulatory powers of the CERC and APTEL.

Arguments

Haryana Utilities raised three main arguments before the APTEL:

• SHAKTI Policy is not a “Change in Law”: Haryana Utilities argued that the SHAKTI Policy should not be considered a “Change in Law” that would trigger compensation under the PPA. They contended that the policy was a mere administrative guideline and not a legislative change that would affect the PPA.
• Lack of Notice of “Change in Law”: Haryana Utilities argued that AP(M)L did not provide a formal notice of the “Change in Law” as required under the PPA, and therefore, AP(M)L was not entitled to any relief.
• Award of Carrying Cost: Haryana Utilities contested the award of carrying costs to AP(M)L, arguing that it was not justified.

AP(M)L, on the other hand, argued that the SHAKTI Policy and the subsequent shortfall in coal supply constituted a “Change in Law” under the PPA. They contended that the policy directly affected their ability to procure coal as per the agreement, thereby impacting their costs. AP(M)L also argued that they were entitled to compensation to restore their economic position as if the change in law had not occurred, as per the principle laid down in the Supreme Court’s Energy Watchdog judgment.

The CERC and APTEL both held that the SHAKTI Policy was indeed a “Change in Law” and that AP(M)L was entitled to compensation. The CERC also held that the shortfall in coal supply was a direct result of the SHAKTI Policy, and that the purpose of the “Change in Law” clause was to restore the affected party to the same economic position as if the change had not occurred.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in this judgment. However, the core issue was whether the SHAKTI Policy and the resulting shortfall in coal supply constituted a “Change in Law” under the PPA, entitling AP(M)L to compensation.

The sub-issues that the court dealt with were:

• Whether the SHAKTI Policy could be considered a “Change in Law.”
• Whether AP(M)L was required to give a separate notice of “Change in Law.”
• Whether the award of carrying cost was justified.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court relied on the following authorities:

• Energy Watchdog v. Central Electricity Regulatory Commission and Others [2017] 14 SCC 80 (Supreme Court of India): This case clarified that changes in Indian law could qualify as a “Change in Law” under the PPA. The court held that the purpose of compensating the party affected by such a change in law is to restore them to their original economic position.
• Maharashtra State Electricity Distribution Company Limited (MSEDCL) v. Adani Power Maharashtra Limited (APML) and Others [2023] SCC OnLine SC 233 (Supreme Court of India): This case discussed the expertise of regulatory bodies like the CERC and APTEL and held that courts should be slow to interfere with their decisions unless they are based on extraneous considerations or are arbitrary.
• Vivek Narayan Sharma v. Union of India (Supreme Court of India): This Constitution Bench judgment held that courts should be slow in interfering with the decisions taken by experts in the field unless they have failed to consider mandatory statutory provisions or their decisions are arbitrary.

The Supreme Court also considered the relevant provisions under the Electricity Act, 2003, particularly Section 63, which deals with tariff-based competitive bidding.

Judgment

The Court viewed the authorities as follows:

• Energy Watchdog v. Central Electricity Regulatory Commission and Others [2017] 14 SCC 80: The court followed the ratio of this case, which held that a change in Indian law would qualify as a change in law under the PPA. The court stated that the purpose of compensating the party affected by such a change in law is to restore them to their original economic position.
• Maharashtra State Electricity Distribution Company Limited (MSEDCL) v. Adani Power Maharashtra Limited (APML) and Others [2023] SCC OnLine SC 233: The court relied on this case to emphasize that the CERC and APTEL are expert bodies, and their decisions should not be interfered with unless they are arbitrary or based on extraneous considerations.
• Vivek Narayan Sharma v. Union of India: The court cited this case to reinforce the principle that courts should be slow to interfere with decisions made by experts in their respective fields.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the principle of restoring the affected party to its original economic position when a “Change in Law” occurs, as per the Energy Watchdog judgment. The Court emphasized that the SHAKTI Policy directly impacted the coal supply to AP(M)L, thereby constituting a “Change in Law” under the PPA. The Court also highlighted the expertise of the CERC and APTEL in the field of electricity regulation and stated that their decisions should not be interfered with unless they are manifestly arbitrary or based on extraneous considerations.

The court’s reasoning was based on a combination of factual analysis (the direct impact of the SHAKTI Policy on coal supply) and legal interpretation (the “Change in Law” clause in the PPA and the principles established in previous judgments). The court emphasized that the purpose of the “Change in Law” clause is to ensure that the affected party is not economically disadvantaged by a change in law.

The Court rejected the argument that the SHAKTI Policy was merely an administrative guideline, stating that its impact on coal supply was significant enough to qualify as a “Change in Law.” The Court also rejected the argument that AP(M)L was required to give a separate notice of the “Change in Law,” stating that the change was self-evident.

The Court’s decision was based on the principle that the purpose of compensating the party affected by such a 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 Court also emphasized the need to respect the decisions of expert bodies like the CERC and APTEL.

The court quoted from the judgment of Energy Watchdog v. Central Electricity Regulatory Commission and Others [2017] 14 SCC 80: “…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 court also quoted from Maharashtra State Electricity Distribution Company Limited (MSEDCL) v. Adani Power Maharashtra Limited (APML) and Others [2023] SCC OnLine SC 233: “…the Courts should be slow in interfering with the decisions taken by the experts in the field and unless it is found that the expert bodies have failed to take into consideration the mandatory statutory provisions or the decisions taken are based on extraneous considerations or they are ex facie arbitrary and illegal, it will not be appropriate for this Court to substitute its views with that of the expert bodies.”

The court further observed that “In our opinion, the concurrent view taken by the CERC & APTEL cannot be said to be a view taken in ignorance of the mandatory statutory provisions nor can it be said that it is based on extraneous consideration. The view also cannot be said to be ex-facie arbitrary or illegal. As such, no interference would be warranted in the present appeal.”

Key Takeaways

• A change in government policy, such as the SHAKTI Policy, can be considered a “Change in Law” if it directly impacts the terms of a Power Purchase Agreement (PPA).
• The purpose of “Change in Law” clauses in PPAs is to restore the affected party to the same economic position as if the change had not occurred.
• Expert regulatory bodies like the CERC and APTEL are to be given deference, and their decisions should not be interfered with unless they are manifestly arbitrary or based on extraneous considerations.
• A separate notice of “Change in Law” may not be necessary if the change is self-evident.

Directions

No specific directions were given by the Supreme Court in this judgment. The Court dismissed the appeal, upholding the decisions of the CERC and APTEL.

Development of Law

The ratio decidendi of this case is that a change in government policy, such as the SHAKTI Policy, which directly impacts the terms of a Power Purchase Agreement (PPA), can be considered a “Change in Law” under the agreement. This decision reinforces the principle established in Energy Watchdog v. Central Electricity Regulatory Commission and Others, that the purpose of “Change in Law” clauses is to restore the affected party to the same economic position as if the change had not occurred. There is no change in the previous position of law, but a reaffirmation of the same.

Conclusion

The Supreme Court dismissed the appeal filed by Haryana Utilities, upholding the decisions of the CERC and APTEL. The Court affirmed that the SHAKTI Policy constituted a “Change in Law” under the PPA, entitling AP(M)L to compensation for the shortfall in coal supply. This judgment reinforces the principle of restoring affected parties to their original economic position when a change in law impacts their contractual obligations and also emphasizes the deference to be given to expert bodies like CERC and APTEL in their respective fields.