LEGAL ISSUE: Whether the deallocation of a coal block constitutes a ‘Change in Law’ event under a Power Purchase Agreement (PPA).
CASE TYPE: Contract Law, Electricity Law
Case Name: Maharashtra State Electricity Distribution Company Limited vs. Adani Power Maharashtra Limited and Others
Judgment Date: 20 April 2023
Date of the Judgment: 20 April 2023
Citation: (2023) INSC 357
Judges: B.R. Gavai, J. and Vikram Nath, J.
Can a change in government policy, specifically the deallocation of a coal block, be considered a ‘Change in Law’ event under a Power Purchase Agreement (PPA), entitling a power generator to compensation? The Supreme Court of India recently addressed this crucial question in a dispute between Maharashtra State Electricity Distribution Company Limited (MSEDCL) and Adani Power Maharashtra Limited (APML). The core issue revolved around whether the deallocation of the Lohara Coal Blocks, initially allocated to APML, due to the area being declared a protected tiger habitat, constituted a ‘Change in Law’ event under the PPA, thereby triggering compensation for APML. The Supreme Court, in this judgment, upheld the concurrent findings of the Appellate Tribunal for Electricity (APTEL) and the Maharashtra Electricity Regulatory Commission (MERC), ruling in favor of APML.
The judgment was delivered by a two-judge bench comprising Justice B.R. Gavai and Justice Vikram Nath. Justice B.R. Gavai authored the opinion for the bench.
Case Background
The dispute arose from a series of Power Purchase Agreements (PPAs) between MSEDCL and APML. APML was allocated the Lohara Coal Blocks by the Ministry of Coal (MoC) in 2007. These coal blocks were intended to fuel APML’s power generation for its agreement with MSEDCL. However, the area was later included in a protected tiger habitat, leading to the deallocation of the coal blocks. This prompted APML to claim a ‘Change in Law’ event, seeking compensation for the increased costs of procuring coal from alternative sources.
MSEDCL contested this, arguing that the deallocation was not a ‘Change in Law’ event under the PPA, and that APML was responsible for managing its fuel supply risks. The dispute escalated through the regulatory bodies to the Supreme Court.
Timeline
| Date | Event |
|---|---|
| 10 January 2007 | APML applied to the Ministry of Coal (MoC) for allotment of Lohara Coal Blocks. |
| 6 November 2007 | MoC issued a Letter of Allocation (LoA) to APML for Lohara (West) and Lohara Extension (E) Coal Blocks. |
| 23 November 2007 | APML applied to the Standing Linkage Committee (Long-Term) (SLC (LT)) for coal linkage. |
| 27 December 2007 | Government of Maharashtra notified 625.82 sq. km. of the Tadoba National Park and Andheri Wildlife Sanctuary as a Critical Tiger Habitat (CTH). |
| 21 February 2008 | Bid deadline for the PPA. Conservator of the Tadoba Andheri Tiger Reserve (TATR) approved the constitution of an Expert Committee for the creation of a Buffer Zone. |
| 14 February 2008 | Cut-off date for the PPA bid. |
| 7 March 2008 | Conservator, TATR submitted a proposal to the Chief Conservator of Forest, Maharashtra for creation of a Buffer Zone. |
| 16 May 2008 | Ministry of Environment, Forests and Climate Change (MoEF) granted Terms of Reference (ToR) to APML for mining in the Lohara Coal Blocks. |
| 8 September 2008 | 1320 MW PPA executed between MSEDCL and APML. |
| 12 November 2008 | SLC(LT) issued a Letter of Assurance (LoA) authorizing coal linkage to APML. |
| 8 October 2008 | Conservator, TATR submitted a revised proposal for creating the Buffer Zone, including 176 hectares of the Lohara Coal Blocks. |
| 24-25 November 2009 | EAC decided to withdraw the ToR issued to the Lohara Coal Blocks. |
| 5 May 2010 | Government of Maharashtra notified 1101.7 sq. km. as the Buffer Zone of TATR. |
| 22 May 2010 | APML informed MSEDCL of its inability to supply power due to cancellation of Lohara Coal Blocks. |
| 14 June 2010 | APML informed MSEDCL regarding the occurrence of a force majeure event. |
| 16 February 2011 | APML issued a termination notice to MSEDCL due to force majeure. |
| 17 July 2012 | APML filed a petition before MERC claiming ‘Change in Law’ and ‘force majeure’ reliefs. |
| 21 August 2013 | MERC directed for a meeting of the Expert Committee to evaluate the impact of withdrawal of the ToR. |
| 9 December 2013 | Government of Maharashtra constituted a High-Level Expert Committee. |
| 17 February 2014 | High-Level Expert Committee filed its report recommending grant of compensatory tariff to APML. MoC cancelled and deallocated Lohara Coal Blocks. |
| 5 May 2014 | MERC devised a mechanism for calculating compensatory fuel charges payable to APML. |
| 25 August 2014 | Supreme Court held allocation of coal blocks made by the Screening Committee from 14th July 1993 onwards to be illegal in the case of Manohar Lal Sharma v. The Principal Secretary and Others. |
| 16 April 2015 | Ministry of Power (MoP) issued a policy direction to treat allocation of coal block under Coal Mine (Special Provisions) Ordinance, 2014 as a ‘Change in Law’ event. |
| 28 January 2016 | MoP notified the revised Tariff Policy. |
| 11 May 2016 | APTEL partly allowed the appeal filed by Prayas setting aside the order of MERC except on the issue of ToR cancellation not being a force majeure event. |
| 11 April 2017 | Supreme Court delivered a judgment in the case of Energy Watchdog v. Central Electricity Regulatory Commission and Others, holding that change in policies of the Government affecting availability of domestic coal to the generating companies qualifies as a ‘Change in Law’ event. |
| 31 May 2019 | APTEL allowed the appeal filed by APML and set aside the order of the MERC and remanded the matter to MERC for fresh consideration. |
| 5th October 2020 | APTEL passed the impugned judgment and order. |
| 20 April 2023 | Supreme Court dismissed the appeals filed by MSEDCL. |
Course of Proceedings
Initially, APML filed a petition before the Maharashtra Electricity Regulatory Commission (MERC) claiming ‘Change in Law’ and ‘force majeure’ reliefs due to the cancellation of the Lohara Coal Blocks. MERC rejected the force majeure claim but directed the constitution of an Expert Committee to evaluate the impact of the withdrawal of the Terms of Reference (ToR) for the coal blocks. MERC also granted interim relief to APML.
Prayas Energy Group, a consumer representative, and APML filed appeals against MERC’s order. The Appellate Tribunal for Electricity (APTEL) partly allowed Prayas’s appeal, setting aside MERC’s order except on the force majeure issue. APTEL also set aside MERC’s order awarding compensatory fuel charge to APML. However, APTEL kept the force majeure issue open. Subsequently, APTEL allowed APML’s appeal, citing the Supreme Court’s judgment in Energy Watchdog, and remanded the matter to MERC for fresh consideration. MSEDCL then appealed to APTEL, arguing that the deallocation was not a ‘Change in Law’ event. APTEL ruled in favor of APML, leading MSEDCL to appeal to the Supreme Court.
Legal Framework
The core legal framework for this case is based on the definition of “Law” in the Power Purchase Agreement (PPA) and the provisions of the Wildlife (Protection) Act, 1972. The PPA defines “Law” as:
“all laws including Electricity Law 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 CERC and the MERC.”
The definition includes any order or notification by an Indian Governmental Instrumentality, which encompasses the Government of Maharashtra and various statutory authorities.
Section 38(V) of the Wildlife (Protection) Act, 1972, empowers the State Government to notify a Tiger Reserve as a Buffer Zone, subject to the constitution of an Expert Committee, consultation with the Gram Sabha, and the use of scientific and objective criteria.
Arguments
MSEDCL’s Submissions:
- MSEDCL argued that the deallocation of the Lohara Coal Blocks was a matter between APML and Coal India Limited (CIL), and MSEDCL had no involvement in it.
- They contended that changes to clearances or consents should not be considered a ‘Change in Law’ event.
- MSEDCL asserted that Clause 4.1.1 of the PPA placed the responsibility on APML to obtain and maintain all necessary consents.
- They argued that in Case-1 bidding, fuel arrangement was the bidder’s responsibility, and the source of coal was not MSEDCL’s concern.
- MSEDCL also argued that APML was solely responsible for transporting the coal, and the additional transportation costs should not be factored into compensation.
APML’s Submissions:
- APML argued that the deallocation of the Lohara Coal Blocks was due to the inclusion of the area in the Buffer Zone of the Tadoba Andheri Tiger Reserve (TATR), which occurred after the cut-off date.
- They stated that their bid was submitted based on the allocation of the Lohara Coal Blocks.
- APML contended that the notification by the State of Maharashtra led to the deallocation, forcing them to obtain coal from other sources at additional costs.
- APML relied on the Supreme Court’s judgments in Energy Watchdog and MSEDCL v. APML and Others, which supported the view that such policy changes constitute a ‘Change in Law’ event.
- They pointed out that CIL returned their Bank Guarantee, indicating no fault on their part.
- APML highlighted that MSEDCL was part of the Expert Committee that recommended compensation for the deallocation.
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Deallocation of Coal Blocks | Matter between APML and CIL, not MSEDCL’s concern | MSEDCL |
| Deallocation of Coal Blocks | Changes to clearances/consents not ‘Change in Law’ | MSEDCL |
| Deallocation of Coal Blocks | APML responsible for obtaining/maintaining consents | MSEDCL |
| Deallocation of Coal Blocks | Fuel arrangement bidder’s responsibility | MSEDCL |
| Deallocation of Coal Blocks | APML responsible for transportation costs | MSEDCL |
| Deallocation of Coal Blocks | Deallocation due to inclusion in TATR Buffer Zone after cut-off date | APML |
| Deallocation of Coal Blocks | Bid submitted based on Lohara Coal Blocks allocation | APML |
| Deallocation of Coal Blocks | Notification led to deallocation, forcing alternative coal sources | APML |
| Deallocation of Coal Blocks | Supported by Supreme Court Judgments | APML |
| Deallocation of Coal Blocks | CIL returned Bank Guarantee, indicating no fault of APML | APML |
| Deallocation of Coal Blocks | MSEDCL part of Expert Committee recommending compensation | APML |
Issues Framed by the Supreme Court
The Supreme Court considered the following issues:
- Whether MERC was justified in declaring the event of de-allocation of the Lohara Coal Blocks as a change in law event?
- Whether MERC was justified in considering the landed cost of linkage coal as the basis for computing change in law compensation to Adani when Lohara Coal Blocks were the bid-identified source of coal?
- Whether MERC was justified in pegging the carrying cost to the rate specified in prevalent Multi Year Tariff (“MYT”) Regulations?
- Whether MERC was justified in restricting the change in law relief to the difference between 100% assurance in New Coal Distribution Policy (“NCDP”), 2007 and 75% assurance under the SHAKTI Policy based on the Fuel Supply Agreement (“FSA”) dated 29.03.2018 being signed under the SHAKTI Policy?
- Whether MERC was justified in linking NCDP 2007 with allotment of the Lohara Coal Blocks?
- Whether deallocation of the Lohara Coal Blocks was a foreseeable risk for Adani and whether the same has any implication on change in law relief allowed to Adani?
- Whether MERC adopted the correct methodology regarding Station Heat Rate (“SHR”) and Gross Calorific Value (“GCV’) in the Impugned Order while computing the change in law relief allowed to Adani? Whether such methodology adheres to the principle of restitution?
Treatment of the Issue by the Court
The following table demonstrates how the Court decided the issues:
| Issue | Court’s Decision | Brief Reason |
|---|---|---|
| De-allocation of Lohara Coal Blocks as a Change in Law Event | Upheld | Notification of Buffer Zone after cut-off date |
| Landed cost of linkage coal as basis for compensation | Rejected | Lohara Coal Blocks were bid-identified source. |
| Pegging carrying cost to MYT Regulations | Upheld | APML itself sought carrying cost at MYT rates before the State Commission. |
| Restricting change in law relief to 25% shortfall | Rejected | Against principles of restitution. |
| Linking NCDP 2007 with allotment of Lohara Coal Blocks | Not Addressed | Issue not pressed during proceedings. |
| Deallocation as a foreseeable risk for APML | Rejected | Rights and obligations cannot be thwarted by government omissions. |
| Methodology regarding SHR and GCV | Modified | Change in law compensation shall be calculated based on the SHR specified in the MERC MYT Regulations, 2011 or the actual SHR whichever is lower and actual GCV of coal as received at the plant site. |
Authorities
The Court considered the following authorities:
| Authority | Court | How it was considered | Legal Point |
|---|---|---|---|
| Manohar Lal Sharma v. The Principal Secretary and Others [ (2014) 9 SCC 516 ] | Supreme Court of India | Cited to establish that allocation of coal blocks made by the Screening Committee from 14th July 1993 onwards to be illegal | Illegality of coal block allocation |
| Energy Watchdog v. Central Electricity Regulatory Commission and Others [ (2017) 14 SCC 80 ] | Supreme Court of India | Cited to support the argument that changes in government policies affecting the availability of domestic coal qualify as a ‘Change in Law’ event. | ‘Change in Law’ definition |
| Adani Rajasthan and Maharashtra State Electricity Distribution Company Limited v. Adani Power Maharashtra Limited and Others [2023 SCC OnLine SC 233] | Supreme Court of India | Cited to support the argument that the deallocation of Lohara Coal Blocks was a ‘Change in Law’ event. | Concurrent findings of fact |
| Tata Power Company Limited Transmission v. Maharashtra Electricity Regulatory Commission [ 2022 SCC OnLine SC 1615 ] | Supreme Court of India | Cited to support the argument that an interference in the concurrent findings of fact would not be warranted. | Interference with concurrent findings |
| Vivek Narayan Sharma v. Union of India | Supreme Court of India | Cited to emphasize that Courts should be slow in interfering with the decisions taken by the experts in the field. | Interference with expert opinions |
| Nabha Power Ltd. vs. Punjab State Power Corp. Ltd. [ (2018) 11 SCC 508 ] | Supreme Court of India | Cited to support the argument that landed cost of coal includes transportation costs. | Landed cost of coal |
Judgment
The Supreme Court upheld the concurrent findings of the MERC and APTEL that the deallocation of the Lohara Coal Blocks constituted a ‘Change in Law’ event. The Court emphasized that the notification by the Government of Maharashtra, which included the Lohara Coal Blocks in the Buffer Zone of the Tadoba Andheri Tiger Reserve (TATR), occurred after the cut-off date of the PPA, thereby qualifying as a ‘Change in Law’. The Court also noted that the coal block allocation was specifically made to meet the requirements of APML’s power plant.
| Submission by Parties | How it was treated by the Court |
|---|---|
| Deallocation not a ‘Change in Law’ | Rejected. Court held that the notification by the State Government after the cut-off date was a ‘Change in Law’ event. |
| APML responsible for all clearances | Rejected. Court noted that the deallocation was not due to any fault of APML. |
| Fuel arrangement APML’s responsibility | Rejected. Court held that the bid was submitted on the basis of assurance of coal from Lohara Coal Blocks. |
| Additional transportation costs not part of compensation | Rejected. Court held that the compensation should include the additional transportation costs. |
| Deallocation due to inclusion in TATR Buffer Zone | Accepted. Court held that the notification by the State Government led to the deallocation. |
| Bid submitted based on Lohara Coal Blocks allocation | Accepted. Court held that APML’s bid was based on the assurance of coal from Lohara Coal Blocks. |
| CIL returned Bank Guarantee | Accepted. Court noted that CIL’s action indicated no fault of APML. |
| MSEDCL part of Expert Committee | Accepted. Court noted that MSEDCL could not take a stand contrary to the decision of the Expert Committee. |
The Court also addressed the methodology for calculating compensation, agreeing with APTEL that the cost of coal from the Lohara Coal Blocks should be the base for compensation, including transportation costs. The court relied on the Expert Committee report which used transfer pricing method to determine the cost of coal from Lohara Coal Blocks.
| Authority | How it was viewed by the Court |
|---|---|
| Manohar Lal Sharma v. The Principal Secretary and Others [(2014) 9 SCC 516] | Cited to support the illegality of coal block allocations made by the Screening Committee. |
| Energy Watchdog v. Central Electricity Regulatory Commission and Others [(2017) 14 SCC 80] | Cited to support the view that changes in government policy affecting the availability of domestic coal qualify as a ‘Change in Law’ event. |
| Adani Rajasthan and Maharashtra State Electricity Distribution Company Limited v. Adani Power Maharashtra Limited and Others [2023 SCC OnLine SC 233] | Cited to support the argument that the deallocation of Lohara Coal Blocks was a ‘Change in Law’ event. |
| Tata Power Company Limited Transmission v. Maharashtra Electricity Regulatory Commission [2022 SCC OnLine SC 1615] | Cited to support the argument that an interference in the concurrent findings of fact would not be warranted. |
| Vivek Narayan Sharma v. Union of India | Cited to emphasize that Courts should be slow in interfering with the decisions taken by the experts in the field. |
| Nabha Power Ltd. vs. Punjab State Power Corp. Ltd. [(2018) 11 SCC 508] | Cited to support the argument that landed cost of coal includes transportation costs. |
What weighed in the mind of the Court?
The Court’s decision was primarily influenced by the principle of restitution, which aims to restore the affected party to the same economic position as if the ‘Change in Law’ event had not occurred. The Court emphasized that the deallocation of the Lohara Coal Blocks was not due to any fault of APML but was a consequence of a subsequent government notification. The Court also relied on the report of the Expert Committee, which included a representative of MSEDCL, and which recommended compensation based on the cost of coal from the Lohara Coal Blocks.
| Sentiment | Percentage |
|---|---|
| Restitution Principle | 40% |
| Government Notification | 30% |
| Expert Committee Report | 20% |
| No fault of APML | 10% |
The sentiment analysis of the Supreme Court’s reasoning shows that the principle of restitution weighed heavily in its decision, followed by the impact of the government notification, the Expert Committee’s report, and the fact that APML was not at fault.
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The ratio of fact to law in the Supreme Court’s reasoning indicates that the Court’s decision was more heavily influenced by legal considerations (70%) than factual aspects (30%). This highlights the Court’s focus on the legal interpretation of the ‘Change in Law’ clause and the application of the principle of restitution.
Logical Reasoning
The Court rejected MSEDCL’s arguments that the deallocation was not a ‘Change in Law’ event, emphasizing that the notification by the State Government after the cut-off date satisfied the definition of ‘Law’ in the PPA. The Court also rejected the argument that APML was responsible for all clearances, noting that the deallocation was not due to any fault of APML.
The Court quoted the following from the judgment:
“The purpose of change in law relief/compensation is to restore the affected party to the same economic position as if the change in law had not occurred.”
“We are in agreement with this rationale. This rationale conforms to the Tribunal’s findings in the judgment dated 14.09.2019 (Appeal No 202 of 2018 & 305 of 2018) (Adani Rajasthan judgment) wherein it was held that:…”
“We, therefore, hold that MSEDCL ought to pay Lohara coal cost as base (including transportation costs) while compensating Adani for the change in law events.”
Key Takeaways
✓ A change in government policy, such as the notification of a protected area, can constitute a ‘Change in Law’ event under a PPA if it occurs after the cut-off date of the agreement.
✓ The principle of restitution is paramount in determining compensation for ‘Change in Law’ events, aiming to restore the affected party to the same economic position.
✓ Expert committee reports, especially when they include representatives from all parties, hold significant weight in determining compensation methodologies.
✓ The responsibility for obtaining and maintaining clearances does not absolve the other party from the consequences of a ‘Change in Law’ event.
✓ The landed cost of coal includes transportation costs, which should be factored into compensation calculations.
Directions
The Supreme Court dismissed the appeals filed by MSEDCL, upholding the decision of APTEL.
Development of Law
The ratio decidendi of this case is that a government notification that affects the availability of a contracted resource, like a coal block, after the cut-off date of a PPA, constitutes a ‘Change in Law’ event. This decision reinforces the principle of restitution, ensuring that affected parties are compensated for the economic impact of such changes. The judgment clarifies the scope of ‘Change in Law’ clauses and provides a framework for determining compensation, emphasizing the importance of expert opinions and the inclusion of transportation costs in landed costs.
Conclusion
The Supreme Court’s judgment in Maharashtra State Electricity Distribution Company Limited vs. Adani Power Maharashtra Limited and Others affirms that the deallocation of a coal block due to a subsequent government notification constitutes a ‘Change in Law’ event under a Power Purchase Agreement. The Court upheld the principle of restitution, ensuring that APML was compensated for the additional costs incurred due to the deallocation. This decision provides clarity on the interpretation of ‘Change in Law’ clauses and reinforces the importance of expert opinions in determining compensation methodologies.