Supreme Court Upholds Change in Law Relief under SHAKTI Policy for Power Generators: Maharashtra State Electricity Distribution Company Limited vs. Adani Power Maharashtra Limited (20 April 2023)

Introduction

Date of the Judgment: 20 April 2023
Citation: 2023 INSC 400
Judges: B.R. Gavai, J., Vikram Nath, J.

Does a change in government policy regarding coal distribution entitle power generating companies to compensation under their existing power purchase agreements? The Supreme Court of India recently addressed this question, affirming that the introduction of the SHAKTI Policy does indeed constitute a ‘Change in Law’ event, entitling power generators to relief. This judgment clarifies the scope of ‘Change in Law’ clauses in PPAs and their impact on the power sector.

The Supreme Court bench, comprising Justices B.R. Gavai and Vikram Nath, delivered the judgment, with Justice B.R. Gavai authoring the opinion. The Court upheld the decision of the Appellate Tribunal for Electricity (APTEL), which had ruled in favor of Adani Power Maharashtra Limited (APML), affirming that the SHAKTI Policy triggered the ‘Change in Law’ clause in their Power Purchase Agreements (PPAs).

Case Background

Maharashtra State Electricity Distribution Company Limited (MSEDCL) and Adani Power Maharashtra Limited (APML) entered into four long-term Power Purchase Agreements (PPAs) between 2008 and 2013. These PPAs were for the supply of power generated by APML to MSEDCL.

The Ministry of Coal introduced the New Coal Distribution Policy, 2013 (NCDP 2013), which revised the coal supply arrangements prescribed under the New Coal Distribution Policy, 2007 (NCDP 2007). APML claimed that this change in policy entitled them to compensation under the ‘Change in Law’ clause of the PPAs.

Initially, APML filed a petition before the Maharashtra Electricity Regulatory Commission (MERC) seeking compensation for the increased costs due to the NCDP 2013. The MERC granted relief to APML. Later, a review petition was filed by APML seeking extension of the relief due to the introduction of the Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India (SHAKTI Policy) which was released by the Ministry of Power on 22nd May, 2017. The MERC dismissed the review petition but allowed APML to file a fresh petition.

APML then filed a fresh petition before the MERC, seeking relief under the ‘Change in Law’ clause of the PPAs for the non-availability or short supply of domestic coal under the SHAKTI Policy after March 2017. The MERC allowed this petition, granting relief, but directed that the relief be computed using the same methodology and parameters as in its earlier order. Both APML and MSEDCL filed cross appeals before the APTEL.

Timeline

Course of Proceedings

The Maharashtra Electricity Regulatory Commission (MERC) initially allowed APML’s claim for compensation due to the NCDP 2013. However, when APML sought an extension of this relief due to the SHAKTI Policy, the MERC dismissed the review petition but allowed APML to file a fresh petition. Subsequently, the MERC allowed APML’s fresh petition, granting relief for the impact of the SHAKTI Policy, but directed that the relief be calculated using the same methodology as before.

Both MSEDCL and APML filed appeals before the Appellate Tribunal for Electricity (APTEL). The APTEL framed five issues for adjudication and ruled in favor of APML, holding that the SHAKTI Policy constituted a ‘Change in Law’ event, and that APML was entitled to compensation. The APTEL also addressed issues related to the calculation of compensation and the requirement of advance intimation by APML.

MSEDCL then appealed to the Supreme Court against the APTEL’s decision. The Supreme Court, after considering the submissions of both parties, upheld the decision of the APTEL.

Legal Framework

The core legal framework revolves around the ‘Change in Law’ clauses within the Power Purchase Agreements (PPAs) between MSEDCL and APML. These clauses typically provide for compensation to the affected party if a new law or a change in existing law impacts the cost of the project.

The Supreme Court referred to Clause 13.1.1 of the PPA, which states that a change in any consent, approval, or license for the project, which results in a change in the cost of the business of selling electricity, will be considered a ‘Change in Law’ event.

The Court also referred to the judgment in Energy Watchdog v. Central Electricity Regulatory Commission and Others, [(2017) 14 SCC 80] which held that modifications to the New Coal Distribution Policy (NCDP) would constitute a ‘Change in Law’ event, entitling generating companies to compensation. The court also referred to Jaipur Vidyut Vitaran Nigam Limited and Others v. ADANI Power Rajasthan Limited and Another [(2020 SCC OnLine SC 697)] which also considered the effect of the SHAKTI Policy.

The Court highlighted 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. This principle is crucial in determining the extent of compensation.

The Court also considered the provisions of the Electricity Act, 2003, with regard to the appointment, qualifications, and members of the Central Electricity Authority (CEA), Central Electricity Regulatory Commission (CERC), and the Appellate Tribunal for Electricity (APTEL), noting that these bodies are composed of experts in the field.

Arguments

Arguments by MSEDCL:

• MSEDCL argued that the SHAKTI Policy (Part-B) restores the position covered by NCDP 2007, which assured 100% coal supply. Therefore, APML should not be compensated for any shortfall in coal supply.
• MSEDCL contended that APML had not complied with the condition of serving a mandatory notice for Change in Law under Article 13.3.2 of the 1320 MW PPA.
• MSEDCL argued that the SHAKTI Policy is a continuation of the NCDP 2007, and thus, there is no change in law.

Arguments by APML:

• APML argued that the SHAKTI Policy undisputedly amounts to a ‘Change in Law’ event.
• APML contended that there is a concurrent finding of fact by both APTEL and MERC that the SHAKTI Policy is a ‘Change in Law’ event.
• APML submitted that there is also a concurrent finding by APTEL and MERC on the issue of mandatory notice, and unless these findings are perverse, the Supreme Court should not interfere.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the introduction of the SHAKTI Policy does not amount to a Change in Law under the PPAs entered into between APML and MSEDCL and whether APML has not provided notice of such Change in Law to the Respondent MSEDCL.
2. Whether the MERC was justified in directing APML to provide advance intimation of impact on energy charge by using alternate coal for the purpose of Merit Order Despatch.
3. Whether the Respondent MSEDCL is justified in contesting APML’s entitlement to Carrying Cost.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court dismissed the appeals filed by MSEDCL, upholding the decision of the APTEL. The Court held that the introduction of the SHAKTI Policy constitutes a ‘Change in Law’ event, entitling APML to compensation.

The Court also upheld the APTEL’s decision on Carrying Cost, stating that it is a settled position of law.

The Court cited the case of Energy Watchdog v. Central Electricity Regulatory Commission and Others [(2017) 14 SCC 80]* to reiterate that modifications to the NCDP would constitute a ‘Change in Law’ event. The Court also cited Jaipur Vidyut Vitaran Nigam Limited and Others v. ADANI Power Rajasthan Limited and Another [(2020 SCC OnLine SC 697)]*, which also considered the effect of the SHAKTI Policy.

The Supreme Court also relied on the restitution principle, stating that the affected party should be restored to the same economic position as if the ‘Change in Law’ event had not occurred.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of restitution, which requires that a party affected by a ‘Change in Law’ event should be restored to the same economic position as if the event had not occurred. The Court emphasized that the SHAKTI Policy, by reducing the assured coal quantity, directly impacted the cost of power generation for APML, thus triggering the ‘Change in Law’ clause. Additionally, the Court gave weight to the concurrent findings of fact by the APTEL and MERC, which are expert bodies in the field of electricity regulation.

The Court’s reasoning was structured around the following:

Key Takeaways

• The SHAKTI Policy constitutes a ‘Change in Law’ event under Power Purchase Agreements (PPAs) due to the reduction in assured coal supply.
• Power generating companies are entitled to compensation for increased costs resulting from the SHAKTI Policy, based on the principle of restitution.
• The decisions of expert bodies like APTEL and MERC are given significant weight by the Supreme Court, unless they are perverse or based on extraneous considerations.
• The Supreme Court reiterated that the principle of restitution aims to restore the affected party to the same economic position as if the ‘Change in Law’ event had not occurred.

Directions

The Supreme Court did not issue any specific directions in this judgment, as it primarily upheld the decisions of the lower authorities. The Court’s ruling serves as a clarification of existing legal principles and their application to the specific facts of the case.

Development of Law

The ratio decidendi of this case is that the introduction of the SHAKTI Policy constitutes a ‘Change in Law’ event under Power Purchase Agreements (PPAs) due to the reduction in assured coal supply, entitling power generating companies to compensation. This judgment reinforces the principle of restitution, ensuring that affected parties are restored to the same economic position as if the ‘Change in Law’ event had not occurred. The decision also affirms the legal position established in previous judgments such as Energy Watchdog and Adani Rajasthan, clarifying that changes in government policies affecting coal supply trigger the ‘Change in Law’ clause in PPAs.

Conclusion

In conclusion, the Supreme Court’s judgment in Maharashtra State Electricity Distribution Company Limited vs. Adani Power Maharashtra Limited and Another affirms that the SHAKTI Policy is a ‘Change in Law’ event, entitling power generators to compensation under their PPAs. This decision reinforces the principle of restitution and provides clarity on the interpretation of ‘Change in Law’ clauses in the context of evolving government policies. The ruling has significant implications for the power sector, ensuring that generating companies are protected from the financial impact of policy changes affecting their operations.