Supreme Court Upholds Compensation for Coal Shortfall: Maharashtra State Electricity Distribution Company Limited vs. Rattan India Power Limited (2023)

LEGAL ISSUE: Whether a power generator is entitled to compensation for the shortfall in the supply of linkage coal and its associated costs.

CASE TYPE: Electricity Regulatory Law

Case Name: Maharashtra State Electricity Distribution Company Limited vs. Rattan India Power Limited

Judgment Date: March 27, 2023

Date of the Judgment: March 27, 2023

Citation: Not Available

Judges: B.R. Gavai, J., Vikram Nath, J.

Can a power distribution company deny compensation to a power generator for the increased costs of procuring alternative coal when the contracted supply of linkage coal falls short? The Supreme Court of India recently addressed this question, clarifying that generators are indeed entitled to compensation for such shortfalls. This judgment reinforces the principle that power generators should be placed in the same economic position they would have been in had the change of law not occurred. The judgment was delivered by a bench comprising Justice B.R. Gavai and Justice Vikram Nath.

Case Background

The case involves a dispute between Maharashtra State Electricity Distribution Company Limited (DISCOM), the appellant, and Rattan India Power Limited, the respondent, a power generator. The dispute arose from the generator’s claim for compensation due to a shortfall in the supply of linkage coal and the associated costs of procuring alternative coal. The generator argued that it should be compensated for the additional costs incurred to maintain power generation. The DISCOM, on the other hand, contested this claim, raising concerns about the methodology of compensation and the potential for undue benefit to the generator. The generator sought compensation for the additional cost incurred due to the shortfall in the supply of linkage coal.

Timeline

Course of Proceedings

The Appellate Tribunal for Electricity (APTEL) set aside the order of the Maharashtra Electricity Regulatory Commission (MERC) dated 03.04.2018. The APTEL directed that the issues of SGRM GCV and compensation for change in law beyond 31.03.2017 be considered afresh in light of the judgment in Adani Power Maharashtra Limited (APML) v. Maharashtra State Electricity Distribution Company Limited & Ors. The APTEL also directed that the full impact of additional costs incurred in procuring coal from alternative sources due to the shortfall in linkage coal supply be passed through to the generator. The DISCOM then appealed to the Supreme Court.

Legal Framework

The judgment references the principle that a power generator should be placed in the same economic position it would have been in but for a change in law. This principle was established in Energy Watchdog v. Central Electricity Regulatory Commission and Others [(2017) 14 SCC 80]. The court also refers to its previous judgment in Maharashtra State Electricity Distribution Company Ltd. v. Adani Power Maharashtra Limited and Others [2023 SCC Online SC 233], which dealt with similar issues of compensation for change in law.

Arguments

Arguments of the Distribution Company (DISCOM):

• The DISCOM argued that the generator receives a specific quantity of coal each month out of the Annual Contracted Quantity (ACQ).
• If the generator does not utilize the allocated coal in a particular month, it should not be carried forward to the next month.
• Allowing the unutilized coal to be carried forward would give undue benefit to the generator.

Arguments of the Generator:

• The generator argued that the apprehension of the DISCOM is misconceived.
• The compensation for monthly coal quantum variation should not be calculated on an annual basis.
• Demand for coal varies from month to month due to factors such as Plant Load Factor (PLF), demand, and actual coal supply.
• If compensation is calculated cumulatively on an annual basis, any surplus coal in one month might get set off against a shortfall in another month, which would not reflect the actual costs incurred.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in this judgment. However, the core issue before the court was whether the Appellate Tribunal for Electricity (APTEL) was correct in directing the Maharashtra Electricity Regulatory Commission (MERC) to reconsider the compensation for change in law and to allow the pass-through of additional costs incurred by the generator due to the shortfall in linkage coal supply.

Treatment of the Issue by the Court

Authorities

Cases:

Judgment

How each authority was viewed by the Court?

✓ The Supreme Court followed the judgment in Maharashtra State Electricity Distribution Company Ltd. v. Adani Power Maharashtra Limited and Others [2023 SCC Online SC 233], stating that the direction of the Appellate Tribunal for Electricity (APTEL) was in tune with the view taken in that case.

✓ The Supreme Court also followed the law laid down in Energy Watchdog v. Central Electricity Regulatory Commission and Others [(2017) 14 SCC 80], stating that the direction of the APTEL was covered by the principles established in that case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure that power generators are adequately compensated for the additional costs they incur due to factors beyond their control, such as a shortfall in the supply of linkage coal. The court emphasized the principle of placing the generator in the same economic position they would have been in had the change of law not occurred. This is evident from the reliance on the Energy Watchdog case. The court also considered the practical aspects of coal supply and demand, acknowledging that demand can vary monthly, and that compensation should reflect these variations. The court was also influenced by the fact that the generator was not claiming undue benefit by carrying forward surplus coal.

The court considered alternative interpretations, such as the DISCOM’s argument that unutilized coal should not be carried forward. However, the court rejected this interpretation, noting that the generator’s method of carrying forward surplus coal was appropriate and did not result in undue benefit. The court also considered the generator’s argument that compensation should be calculated monthly, which the court accepted, finding that it accurately reflected the costs incurred.

The Supreme Court disposed of the appeal, affirming the decision of the Appellate Tribunal for Electricity (APTEL). The court held that the generator should be fully compensated for the additional costs incurred in procuring coal from alternative sources and that the compensation should be calculated on a monthly basis.

The reasons for the decision are:

• The Appellate Tribunal for Electricity (APTEL) correctly directed the Maharashtra Electricity Regulatory Commission (MERC) to reconsider the compensation for change in law.
• The generator is entitled to pass-through of additional costs incurred due to the shortfall in linkage coal supply.
• The generator’s methodology of carrying forward surplus coal from one month to another was appropriate.

The court quoted the following from the judgment:

• “Insofar as direction No.1 is concerned, the same is in tune with the view taken by us in Maharashtra State Electricity Distribution Company Ltd. v. Adani Power Maharashtra Limited and Others.”
• “Insofar as, direction No.2 is concerned, the same is also covered by the judgment of this Court in Adani Power Maharashtra Limited (supra) following the law laid down in Energy Watchdog v. Central Electricity Regulatory Commission and Others.”
• “If this methodology is adopted by the generator, we do not find that the apprehension of the learned Additional Solicitor General of India would be substantiated.”

There were no dissenting opinions in this judgment.

Key Takeaways

• Power generators are entitled to compensation for additional costs incurred due to shortfalls in the supply of linkage coal.
• Compensation should be calculated on a monthly basis to accurately reflect the costs incurred.
• Generators can carry forward surplus coal from one month to another without it being considered an undue benefit.
• The principle of placing the generator in the same economic position they would have been in had the change of law not occurred is upheld.

Directions

The Supreme Court did not issue any specific directions other than disposing of the appeal. The matter was already remitted to the Maharashtra Electricity Regulatory Commission (MERC) by the Appellate Tribunal for Electricity (APTEL) for reconsideration of the compensation.

Specific Amendments Analysis

There is no specific amendment analysis in this judgment.

Development of Law

The ratio decidendi of this case is that power generators are entitled to compensation for additional costs incurred due to shortfalls in the supply of linkage coal, and that this compensation should be calculated on a monthly basis. This judgment reinforces the principle established in Energy Watchdog v. Central Electricity Regulatory Commission and Others, ensuring that generators are placed in the same economic position they would have been in had the change of law not occurred. There is no change in the previous position of law, but it clarifies the methodology of compensation calculation and the permissibility of carrying forward surplus coal.

Conclusion

The Supreme Court upheld the decision of the Appellate Tribunal for Electricity (APTEL), affirming that power generators are entitled to compensation for the additional costs incurred due to shortfalls in the supply of linkage coal. The court clarified that such compensation should be calculated on a monthly basis and that generators can carry forward surplus coal from one month to another without it being considered an undue benefit. This judgment reinforces the principle of ensuring that generators are placed in the same economic position they would have been in had the change of law not occurred.