Supreme Court Upholds Compensation for Power Company Under SHAKTI Policy: MSEDCL vs. Adani Power (2023)

Date of the Judgment: April 20, 2023

Citation: 2023 INSC 354

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

Can a change in government policy regarding coal distribution be considered a “Change in Law” that requires compensation under a power purchase agreement? The Supreme Court of India addressed this crucial question in a dispute between Maharashtra State Electricity Distribution Company Limited (MSEDCL) and Adani Power Maharashtra Limited (APML). The court examined whether the SHAKTI Policy, which altered coal supply arrangements, triggered compensation clauses in the existing PPAs. The bench, consisting of Justices B.R. Gavai and Vikram Nath, delivered the judgment.

Case Background

The dispute arose from a series of long-term Power Purchase Agreements (PPAs) between Maharashtra State Electricity Distribution Company Limited (MSEDCL) and Adani Power Maharashtra Limited (APML). These PPAs, signed between 2008 and 2013, were for the supply of power from APML to MSEDCL. A key aspect of these agreements was the supply of coal, which was initially governed by the New Coal Distribution Policy (NCDP) of 2007. In 2013, the Ministry of Coal introduced the NCDP 2013, which altered the coal supply arrangements. This led APML to claim compensation under the “Change in Law” clause of the PPAs. APML argued that the NCDP 2013 and, subsequently, the SHAKTI Policy, which was introduced in 2017, impacted their coal supply and increased their costs, thus entitling them to compensation.

Specifically, APML sought compensation for the increased costs due to the shortfall in domestic coal supply under the SHAKTI Policy, which was introduced by the Ministry of Power on May 22, 2017. The SHAKTI Policy required the Appropriate Commission to consider the cost of imported or market-based e-auction coal to make up for the shortfall in domestic coal. MSEDCL contested this claim, arguing that the SHAKTI Policy did not constitute a “Change in Law” event and that APML was not entitled to compensation.

Timeline:

Course of Proceedings

Initially, APML filed a petition before the Maharashtra Electricity Regulatory Commission (MERC) seeking compensation for the increased costs due to changes in coal supply policies. The MERC ruled in favor of APML, recognizing the SHAKTI Policy as a “Change in Law” event. MSEDCL appealed this decision to the Appellate Tribunal for Electricity (APTEL), which upheld the MERC’s order. The APTEL framed five issues for adjudication, including whether the SHAKTI Policy constituted a Change in Law, the extent of compensation, and other related matters. MSEDCL then approached the Supreme Court challenging the APTEL’s decision. The Supreme Court heard the appeals and ultimately dismissed them, affirming the decisions of the lower authorities.

Legal Framework

The core of the legal framework in this case revolves around the “Change in Law” clauses present in the Power Purchase Agreements (PPAs) between MSEDCL and APML. These clauses typically allow for adjustments in tariffs to compensate for changes in laws or regulations that impact the cost of power generation. The New Coal Distribution Policy (NCDP) of 2007 initially governed coal supply, assuring 100% normative coal supply. The NCDP 2013 introduced changes that reduced the assured supply, and the SHAKTI Policy further modified the coal supply framework. The SHAKTI Policy, introduced on May 22, 2017, aimed to address the shortfall in domestic coal supply by allowing the use of imported or market-based e-auction coal. Clause 6.1 of the SHAKTI Policy requires the Appropriate Commission to consider the cost of this alternate coal for pass-through. The Supreme Court also considered previous judgments, including Energy Watchdog v. Central Electricity Regulatory Commission and Others, which established that changes in coal distribution policies could constitute a “Change in Law” event.

Arguments

MSEDCL’s Arguments:

• MSEDCL argued that the SHAKTI Policy (Part-B) essentially restored the coal supply position as covered by the NCDP 2007, which assured 100% coal supply. Therefore, APML should not be compensated for any shortfall.
• MSEDCL contended that APML failed to provide a mandatory notice for the “Change in Law” under Article 13.3.2 of the 1320 MW PPA.
• MSEDCL argued that the SHAKTI Policy is a continuation of NCDP 2007 and, therefore, does not constitute a new “Change in Law” event.

APML’s Arguments:

• APML argued that the SHAKTI Policy undisputedly amounts to a “Change in Law” event, as it altered the coal supply arrangements.
• APML submitted that both APTEL and MERC had concurrently found that the SHAKTI Policy is a “Change in Law” event and that these findings should not be interfered with unless they are perverse or based on extraneous considerations.
• APML contended that the SHAKTI Policy reduced the Assured Coal Quantity (ACQ) compared to the 2007 NCDP, thus impacting their costs.

Submissions Table:

Innovativeness of the Argument: APML’s argument was innovative in that it focused on the practical impact of the SHAKTI Policy on their coal supply and costs. They argued that the policy, despite its stated aims, effectively reduced the assured coal quantity, thereby triggering the “Change in Law” clause. MSEDCL, on the other hand, focused on the policy’s intent to restore the 2007 position, which was not factually accurate.

Issues Framed by the Supreme Court

The Appellate Tribunal for Electricity (APTEL) framed the following five issues for adjudication:

1. Whether the introduction of the SHAKTI Policy does not amount to a “Change in Law” under the PPAs, and whether APML failed to provide notice of such change to MSEDCL.
2. Whether the MERC was correct in limiting the shortfall in domestic coal to a maximum of 25% of ACQ for the purpose of “Change in Law” compensation after the introduction of the SHAKTI Policy.
3. 1. Whether the MERC was correct in holding that the Station Heat Rate (SHR) submitted by APML or the SHR and Auxiliary Consumption norms specified under the MYT Regulations, 2011, whichever is superior, should form the basis for computing “Change in Law” compensation.
   2. Whether the MERC was correct in holding that the reference Gross Calorific Value (GCV) of domestic coal supplied by Coal India Limited (CIL) should be the middle value of the GCV range of assured coal grade in LoA/PSA/MoU and not the GCV as received.
4. Whether the MERC was justified in directing APML to provide advance intimation of the impact on energy charges by using alternate coal for the purpose of Merit Order Despatch (MOD).
5. Whether MSEDCL was justified in contesting APML’s entitlement to Carrying Cost.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court relied on several key authorities to reach its decision:

Cases:

• Energy Watchdog v. Central Electricity Regulatory Commission and Others [(2017) 14 SCC 80] – This case established that changes in coal distribution policies could constitute a “Change in Law” event. The court held that if there is a change in any consent, approval, or license for a project, which results in a change in the cost of selling electricity, the seller is governed under Clause 13.1.1 of the PPA.
• Jaipur Vidyut Vitaran Nigam Limited and Others v. ADANI Power Rajasthan Limited and Another [2020 SCC OnLine SC 697] – This case considered the effect of the SHAKTI Policy and held that the seller would be entitled to the benefit occurring on account of the SHAKTI Policy.
• MSEDCL v. APML and Others [2023 SCC OnLine 233] – This case clarified that the Change in Law relief for domestic coal shortfall should be on ‘actuals’ and that the SHR and auxiliary consumption should be considered as per the Regulations or actual, whichever is lower. It also held that the start date for the Change in Law event for the NCDP 2013 is April 1, 2013.
• ADANI Power Limited v. Central Electricity Regulatory Commission [2018 SCC OnLine APTEL 5] – The APTEL held that the generating company is eligible for Carrying Cost arising out of approval of the Change in Law events from the effective date of Change in Law till the approval of the said event by appropriate authority.
• Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) and another v. Adani Power Limited and Others [(2019) 5 SCC 325] – The Supreme Court upheld the APTEL’s decision to grant Carrying Cost to the generating company.

Legal Provisions:

• Clause 13.1.1 of the Power Purchase Agreements (PPAs) – This clause deals with “Change in Law” events and provides for compensation to the affected party.
• Clause 6.1 of the SHAKTI Policy – This clause requires the Appropriate Commission to consider the cost of imported/market-based e-auction coal for pass-through to make up for the shortfall in domestic coal.

Authority Usage Table:

Judgment

The Supreme Court dismissed the appeals filed by MSEDCL, thereby upholding the decisions of the APTEL and MERC. The Court affirmed that the SHAKTI Policy constitutes a “Change in Law” event, entitling APML to compensation under the respective PPAs. The Court also addressed the issues of notice, carrying cost, and the method for calculating compensation.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Energy Watchdog v. CERC [(2017) 14 SCC 80]*: The Court followed this precedent, reiterating that changes in coal distribution policies can constitute a “Change in Law” event.
• Jaipur Vidyut v. Adani Power Rajasthan [2020 SCC OnLine SC 697]*: The Court followed this precedent, stating that sellers are entitled to benefits under the SHAKTI Policy.
• MSEDCL v. APML and Others [2023 SCC OnLine 233]*: The Court followed this precedent, clarifying the method for calculating compensation for domestic coal shortfall.
• ADANI Power Limited v. CERC [2018 SCC OnLine APTEL 5]*: The Court followed this precedent, stating that the generating company is eligible for Carrying Cost.
• Uttar Haryana Bijli v. Adani Power [(2019) 5 SCC 325]*: The Court followed this precedent, upholding the APTEL’s decision to grant Carrying Cost.

What weighed in the mind of the Court?

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

• Restitutionary Principle: The Court emphasized the principle of restitution, which aims to restore the affected party to the same economic position as if the “Change in Law” had not occurred. This principle was central to the court’s decision to grant compensation to APML.
• Actual Losses: The Court focused on compensating for the actual losses incurred by APML due to the shortfall in domestic coal supply. The judgment clarified that compensation should be based on the actual shortfall and not limited to a predetermined percentage.
• Expert Opinions: The Court recognized the expertise of regulatory bodies like the MERC and APTEL in the electricity sector. It noted that these bodies had consistently found the SHAKTI Policy to be a “Change in Law” event.
• Consistency with Precedents: The Court relied on its previous judgments, particularly Energy Watchdog and Adani Power Rajasthan, to ensure consistency in the application of legal principles.
• SHAKTI Policy Impact: The Court acknowledged that the SHAKTI Policy did not fully restore the coal supply position of NCDP 2007, and that it reduced the assured coal quantity, thereby impacting the cost of power generation for APML.

Sentiment Analysis Table:

Fact:Law Ratio:

Logical Reasoning:

The Court considered alternative interpretations, such as MSEDCL’s argument that the SHAKTI Policy restored the position of NCDP 2007. However, the Court rejected this argument because it was factually incorrect. The Court emphasized that the SHAKTI Policy did not assure 100% coal supply as the NCDP 2007 did. The Court also considered whether APML had provided adequate notice, but upheld the APTEL’s finding that the notice was sufficient. The final decision was reached by applying the principle of restitution and ensuring that APML was compensated for the actual losses incurred due to the change in law.

The Court’s reasoning was based on the need to ensure that the affected party is restored to the same economic position as if the “Change in Law” had not occurred. This was achieved by compensating APML for the increased costs due to the shortfall in domestic coal supply. The Court also emphasized the importance of following established precedents and ensuring consistency in the application of legal principles. The Court also emphasized the importance of not interfering with the decisions of expert bodies unless they are perverse or based on extraneous considerations.

The Court also quoted the following from the judgment:

• “It is clear from a reading of the Resolution dated 21-6-2013, which resulted in the letter of 31-7-2013, issued by the Ministry of Power, that the earlier coal distribution policy contained in the letter dated 18-3-2007 stands modified as the Government has now approved a revised arrangement for supply of coal.”
• “The restitutionary principle has been stated by this Court in the case of Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) (supra) thus: Article 13.2 is an in-built restitutionary principle which compensates the party affected by such change in law and which must restore, through monthly tariff payments, the affected party to the same economic position as if such change in law has not occurred.”
• “In our view, the view taken by the 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 considerations. The view also cannot be said to be ex-facie arbitrary or illegal.”

There was no dissenting opinion in this case. The bench was composed of Justices B.R. Gavai and Vikram Nath, and both concurred with the judgment.

Key Takeaways

• The SHAKTI Policy constitutes a “Change in Law” event under the Power Purchase Agreements (PPAs).
• Power generating companies are entitled to compensation for increased costs due to the shortfall in domestic coal supply under the SHAKTI Policy.
• Compensation should be based on the actual shortfall in coal supply and not limited to a predetermined percentage.
• The principle of restitution requires that the affected party be restored to the same economic position as if the “Change in Law” had not occurred.
• Regulatory bodies’ decisions should not be interfered with unless they are perverse or based on extraneous considerations.
• Carrying cost is a settled position of law and the generating company is entitled to it from the effective date of Change in Law till the approval of the said event by appropriate authority.

Potential Future Impact: This judgment reinforces the principle that changes in government policy that affect contractual obligations can trigger “Change in Law” clauses in PPAs. It provides clarity on the calculation of compensation and the importance of the restitutionary principle. This decision will likely impact future disputes involving changes in coal supply policies and their effect on power purchase agreements.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

There was no specific discussion on any amendments in the judgment.

Development of Law

The ratio decidendi of this case is that the SHAKTI Policy constitutes a “Change in Law” event under the Power Purchase Agreements (PPAs), and the affected party is entitled to compensation based on the restitutionary principle. This judgment reinforces the principle that changes in government policy that affect contractual obligations can trigger “Change in Law” clauses in PPAs. This judgment also reiterates that the decisions of expert bodies such as the MERC and APTEL should not be interfered with unless they are perverse or based on extraneous considerations.