Supreme Court Upholds Fixed Charge Liability in Power Purchase Agreement Dispute: Maharashtra State Electricity Distribution Company Ltd. vs. Ratnagiri Gas and Power Private Limited (2023) INSC 993 (09 November 2023)

Date of the Judgment: 09 November 2023
Citation: (2023) INSC 993
Judges: Dr Dhananjaya Y Chandrachud, CJI, J.B. Pardiwala, J., and Manoj Misra, J.
Can a power distribution company avoid paying fixed capacity charges under a Power Purchase Agreement (PPA) if it refuses to schedule power generated from an alternate fuel source? The Supreme Court of India addressed this question in a dispute between Maharashtra State Electricity Distribution Company Ltd. (MSEDCL) and Ratnagiri Gas and Power Private Limited (RGPPL). The court held that MSEDCL was liable to pay fixed charges to RGPPL, even though MSEDCL did not approve the use of an alternate fuel source by RGPPL. This judgment clarifies the obligations of power distribution companies under PPAs when faced with fuel shortages. The judgment was authored by Chief Justice of India Dr. Dhananjaya Y Chandrachud.

Case Background

Ratnagiri Gas and Power Private Limited (RGPPL), the first respondent, was established as a joint venture to take over the assets of Dabhol Power Company Limited. RGPPL owns a gas-based generating station at Ratnagiri, Maharashtra. 95% of its capacity was allocated to the State of Maharashtra, to be supplied to the distribution licensee, Maharashtra State Electricity Distribution Company Ltd. (MSEDCL), the appellant. On 10 April 2007, MSEDCL and RGPPL entered into a Power Purchase Agreement (PPA) for 25 years, where MSEDCL would purchase power from RGPPL. The tariffs were determined by the Central Electricity Regulatory Commission (CERC), considering the capital cost and plant capacity of the generating station.

RGPPL was initially supposed to receive gas supply from RIL. However, from September 2011, the gas supply progressively declined due to low-yielding gas fields. To compensate for the shortfall in power generation, RGPPL entered into a Gas Supply Agreement (GSA) and Gas Transportation Agreement (GTA) with GAIL for the supply of Recycled Liquid Natural Gas (RLNG) under spot cargo on a take-and-pay-contract basis. RGPPL informed MSEDCL about this arrangement on 16 December 2011, stating that the shortfall in domestic gas supply was impacting their ability to recover fixed costs.

MSEDCL refused to schedule power at the rates stipulated by RGPPL, stating that RGPPL failed to obtain MSEDCL’s approval before entering into the GSA/GTA with GAIL, as mandated by Clause 5.9 of the PPA. MSEDCL claimed that the declaration of capacity on RLNG was unilateral and arbitrary, absolving them of the liability to pay capacity charges.

Timeline

Course of Proceedings

To resolve the issue of non-payment of fixed charges, RGPPL filed a petition under Section 79 of the Electricity Act, 2003, seeking resolution of issues arising from the shortfall of domestic gas, the reservations of the beneficiaries to allow it to enter into alternate contractual arrangements for fuel (RLNG), the revision of the Normative Annual Plant Availability Factor (NAPAF), and directions to the beneficiaries to pay outstanding fixed charges.

The Central Electricity Regulatory Commission (CERC) allowed the petition and held MSEDCL liable to pay fixed capacity charges under the PPA. CERC stated that Clause 4.3 of the PPA permits the use of LNG/Natural gas or RLNG as a ‘primary fuel,’ and that RGPPL was permitted to use even liquid gas, albeit with MSEDCL’s consent. CERC also stated that the terms of the PPA do not prevent RGPPL from declaring capacity based on RLNG and that the beneficiaries have the option to dispatch or refuse to dispatch the capacity on natural gas, RLNG, or liquid fuel.

The Appellate Tribunal for Electricity (APTEL) upheld the CERC order. APTEL stated that the need to obtain consent from the distribution licensee arises only when the power generation company makes arrangements based on liquid gas. In this case, the change was from one primary fuel (natural gas) to another primary fuel (RLNG), which did not require MSEDCL’s consent. APTEL further stated that the PPA did not require RGPPL to obtain MSEDCL’s consent for entering into the GSA/GTA with GAIL.

The civil appeal against APTEL’s decision was initially disposed of by the Supreme Court, granting liberty to the appellant to approach the Court when necessary. Following this, RGPPL filed an execution petition before APTEL seeking the payment of dues, leading to the present appeal before the Supreme Court.

Legal Framework

The dispute revolves around the interpretation of specific clauses of the Power Purchase Agreement (PPA) between MSEDCL and RGPPL. Key clauses include:

• Clause 1.1(b): Defines “Declared Capacity” as the capability of the station to deliver electricity, taking into account the availability of gas and liquid fuels.
  “Declared Capacity” means the capa bility of the Station to deliver ex -bus electricity in MW declared by the Station in relation to any period of the day, or the whole day, duly taking into account the availability of Gas and liquid fuels .
• Clause 2.2.1: States that MSEDCL is liable to pay full capacity charges and is entitled to the corresponding incremental power.
  MSEDCL is liable to pay full capacity charges as mentioned in Clause 5.2 and shall be entitled to corresponding incremental power.
• Clause 4.3: Defines the primary fuel for RGPPL as LNG/Natural gas and/or RLNG and states that if agreed by MSEDCL, RGPPL can make arrangements for liquid fuels.
  “Primary Fuel for RGPPL is LNG/Natural gas and/or RLNG. Normally capacity of the station shall be declared on gas and/or RLNG for all three power blocks . However, if agreed by MSEDCL, RGPPL shall make arrangements of Liquid fuel(s) for the quantum required by MSEDCL. In such a case the capacity on liquid fuel shall also be taken into account for the purpose of Availability, Declared Capacity and PLF calculations till the time Liquid fuel(s) stock agreed/requisitioned by MSEDCL is available at site.”
• Clause 5.2: Specifies the capacity charges payable by MSEDCL, which are fixed charges corresponding to the declared capacity.
  “The Annual Capacity Charge (ACC) of Power Block for supply of power from the station worked out to Rs. 1446.451 Cr. per annum based on capacity charge of 96p/KWH finalized at the time of asset takeover by RGPPL. This Capacity Charge of 96p/KWH is increased to 98.5p/KWH pursuant to discussions under the aegis of Gd. This Capacity Charge of 98. 5p/KWH is subject to further review and finalization by GoT and GOM pursuant to the ongoing restructuring exercise under consideration by GoI to ensure project viability based on above capacity charges on levelized basis of 98.5p/KWH, the total Annual Capacity Charges work out to Rs 1484.12 Cr. per annum. Full capacity charges shall be payable at 80% of 21 50MW (i.e.1720MW) declared capacity lower than this shall be recovered on pro -rata basis after COD of Block(s)/Station. MSEDCL shall pay capacity charges in proportion to the allocation of power from RGPPL.”
• Clause 5.3: Specifies the energy charges payable by MSEDCL, which are variable charges corresponding to the actual electricity delivered.
  “The Energy Charge for supply of power from the Station shall be worked out based on the gross heat rate and auxiliary Power Consumption as given below:”
• Clause 5.9: Requires RGPPL to obtain approval from MSEDCL on contracting terms and price before entering into a Gas Supply Agreement (GSA) or Gas Transportation Agreement (GTA) that has commercial implications.
  “Gas Supply Agreement (GSA)/ Gas Transportation Agreement (GTA) Gas supply agreement is presently for 1.5 MMTPA R -LNG upto September 2009 after being sourced through Petronet LNG Ltd and regasified at their Dahej terminal with supply though GAIL/off -takers. The conditions of GSA/GTA having commercial implications (for example bearing on Plant availability, contracted quantity, price components, Take or Pay provisions, penalties and damages etc.) shall be signed separately with MSEDCL as a supplementary agreement. The total required Gas/LNG is envisaged to be procured through short -term contracts/ long- term contracts through GAIL and under the directions of GoI, the details of which shall be furnished in due course. RGPPL shall be required to obtain approval of MSEDCL on contracting terms and price before entering into the GSA/GTA contract.”

The Supreme Court, in its judgment, emphasized that the PPA must be read as a whole, and the clauses must be interpreted in a manner that aligns with the intention of the parties and the factual context of the agreement.

Arguments

Submissions by the Appellant (MSEDCL):

• MSEDCL argued that Clause 4.3 and Clause 5.9 of the PPA should be read together. According to this interpretation, RGPPL was obligated to obtain prior approval from MSEDCL before entering into the GSA/GTA with GAIL. Failing this, MSEDCL should not be liable to pay for the declared capacity attributable to RLNG.
• MSEDCL contended that the prior approval clause in 5.9 applies to both capacity charges under clause 5.2 and energy charges under clause 5.3. The distinction made by the lower authorities between these sub-clauses was incorrect.
• MSEDCL stated that the phrase “commercial implication” in Clause 5.9 makes the consent requirement applicable to the GSA/GTA with GAIL, as it affects plant availability and declared capacity.
• MSEDCL argued that there is an “organic interlinking” between Clause 5.9, commercial implications, plant availability, declared capacity, and the choice of fuel as provided in Clause 4.3.
• MSEDCL submitted that the plant availability factor would be less than 70%, and as such, the capacity charges would be reduced in accordance with Clause 21(1)(a) of CERC (Terms and Conditions of Tariff) Regulations 2009.
• MSEDCL argued that CERC and APTEL have rewritten the contract, which is impermissible. The conduct of the parties suggests that MSEDCL’s approval was a mandatory pre-requisite for the liability of fixed charges.
• MSEDCL stated that the impugned decisions would impact its customers.

Submissions by the Respondent (RGPPL):

• RGPPL stated that the generating station was established to meet the electricity demands of MSEDCL after the failure of M/s Enron International and M/s Dabhol Power Company.
• RGPPL submitted that the capacity declaration using RLNG and demanding capacity charges based on such declared capacity are in accordance with Clauses 4.3 and 5.2 of the PPA.
• RGPPL stated that the PPA contained no clause for termination and was valid for 25 years. MSEDCL was bound by the PPA, particularly Clauses 6.6 and 6.7, which stipulate that even if a dispute is pending, MSEDCL is bound to pay 95% of the charges.

Submissions Table

Issues Framed by the Supreme Court

The primary issue framed by the Supreme Court was:

1. Whether the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal for Electricity (APTEL) were justified in holding MSEDCL liable to pay fixed charges to RGPPL.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

The Supreme Court also considered the following legal provisions:

• Clause 1.1(b) of the PPA: Definition of “Declared Capacity”.
• Clause 2.2.1 of the PPA: MSEDCL’s liability to pay full capacity charges.
• Clause 4.3 of the PPA: Definition of primary fuels for RGPPL.
• Clause 5.2 of the PPA: Capacity charges payable by MSEDCL.
• Clause 5.3 of the PPA: Energy charges payable by MSEDCL.
• Clause 5.9 of the PPA: Requirement of MSEDCL’s approval for GSA/GTA.
• Clause 2.2.2 of the PPA: RGPPL’s entitlement to sell power to other parties if MSEDCL is unable to utilize the entire allocated capacity.

Judgment

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

How each authority was viewed by the Court?

• Transmission Corporation of Andhra Pradesh Ltd v. GMR Vemagiri Power Generation Limited [(2018) 3 SCC 716]: The Supreme Court relied on this case to emphasize that a commercial document should be interpreted in a manner that aligns with the original purpose and intent of the parties. It also stated that implied terms should only be read into a contract when necessary to lend efficacy to the terms of the contract.

The Supreme Court held that the CERC and APTEL were justified in affixing liability to pay fixed charges on MSEDCL. The court reasoned that:

• Clause 4.3 of the PPA explicitly states that the primary fuels for RGPPL include LNG/Natural gas and/or RLNG. Therefore, RGPPL was permitted to use RLNG without requiring MSEDCL’s consent.
• The requirement of an agreement mandated for arrangements involving liquid fuel cannot be read into the plain text of the clause that envisages RLNG as a primary fuel.
• Clause 5.9 and Clause 4.3 operate in different spheres, and the requirements of the former cannot be imposed on an arrangement permissible by the latter.
• Capacity charges under Clause 5.2 are payable based on the declared capacity, not actual energy delivery. Thus, MSEDCL’s liability for fixed charges arises as long as the declared capacity is made in terms of the PPA.
• The court stated that the appellant’s reading implies that such a fixed charge can be avoided and made subject to the consent of the appellant, which goes against the apparent intention of the parties to treat capacity charges as fixed charges under the PPA.
• The court emphasized that a commercial document cannot be interpreted in a manner that is at odds with the original purpose and intention of the parties.

The Supreme Court quoted the following from the judgment:

“A commercial document cannot be interpreted in a manner to arrive at a complete variance with what may originally have been the intendment of the parties. Such a situation can only be contemplated when the implied term can be considered necessary to lend efficacy to the terms of the contract. If the contract is capable of interpretation of its plain meaning with regard to the true intention of the parties it will not be prudent to read implied terms on the understanding of a party, or by the court, with regard to business efficacy.”

“Capacity charges mandated under Clause 5.2 hinge on the declared capacity that the Station is capable of delivering to its beneficiaries. Energy Charges , on the other hand, are payable only against the actual energy delivered. The appellant’s liability for the former is actual delivery agnostic. It arises as long as the declared capacity is made in terms of the PPA i.e. Clause 4.3.”

“In the present case, CERC and APTEL have correctly held that the GSA/GTA with GAIL is permissible by the terms of the contract and the consent or approval of the appellant is irrelevant. Clause 5.9 and Clause 4.3 operate in different spheres and the requirements of the former cannot be foisted on an arrangement permissible by the latter.”

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several key factors:

• Contractual Interpretation: The court emphasized the need to interpret the PPA as a whole, giving due consideration to the plain language of the clauses and the intention of the parties.
• Business Efficacy: The court noted that interpreting the contract in favor of MSEDCL would be detrimental to the viability of RGPPL, which was established to meet the energy needs of the State of Maharashtra.
• Factual Context: The court acknowledged the unprecedented shortage of domestic gas, which necessitated RGPPL’s decision to use RLNG as an alternate fuel source.
• Fixed Charges: The court reiterated that capacity charges are fixed and payable based on the declared capacity, irrespective of actual energy delivery.

The court’s reasoning was primarily based on a textual interpretation of the PPA, supported by considerations of business efficacy and the factual context. The court rejected MSEDCL’s argument that its consent was required for the use of RLNG, emphasizing that Clause 4.3 of the PPA explicitly allows the use of RLNG as a primary fuel without requiring MSEDCL’s approval.

Sentiment Analysis Table

Ratio Decidendi

The ratio decidendi of the judgment is that under a Power Purchase Agreement (PPA) that specifies multiple primary fuel sources, a power generating company is not required to obtain the consent of the power distribution company to switch between those primary fuel sources. The power distribution company is liable to pay fixed capacity charges based on the declared capacity of the generating station, even if it refuses to schedule power generated from an alternate primary fuel source.

Ratio Table

Conclusion

The Supreme Court’s judgment in Maharashtra State Electricity Distribution Company Ltd. vs. Ratnagiri Gas and Power Private Limited clarifies the obligations of power distribution companies under PPAs when faced with fuel shortages. The court has firmly established that a power distribution company is liable to pay fixed capacity charges to a power generating company even if it refuses to schedule power from an alternate fuel source, provided that the alternate fuel source is a primary fuel under the PPA.

The judgment underscores the importance of adhering to the plain language of contractual agreements and interpreting them in a manner that aligns with the original purpose and intention of the parties. The court’s decision also highlights the need for power distribution companies to honor their contractual obligations and avoid seeking to escape liability through strained interpretations of PPA clauses. This judgment is likely to have a significant impact on the power sector, particularly in cases where power generating companies face fuel supply challenges and are forced to use alternate fuel sources to meet their contractual obligations.

The Supreme Court’s ruling reaffirms that fixed capacity charges are payable based on the declared capacity of the power plant, not the actual energy delivered. This ensures that power generating companies can recover their fixed costs even if the distribution company does not schedule power. This is a crucial aspect of the power sector, as it provides financial stability to power generating companies and encourages investment in the sector.

Flowchart of the Case