Supreme Court Upholds Power Purchase Agreement: Southern Power Distribution Company Ltd. vs. Hinduja National Power Corporation Ltd. (2 February 2022)

LEGAL ISSUE: Whether a Distribution Company can withdraw from a Power Purchase Agreement (PPA) after initially agreeing to it and after the power plant has become operational. CASE TYPE: Electricity Law, Contract Law, Regulatory Law. Case Name: Southern Power Distribution Company Limited of Andhra Pradesh (APSPDCL) & Anr. vs. M/s Hinduja National Power Corporation Limited & Anr. [Judgment Date]: 2 February 2022

Date of the Judgment: 2 February 2022
Citation: 2022 INSC 103
Judges: L. Nageswara Rao J., B.R. Gavai J.
Can a state distribution company back out of a power purchase agreement after the power plant is built and operational? The Supreme Court of India addressed this very question in a recent case. The court examined whether a power distribution company could withdraw from a power purchase agreement (PPA) it had previously agreed to, especially after the power plant had become operational. The bench comprising Justices L. Nageswara Rao and B.R. Gavai delivered the judgment.

Case Background

The case revolves around a dispute between Southern Power Distribution Company Limited of Andhra Pradesh (APSPDCL) and Hinduja National Power Corporation Limited (HNPCL). The dispute began with a Memorandum of Understanding (MoU) in 1992 between the Andhra Pradesh State Electricity Board (APSEB) and HNPCL, where APSEB transferred licenses and approvals for a power project to HNPCL. An initial PPA was signed in 1994, followed by an amended PPA in 1998. However, this agreement was not implemented until 2007, when HNPCL sought to revive the project as a merchant plant, offering 25% of the power to the state. However, the state government later agreed to purchase 100% of the power from HNPCL. In 2011-2012, HNPCL participated in a bidding process for power procurement and emerged as the second lowest bidder (L-2). However, the Bid Evaluation Committee discarded HNPCL’s bid, stating that its entire capacity was already encumbered to the State of Andhra Pradesh. The State Government then agreed to purchase 100% power from HNPCL as per the amended PPA. A Memorandum of Agreement (MoA) was signed in 2013 to continue the amended PPA. In 2014, HNPCL filed a petition for determination of capital costs. After the bifurcation of Andhra Pradesh in 2014, a Continuation Agreement was signed in 2016. However, in 2018, APSPDCL sought to withdraw from the PPA, leading to the current legal battle.

Timeline

Course of Proceedings

The State Commission initially allowed APSPDCL to withdraw its petition seeking approval of the PPA and dismissed HNPCL’s petition for determination of tariff. HNPCL then appealed to the Appellate Tribunal for Electricity (APTEL), which admitted the appeal and directed the parties to maintain the status quo. APSPDCL challenged this order in the High Court of Andhra Pradesh, but the High Court dismissed their petitions. The Supreme Court also refused to interfere with the interim order of APTEL. Finally, the APTEL allowed HNPCL’s appeal and directed the State Commission to dispose of both the petitions on merits. This order of APTEL was challenged before the Supreme Court.

Legal Framework

The case primarily involves the interpretation of Section 86(1)(b) of the Electricity Act, 2003, which empowers the State Electricity Regulatory Commission to regulate the electricity purchase and procurement process of distribution licensees. This includes the power to approve Power Purchase Agreements (PPAs). Additionally, Section 21 of the Andhra Pradesh Electricity Reform Act, 1998, states that any agreement relating to the supply of energy without the prior consent of the Commission is void. The court also considered the National Tariff Policy and the Andhra Pradesh Electricity Regulatory Commission (Terms and conditions for determination of tariff for supply of electricity by a generating company to a distribution licensee and purchase of electricity by distribution licensees) Regulation, 2008. The court observed that the State Commission has the power to approve an MoU which subserves public interest and may also take into consideration the question as to whether the terms to be agreed are fair and just.

Arguments

Arguments of the Appellants (APSPDCL):

• The appellants argued that they had the right to withdraw their application for approval of the PPA unless there was a legal prohibition.

• They contended that the PPA was not valid until approved by the State Commission under Section 86(1)(b) of the Electricity Act, 2003 and that any agreement without prior consent was void under Section 21 of the Andhra Pradesh Electricity Reform Act, 1998.

• They submitted that the MoA and Continuation Agreement were contrary to the National Tariff Policy and the State Commission’s Tariff Regulations, and that the direction to continue purchasing electricity from HNPCL was against statutory provisions.

• They argued that the project did not fall under any category of the Tariff Regulations and that HNPCL’s huge investments were not based on assurances from the DISCOMS but rather on its intent to operate as a merchant plant.

• They contended that the project of HNPCL was revived as a merchant power plant and can sell power to third parties. They cannot be compelled to purchase power from HNPCL at a high price. The capital cost has increased from Rs. 4628.11 crores to Rs. 8087 crores which will have a direct effect on the purchase price of the electricity and if they are directed to purchase electricity at such a high price, the loss would be ultimately to the consumers and is against the public interest.

Arguments of the Respondents (HNPCL):

• The respondents argued that the APTEL’s order only directed the State Commission to dispose of the petitions on merits and did not harm the appellants.

• They contended that a right of withdrawal is not absolute, and once the judgment is reserved, there cannot be any further application seeking withdrawal.

• They submitted that HNPCL had initially desired to start the project as a merchant plant, but was compelled to supply 100% power to the State of Andhra Pradesh.

• They argued that HNPCL was discarded from the competitive bidding process due to the encumbrance of its capacity to the State, and that the State had expressed its interest to purchase 100% power from HNPCL.

• They submitted that the APTEL had rightly held that HNPCL had made huge investments based on the representation of the State Government. They also stated that the DISCOMS were purchasing power at a much higher rate from other generators and that the conduct of the DISCOMS was mala fide.

The innovativeness of the argument by the respondent is that it was the State who insisted HNPCL to supply 100% of the power and that the DISCOMS were purchasing power at a much higher rate from other generators.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues, but the core issue was whether the Appellate Tribunal for Electricity (APTEL) was correct in directing the State Commission to decide the matter on merits and setting aside the decision of the State Commission to allow withdrawal of the PPA. The main issue was whether the Distribution Companies (DISCOMS) were entitled to withdraw the application for approval of the PPA.

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 appeal filed by APSPDCL, upholding the APTEL’s decision. The Court held that the DISCOMS could not withdraw from the PPA, given their prior conduct, agreements, and the fact that the project was operational. The Court also found that the State Commission was wrong in dismissing HNPCL’s petition for determination of tariff. The court held that the reasons given by the DISCOMS for withdrawal were available before the signing of the MoA and the Continuation Agreement and that the DISCOMS could not be permitted to change their decision at their whims and fancies, which is adversarial to the public interest and public good. The Supreme Court strongly deprecated the conduct of the APSPDCL for defying the orders of the APTEL and the Supreme Court and for purchasing power at a higher rate from other generators. The Court imposed costs of Rs. 5,00,000 on the appellants and directed the State Commission to decide the pending petitions within six months. The Court also directed the DISCOMS to purchase power from HNPCL at Rs. 3.82 per unit until the State Commission decides on the petitions.

How each authority was viewed by the Court?

• Boal Quay Wharfingers Ltd. v. King’s Lynn Conservancy Board [(1971) 1 WLR 1558]* – Distinguished. The court held that the case arose out of an application to a licensing authority and not a quasi-judicial proceeding.
• Hulas Rai Baij Nath v. Firm K.B. Bass and Co. [(1967) 3 SCR 886]* – Distinguished. The court held that the facts were different and the case did not apply to the present case.
• Madhu Jajoo v. State of Rajasthan [AIR 1999 Raj 1]* – Followed. The court relied on this case to support the proposition that withdrawal of an application could not be permissible when such a withdrawal amounts to frustration of a contract and thereby defeats the rights of the defendant.
• Kiran Girhotra & Ors. v. Raj Kumar & Ors. [(2009) 164 DLT 483]* – Followed. The court relied on this case to support the proposition that withdrawal of an application could not be permissible when such a withdrawal amounts to frustration of a contract and thereby defeats the rights of the defendant.
• M. Radhakrisna Murthy v. Government of A.P. & Ors. [(2001) 3 ALD 330 (DB)]* – Followed. The court relied on this case to support the proposition that withdrawal of an application could not be permissible when such a withdrawal amounts to frustration of a contract and thereby defeats the rights of the defendant.
• Smt. Ajita Debi v. Musst. Hossenara Begum [AIR 1977 Cal 59]* – Followed. The court relied on this case to support the proposition that withdrawal of an application could not be permissible when such a withdrawal amounts to frustration of a contract and thereby defeats the rights of the defendant.
• Mathuralal v. Chiranji Lal [AIR 1962 Raj 109]* – Followed. The court relied on this case to support the proposition that withdrawal of an application could not be permissible when such a withdrawal amounts to frustration of a contract and thereby defeats the rights of the defendant.
• The Registrar, Manonmaniam Sundaranar University v. Suhura Beevi [AIR 1995 Mad 422]* – Followed. The court relied on this case to support the proposition that withdrawal of an application could not be permissible when such a withdrawal amounts to frustration of a contract and thereby defeats the rights of the defendant.
• Arjun Singh v. Mohindra Kumar [AIR 1964 SC 993]* – Followed. The court relied on this case to support the proposition that a right of withdrawal is not an absolute right and that once the judgment is reserved there cannot be any further application seeking withdrawal.
• Bharati Behera v. Jhili Prava Behera [W.P. No.26254 of 2013 decided by Orissa High Court on 18.04.2014]* – Followed. The court relied on this case to support the proposition that a right of withdrawal is not an absolute right and that once the judgment is reserved there cannot be any further application seeking withdrawal.
• Rabia Bi Qasim v. Countrywide Consumer Financial Services Limited [ILR 2004 KAR 2215]* – Followed. The court relied on this case to support the proposition that a right of withdrawal is not an absolute right and that once the judgment is reserved there cannot be any further application seeking withdrawal.
• Pujya Sindhi Panchayat v. Prof. C.L. Mishra [AIR 2002 Rajasthan 274 (DB)]* – Followed. The court relied on this case to support the proposition that a right of withdrawal is not an absolute right and that once the judgment is reserved there cannot be any further application seeking withdrawal.
• Yash Mehra v. Arundhati Mehra [(2006) 132 DLT 166]* – Followed. The court relied on this case to support the proposition that a right of withdrawal is not an absolute right and that once the judgment is reserved there cannot be any further application seeking withdrawal.
• Dharani Sugars and Chemicals Limited v. TMN Engineering Industry [CRP PD No.3309 to 3312 of 2011 and MP No.1 of 2011 decided by the Madras High Court on 30.08.2017]* – Followed. The court relied on this case to support the proposition that a right of withdrawal is not an absolute right and that once the judgment is reserved there cannot be any further application seeking withdrawal.
• Tata Power Company Limited v. Reliance Energy Limited and others [(2009) 16 SCC 659]* – Explained. The court clarified that while a generating company may supply directly to consumers, it is still subject to approval and directions of the Commission while supplying to a distributing agency.
• Kumari Shrilekha Vidyarthi and others v. State of U.P. and others [(1991) 1 SCC 212]* – Followed. The court relied on this case to support the proposition that every action of the State is required to be guided by the touch-stone of non-arbitrariness, reasonableness and rationality and that every holder of a public office is a trustee whose highest duty is to the people of the country.
• Food Corporation of India v. M/s Kamdhenu Cattle Feed Industries [(1993) 1 SCC 71]* – Followed. The court relied on this case to support the proposition that in contractual sphere as in all other State actions, the State and all its instrumentalities have to conform to Article 14 of the Constitution of whichnon-arbitrariness is a significant facet.
• Indian Oil Corporation Limited and others v. Shashi Prabha Shukla and another [(2018) 12 SCC 85]* – Followed. The court relied on this case to support the proposition that a public authority in its dealings has to be fair, objective, non-arbitrary, transparent and non-discriminatory.
• Kalabharati Advertising v. Hemant Vimalnath Narichania and others [(2010) 9 SCC 437]* – Followed. The court relied on this case to support the proposition that the State is under obligation to act fairly without ill will or malice.

Ratio Decidendi

The ratio decidendi of this case is that a State Distribution Company cannot withdraw from a Power Purchase Agreement (PPA) after initially agreeing to it, especially after the power plant has become operational. The court emphasized that such a withdrawal would frustrate the contract and defeat the rights of the other party. The court also held that a right of withdrawal is not absolute, and once a judgment is reserved, there cannot be any further application seeking withdrawal. The court relied on the principles of non-arbitrariness, reasonableness, and rationality in the actions of the State and its instrumentalities.

Obiter Dicta

The obiter dicta in the case includes the court’s observations on the conduct of APSPDCL in defying the orders of the APTEL and the Supreme Court and for purchasing power at a higher rate from other generators. The court also observed that the State Commission has the power to approve an MoU which subserves public interest and may also take into consideration the question as to whether the terms to be agreed are fair and just. The court also made observations on the need for public authorities to act fairly, objectively, and without malice.

Conclusion

The Supreme Court’s decision in Southern Power Distribution Company Ltd. vs. Hinduja National Power Corporation Ltd. reinforces the sanctity of contracts, especially in the power sector. It highlights that once agreements are made and acted upon, they cannot be unilaterally withdrawn, particularly when significant investments have been made and the project is operational. The court’s emphasis on the State’s duty to act fairly and reasonably is crucial for maintaining trust and stability in the power sector. This judgment serves as a precedent for similar cases, ensuring that distribution companies cannot arbitrarily back out of PPAs, thereby protecting the interests of generating companies and promoting a stable energy market.

Flowchart of the Case