Supreme Court Upholds State Commission’s Authority in Power Purchase Agreements: Southern Power Distribution Company Limited vs. Hinduja National Power Corporation Limited (2022)

Date of the Judgment: February 2, 2022
Citation: 2022 INSC 101
Judges: L. Nageswara Rao, J. and B.R. Gavai, J.
Can a power distribution company withdraw from a power purchase agreement (PPA) after initially seeking its approval? The Supreme Court of India recently addressed this question, emphasizing the importance of regulatory oversight and public interest in such agreements. The court’s decision clarifies the obligations of distribution companies and the role of state electricity regulatory commissions in approving PPAs.

Case Background

The case revolves around a long-standing dispute between the Southern Power Distribution Company Limited of Andhra Pradesh (APSPDCL) and Hinduja National Power Corporation Limited (HNPCL). It 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. A Power Purchase Agreement (PPA) was initially signed in 1994, and later amended in 1998. However, the project remained inactive until 2007 when HNPCL sought to revive it as a merchant plant, offering 25% of the power to the state. Negotiations led to the state agreeing to purchase 100% of the power.

In 2011-2012, HNPCL participated in a bidding process and emerged as the second-lowest bidder. However, the Bid Evaluation Committee discarded HNPCL’s bid, stating that the entire capacity was encumbered to the State. In 2012, the State Government agreed to purchase 100% power from HNPCL as per the amended PPA. In 2013, a Memorandum of Agreement (MoA) was signed to continue the amended PPA, and HNPCL entered into a Fuel Supply Agreement (FSA). HNPCL then filed a petition for determination of capital cost and tariff in 2014. After the bifurcation of Andhra Pradesh in 2014, the newly formed distribution companies, including APSPDCL, entered into a Continuation Agreement with HNPCL in 2016. The distribution companies then sought approval of this agreement from the State Commission.

Timeline

Course of Proceedings

Initially, HNPCL filed a petition (O.P. No. 21 of 2015) before the Andhra Pradesh Electricity Regulatory Commission (State Commission) for determination of the capital cost of the project and the tariff for the electricity generated. Subsequently, the distribution companies filed O.P. No. 19 of 2016 seeking approval of the Continuation Agreement. After the State Commission reserved its judgment, the distribution companies filed applications to withdraw their petition for approval of the PPA and to dispose of HNPCL’s petition for tariff determination. The State Commission allowed the withdrawal and dismissed HNPCL’s petition. HNPCL appealed to the Appellate Tribunal for Electricity (APTEL), which reversed the State Commission’s decision and directed it to dispose of both petitions on merits. The distribution companies then challenged the APTEL’s order in the High Court of Andhra Pradesh, which dismissed their petitions. Finally, the distribution companies appealed to the Supreme Court.

Legal Framework

The Supreme Court considered the following key legal provisions:

• Section 86(1)(b) of the Electricity Act, 2003: This section empowers the State Electricity Regulatory Commission to regulate the purchase and procurement of electricity by distribution licensees, including the price at which electricity is procured.
  “to regulate electricity purchase and procurement process of distribution licensees including the price at which electricity shall be procured from the generating companies or licensees or from other sources through agreements.”
• Section 21 of the Andhra Pradesh Electricity Reform Act, 1998: This section stipulates that any agreement related to generating, transmitting, distributing, or supplying energy without the prior written consent of the Commission is void.
  “(5) Any agreement relating to any transaction of the nature described in sub sections (1), (2), (3) or (4) unless made with or subject to such consent as aforesaid, shall be void.”

The court also noted that the State Commission’s powers are guided by the principles of public interest and the need to ensure fair and just terms in power purchase agreements, as outlined in the Electricity Act, 2003 and related regulations.

Arguments

Arguments by the Distribution Companies (APSPDCL):

• The distribution companies argued that they had the right to withdraw their petition seeking approval of the PPA, as there was no legal prohibition against it. They cited Boal Quay Wharfingers Ltd. v. King’s Lynn Conservancy Board [(1971) 1 WLR 1558] and Hulas Rai Baij Nath v. Firm K.B. Bass and Co. [(1967) 3 SCR 886] to support this claim.
• 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 of the Commission was void under Section 21 of the Andhra Pradesh Electricity Reform Act, 1998.
• The distribution companies argued that the MoA and Continuation Agreement were contrary to the National Tariff Policy and the State Commission’s Tariff Regulations.
• They claimed that HNPCL had made investments on its own accord and not based on assurances from the State, as the project was initially intended as a merchant plant.
• They argued that compelling them to purchase power from HNPCL at a high price would harm consumers and be against public interest.

Arguments by HNPCL:

• HNPCL argued that the APTEL’s order only directed the State Commission to dispose of the petitions on merits, which did not harm the distribution companies.
• They contended that the right to withdraw an application is not absolute, especially when it frustrates a contract and defeats the rights of the other party. They cited Madhu Jajoo v. State of Rajasthan [AIR 1999 Raj 1] and other cases to support this argument.
• HNPCL argued that the right to withdraw is not absolute and cannot be exercised after the judgment is reserved, citing Arjun Singh v. Mohindra Kumar [AIR 1964 SC 993] and other cases.
• HNPCL stated that they had intended to operate the plant as a merchant plant but were compelled by the State to supply 100% power to the State.
• They pointed out that the Bid Evaluation Committee had discarded their bid in the open bidding process because their entire capacity was encumbered to the State.
• They claimed that the State Government had repeatedly expressed its interest in purchasing 100% power from HNPCL.
• HNPCL argued that the distribution companies were purchasing power at a higher rate from other generators, demonstrating mala fide intent.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues:

1. Whether the distribution companies were entitled to withdraw their application (O.P. No. 19 of 2016) seeking approval of the PPA.
2. Whether the State Commission was justified in dismissing HNPCL’s petition (O.P. No. 21 of 2015) for determination of capital cost and tariff.

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

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

How each authority was viewed by the Court?

• The authorities cited by the distribution companies regarding the right to withdraw an application, such as Boal Quay Wharfingers Ltd. v. King’s Lynn Conservancy Board [(1971) 1 WLR 1558] and Hulas Rai Baij Nath v. Firm K.B. Bass and Co. [(1967) 3 SCR 886], were distinguished on the facts of the case.
• The authorities cited by HNPCL regarding the limitations on the right to withdraw an application, such as Arjun Singh v. Mohindra Kumar [AIR 1964 SC 993], were followed to emphasize that the right to withdraw is not absolute and cannot be exercised after the judgment is reserved.
• The court relied on Tata Power Company Limited v. Reliance Energy Limited and others [(2009) 16 SCC 659] to emphasize that while generating companies can supply directly to consumers, they are still subject to regulatory oversight when supplying to distribution agencies.
• The court relied on Kumari Shrilekha Vidyarthi and others v. State of U.P. and others [(1991) 1 SCC 212], Food Corporation of India v. M/s Kamdhenu Cattle Feed Industries [(1993) 1 SCC 71], Indian Oil Corporation Limited and others v. Shashi Prabha Shukla and another [(2018) 12 SCC 85] and Kalabharati Advertising v. Hemant Vimalnath Narichania and others [(2010) 9 SCC 437] to highlight the State’s obligation to act fairly, non-arbitrarily, and in the public interest.

The Supreme Court held that the distribution companies’ decision to withdraw their application was arbitrary, irrational, and unreasonable. The court emphasized that the State and its instrumentalities must act in the public interest and cannot resile from their earlier stands without a valid reason. The court also held that the State Commission was wrong in dismissing HNPCL’s petition for tariff determination, which HNPCL was entitled to under the Electricity Act, 2003.

The court observed that the distribution companies, by not purchasing power from HNPCL at the rate of Rs. 3.82 per unit as per the interim orders, had acted against public interest by purchasing power at a higher rate from other generators. The court strongly deprecated such conduct.

The court quoted the following from the judgment:

“It is thus clear that the consistent stand of the appellants – DISCOMS from the year 2012, for the first time, changed on 4th January, 2018, when they filed Interlocutory Applications before the State Commission for withdrawal of O.P. No.19 of 2016 and disposal of O.P. No.21 of 2015.”

“We have no hesitation to hold that, on account of the assurance given by the State of Andhra Pradesh/APDISCOMS, HNPCL had altered its position and as such, it was not permissible for the appellants – DISCOMS to withdraw O.P. No.19 of 2016.”

“We strongly deprecate such a conduct of the appellants – DISCOMS, which are instrumentalities of the State. The appellants – DISCOMS, rather than acting in public interest, have acted contrary to public interest.”

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the need to uphold public interest, ensure fairness, and maintain the integrity of the regulatory framework. The court was critical of the distribution companies’ conduct, which it found to be arbitrary and against public good. The court emphasized that State instrumentalities must act in a fair, transparent, and non-arbitrary manner. The court also noted that the distribution companies had acted against public interest by not purchasing power at the rate of Rs. 3.82 per unit from HNPCL and instead purchasing it at a higher rate from other generators.

Fact:Law Ratio

The court’s decision was more influenced by the factual aspects of the case, such as the conduct of the distribution companies, the assurances given to HNPCL, and the public interest involved, than by purely legal considerations.

Logical Reasoning

Conclusion

The Supreme Court’s judgment in the case of Southern Power Distribution Company Limited vs. Hinduja National Power Corporation Limited underscores the critical role of state electricity regulatory commissions in overseeing power purchase agreements. The court emphasized that distribution companies cannot arbitrarily withdraw from agreements after seeking regulatory approval, especially when such actions are against public interest and undermine the rights of other parties. The judgment reinforces the principle that State instrumentalities must act fairly, transparently, and in a manner that promotes public good. The court’s decision also highlights that the State Commission is the final authority that has to decide on the tariff after considering all the aspects. The judgment serves as a significant precedent for future disputes involving power purchase agreements and regulatory oversight in the electricity sector.