SC Clarifies the Scope of Regulatory Power under Section 79 (1) of Electricity Act, 2003

At least since 2012, there has been a fair amount of legal uncertainty on the ambit of powers of the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions (SERCs) under the provisions of the Electricity Act, 2003 (the 2003 Act) to award what came to be known as a “compensatory tariff” in case of tariff-based competitively bid power generating projects.

The issue took centre stage in 2011-12 with the promulgation of regulations by Indonesia, which barred export of coal from that country below a certain benchmark price. A number of Indian power project developers had submitted aggressive tariff bids during 2006-2009 relying on the import of relatively cheaper coal from Indonesia to India to fuel their power projects.

When Indonesia introduced benchmark floor prices for the export of coal, many Indian power project developers realised that their tariff bids would no longer be financially viable if they were to import coal from Indonesia above the benchmark price. This period also witnessed a significant rise in international prices of coal and an increasing shortage of domestic coal in India to fuel the rapidly expanding thermal power generation capacities.

It is against this background that certain Indian power generators primarily relying on imported coal to run their plants were forced to look for financial compensation from the distribution utilities, even though the power purchase agreements (PPAs) signed by them did not ostensibly provide for any compensatory tariff over and above the quoted tariff in the bid process.

Two large generators, Adani Power Limited with a 4620 MW power plant located at Mundra, Gujarat and Coastal Gujarat Power Limited (a subsidiary of Tata Power Company) with a 4000 MW Ultra Mega Power Project (UMPP), filed petitions before the CERC seeking compensatory tariff on various grounds including in exercise of the regulatory power of the CERC under Section 79 of the 2003 Act, independent of the provisions of the PPAs signed by them. Vide orders issued in 2013 and 2014, the CERC while negating the claims of petitioners on the ground of force majeure and change in law under the PPAs, awarded certain compensatory tariffs to the two companies in exercise of its regulatory powers under Section 79 to mitigate the financial suffering of the generators on account of an unprecedented rise in imported coal prices.

Various appeals and cross-appeals were filed against the CERC orders and the Appellate Tribunal for Electricity (APTEL) in its 486 page long judgment delivered on April 7, 2016 set aside the CERC orders regarding its power to grant compensatory tariff under Section 79 of the 2003 Act. However, it upheld the claims of two petitioner companies that the promulgation of Indonesian regulations banning export of coal below the published benchmark price constituted a force majeure event under the respective PPAs and asked the CERC to work out the financial compensation in accordance with the provisions of the PPA.

Appeals were filed against the APTEL order by certain distribution utilities and energy sector NGOs before the Supreme Court of India (SC). Vide its landmark judgment dated April 11, 2017 in the case of Energy Watchdog v. CERC, the Hon’ble SC clarified the scope of the regulatory power of the CERC under Section 79(1)(b) of the 2003 Act.

Some of the salient points of the SC judgment and their implications are as follows:

  • Adoption of competitively bid tariff under Section 63 of the 2003 Act is not independent of the general regulatory power of the CERC under Section 79(1)(b) of the Act. However, to the extent the competitive bidding guidelines issued by the Central Government under Section 63 covers the field, the CERC is bound by those guidelines and it must exercise its regulatory powers under Section 79(1)(b) only in accordance with those guidelines.

Where there are no guidelines framed at all or where the guidelines do not deal with a given situation, the CERC’s general regulatory powers can be exercised. This means that the window for revisiting a competitively bid tariff by the CERC (and by implication the SERC) is not completely closed and to this extent the SC order is a welcome step forward from the judgment delivered by APTEL on April 7, 2016. At the same time, however, the window for revisiting a competitively bid tariff is quite narrow in as much as the generating company will have to establish that its case/situation is not covered by the standard bidding guidelines framed by the Central Government for determination of tariff through a transparent bidding process.

  • Unsurprisingly, the SC has held that the word “Law” as defined in the PPAs covers only the Indian law and not foreign laws like the Indonesian regulation on export of coal, which was the bone of contention between the generators and utilities.
  • Reversing APTEL’s decision on the point, the SC has held that the change in the National Coal Distribution Policy (NCDP) in July 2013 curtailing the assured supply of domestic coal to power generators constituted a ‘Change in Law’ under the PPAs. As a result, power generators depending on supply of domestic coal would be able to obtain relief under ‘change in law’ provision of the PPAs. The order thus also puts to rest the ambiguity around the issue as to whether NCDP has the force of law and whether changes in NCDP resulting in a change in coal allocation to the power generators would entitle them to a change in law relief under their PPAs.
  • Expectedly, the SC has accorded a great deal of importance to the sanctity of tariffs discovered through a competitive bidding process. The argument that an unprecedented rise in prices of imported coal including as a result of promulgation of Indonesian regulations had altered or taken away the fundamental basis of the PPAs and therefore, the doctrine of frustration contained in Section 56 of the Contract Act, 1872 would apply has been rejected. Following the approach adopted by the SC in Alopi Parshad v Union of India, (1960) 2 SCR 293, the SC held that the risk of abnormal rise in fuel prices in a tariff bid project remains with the generator.
  • The SC has also narrowed down the scope of ‘force majeure events’ covered in the PPAs. While agreeing that the definition of ‘force majeure’ in the PPAs was not an exhaustive provision, the SC held that a party’s performance being hindered by an unforeseen event will not necessarily rise to a force majeure event unless the same has partly prevented the party from performing its obligation. The expression ‘hindered’ in the force majeure clause needed to be construed with regard to the words that precede and follow it. When read with other sub-clauses, ‘hindered’ meant that the affected party must be partly prevented in performance of its obligation. As a result, the broader interoperation given by the APTEL to word ‘hindered’ to hold the promulgation of Indonesian Regulations as a force majeure event has been rejected.

This judgment has far reaching implications for the existing and future tariff bid based PPAs in India. The power generators, especially those relying on imported coal, are not a happy lot. However, the judgment settles the legal position on the scope of regulatory powers and other related matters and this can certainly be termed as a step forward in the still nascent jurisprudence of electricity regulation in India.

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