Abstract
As India races to be the front runner in renewable energy, DISCOMS have been pressurizing power generators to retrospectively reduce the tariffs for concluded PPAs. On the other hand, State Governments have been falling into a financial blackhole due to the exorbitant tariffs. This post seeks to address the question of law pending in the Apex Court regarding the retrospective revision of tariffs for an approved, concluded and executed PPA.
Introduction
India has set its sights on becoming a green energy world leader and has witnessed a fast-paced growth in the last six years. [i] The Annual Report (2019-20) of the Ministry of New and Renewable Energy places India in the 4th and 5th global position of wind and solar power deployment, respectively. [ii] Companies have been establishing wind and solar plants across the country in line with the initiatives taken by the Government of India and various states to generate electricity through alternative sources of energy. These initiatives have been undertaken to reduce the dependency of India on fossil fuels such as coal.
In some states in India, power distribution companies (“DISCOMS”) of the state, have been accused of arm-twisting wind and solar power generators (“Generators”) into reducing tariffs of already executed, approved, and concluded Power Project Agreements (“PPA”). The PPAs in question were executed between Generators and DISCOMS usually for a period of twenty-five years.
In accordance with the Electricity Act, 2003 (“Act”), the ‘Appropriate Commission’, i.e., either the Central Electricity Regulatory Commission or the relevant State Electricity Regulatory Commission [iii] has the power to determine the tariff for supply of electricity by a Generator to a DISCOM. [iv]
As per the Act, the Appropriate Commission can determine tariff by way of two different processes, the first being in accordance with the provisions of Section 62 of the Act. Under this provision, the Appropriate Commission in line with the regulations issued under Section 61 of the Act, determines the tariff. The second being in accordance with the provisions of Section 63 of the Act, where an L-1 bidder is decided by way of bidding process conducted by a nodal agency. The Appropriate Commission approves the tariff if the same has been reached through a transparent bidding process and in accordance with the Central Government’s bidding guidelines.
The Supreme Court of India is presently adjudicating upon a very interesting question of law pertaining to DISCOMS and Generators. [v] The question of law pending before the Supreme Court is with respect to retrospective revision of tariffs pertaining to already executed, approved, and concluded PPAs.
Interestingly, this question of law arises from an Andhra Pradesh High Court decision, ReNew Power Limited v. the State of Andhra Pradesh & Ors. The Andhra Pradesh High Court in 2019 had heard a batch of writ petitions filed by the Generators who alleged they were facing coercive tactics of the Government of Andhra Pradesh to reduce tariffs of already concluded PPAs. Although the Court by setting aside the impugned Government order held in favor of the Generators, while disposing of the writ petition, it provided for an interim rate at which the tariff is to be paid till the time the dispute is settled by the Andhra Pradesh Electricity Regulatory Commission (“APERC”). This rate was determined without any clear basis. The decision of this court raises a very primary question of law, that whether a tariff determined for a PPA by a State Electricity Regulatory Commission can be revisited by the State Electricity Regulatory Commission and be revised retrospectively.
Factual Background
In accordance with the solar policy unveiled by the Government of Andhra Pradesh in 2014, a request for selection for bids was invited from Generators interested in generating solar power. Upon following due procedure, the Generators executed PPAs with DISCOMS in 2014 to produce solar power. A similar process was also followed with respect to Generators interested in generating wind power and accordingly DISCOMS executed PPAs with Generators to produce wind power between 2016 – 2017.
As discussed above, the State Electricity Regulatory Commission has been vested with the power to either determine the tariffs in accordance with the regulations or approve the tariffs discovered by way of a bidding process. While the process varies for wind Generators and solar Generators, the APERC’s role in determining the tariff remains the same. As per the procedure outlined by the central enactment and after a bidding process, the APERC determined the tariffs for the PPAs and the Generators subsequently began generating power and supplying the same to the DISCOMS.
The Generators supplied power to the DISCOMS over time and raised invoices at the tariffs determined by the APERC, however, no payments were made. Years after the PPAs had been executed and power was being supplied at the rates determined by the APERC, the Government of Andhra Pradesh was of the view that these tariffs were exorbitant, and the State Government was being pushed into a financial black hole. To ensure steps were being taken to reduce the tariff, the Government of Andhra Pradesh vide Government Order Rt. No. 63 (“GO”) constituted a High-Level Negotiating Committee (“HLNC”) to review the PPAs, negotiate with the Generators, reduce the prices and to make suitable recommendations. Subsequently, on July 12, 2019, a letter was issued to all the Generators, wherein it was stated that the determination of tariff by the APERC did not reveal the true market price and an accurate price for the same was required to be determined. The Generators were requested to reduce the tariff to Rs. 2.44/KWH for solar Generators and Rs. 2.43/ KWH for wind Generators from the date of commissioning of the projects and revise the bills that are already submitted and are due for payment within ten days. The letter also stated that if the tariffs were not reduced by the Generators, the DISCOMS would terminate the PPAs.
The Generators challenged this letter and the GO by way of a writ petition before the Andhra Pradesh High Court. Apart from this, the Generators were also aggrieved by the failure of DISCOMS to pay bills and deliberate curtailment of power from Generators who have a ‘Must Run’ status as per law.
Contention of the Parties
The Generators challenged the interference of the State and the steps taken by the Government of Andhra Pradesh in the matter on primarily two grounds: (i) since electricity is a subject in the concurrent list and a central act governing the same is in place, the State cannot issue directions or legislate which is not in line with the central legislation. The State can only give directions in matters of ‘policy’ which is not the present case. The determination of tariff is a function of the APERC, and the tariff was duly decided in terms of law. Further, nothing in the statute permits the State or DISCOM to unilaterally alter the rate provided under the PPA; (ii) the sanctity of the contract should be preserved, and the State cannot change the terms of a concluded contract or terminate the agreement due to high tariffs. The State, being a third party to the PPA, has no role to play and cannot dictate terms to the Generators. Furthermore, it was argued that pursuant to the PPAs, the Generators have heavily borrowed money for investment in plants, and any reduction in the agreed upon tariff would render them in debt.
It was clarified by the DISCOMS that they did not intend to terminate the PPAs; however, they had approached APERC for revision of tariff. For this purpose, the State intended to bring all parties to the negotiation table through steps such as the issuance of letter and constitution of the HLNC. It was explained that due to the high cost of power in Andhra Pradesh as compared to other states, the actions of the government were in public interest. It was also contended that the State is duty-bound to protect itself from financial crises and thus is empowered to issue directions. This is also made clear by the Act through sections 11, 65 and 108. Moreover, it was reiterated that electricity is a concurrent subject, which provides for State jurisdiction in the matter. The maintainability of the writ petition was challenged by placing reliance on the case of [6] Uttar Pradesh Power Corporation Ltd. v. N.T.P.C Ltd., to argue that only the APERC can decide upon the issue of tariff.
Sanctity of Contract
At its crux, the issue is one of fundamental contract law since a contract is binding on its parties. The Supreme Court in the past has held that a contract, being a creation of both the parties, is to be interpreted by having due regard to the actual terms settled between the parties. [7] The occurrence of commercial difficulty, inconvenience, or hardship in the performance of those conditions, is not considered as a justification for not complying with the terms of the contract which had been accepted with open eyes. [8] Moreover, the common law principle of privity of contract prevents a third party from enforcing the terms of a contract. During the hearing, it was also argued by the Generators that once the State, through its DISCOMs, enters a private contract, it could not claim any special privileges and would be required to honour the terms of the contract.
The Court relied on the Supreme court case of [9] Bihar State Electricity Board, Patna v. Green Rubber Industries where a party was held bound by the terms of contract even though he had not read them. The case also discussed that when the terms of a contract do not permit alteration, unilateral or not, the same cannot be done at the behest of a third party. A contract can only be modified by mutual consent of the parties or by contract or law. Further, the Supreme Court has also recognized that a party to a contract cannot at a later stage, while the contract was being performed, impose terms and conditions which were not part of the offer and which were based upon unilateral issuance of office orders. [10]
The Supreme Court while adjudicating disputes pertaining to PPAs has recognized that the sanctity of a PPA entered between the parties by mutual consent cannot be allowed to be breached and the terms of PPA are binding on both the parties equally. [11]
In this case, the court noted that the State is not a party to the PPA and the DISCOMS instead, are signatories to the contract. It was also noted that the terms of the PPAs did not permit unilateral alteration or alteration at the behest of a third party. The court observed that since the Generator did not consent to the modification of tariffs stated in the PPA, the DISCOMS could not unilaterally alter the same. The court further stated that the Government of Andhra Pradesh, being a third party to the PPAs could not give directions to alter the PPAs and doing so would be against well-settled law.
The reasoning of the Court is inter alia based upon this principle of sanctity of contract. Since the PPA has been entered into by the parties by mutual consent, the contract cannot be allowed to be breached by a decision of the State Commission to extend the earlier control period beyond its expiry date. This would be to the advantage of the generating company-respondent No.1 and disadvantage the appellant. However, the terms of PPA are binding on both the parties equally.
Reliance on Section 11
During the hearing, it was contended by the respondents that the State was justified in exercising its power under the three sections of the Act. An analysis of Section 11 of the Act would show that the appropriate Government only has the power to pass directions in “extraordinary circumstances.” [12] The power that can be exercised by the State Government under Section 11 is limited to the operation and maintenance of a generating station only. The financial implication of such operation and maintenance as has been directed pursuant to Section 11 (1) the Act must be evaluated by the Appropriate Commission. Evidently, even under Section 11 of the Act, the role of a State Government and the role of the Appropriate Commission is clearly distinguished. In the given case, the High Court believed reliance on Section 11 of the Act was inapplicable in the given case, as the case at hand did not qualify as an extraordinary circumstance.
Reliance on Section 65
Section 65 allows the State to grant subsidies in the determined tariffs, however, the state is duty-bound to ensure the advance payment of compensation to the generator because of the subsidy. However, from a reading of the Section, it is evident that Section 65 did not grant any such powers to the State as being exercised by it through the GO and the resultant letter. Given that the wordings of Section 65 pertain to situations where it is the duty of the State Government to provide the DISCOM with an amount in advance for the subsidy being granted, it was expressly clear to the court that this section too did not apply to the fact scenario.
Reliance on Section 108
Under Section 108 of the Act, the State Commission in the discharge of its functions is required to be guided by such directions in matters of policy involving public interest as the State Government may give to it in writing. Further, if any question arises whether a direction relates to a matter of policy involving public interest, the decision of the State Government thereon shall be final.
From a reading of Section 108 of the Act, it is seen that the Act permits the State to give directions to the State Commission, which in turn, shall use such directions for guidance in policy matters. However, for Section 108 to be invoked, there are two elements to be followed. The first, that the State Government must provide the State Commission directions in writing. The second being, that the directions must be related to policy involving public interest.
The High Court after hearing the parties believed the determination and re-determination of tariffs did not qualify as a “policy matter” and the State could not rely upon Section 108 of the Act to issue the GO and the consequential letters.
Barred by Article 162
Under Article 162 of the Indian Constitution, the executive power of a State extends to matters with respect to which the Legislature of the State has the power to make laws. However, this power is limited. Through the proviso in Article 162, any matter with respect to which the Legislature of a State and Parliament have power to make laws, the executive power of the State is subject to, and limited by, the executive power expressly conferred by the Constitution or by any law made by the Parliament.
The Supreme Court has even held that once a law occupies the field, it is not open to the State Government in exercise of its executive power under Article 162 of the Constitution to prescribe any laws in the same field by an executive order. The Supreme Court did recognize that “in matters relating to a particular subject in absence of any parliamentary legislation on the said subject, the State Government has the jurisdiction to act and to make executive orders. The executive power of the State would, in the absence of legislation, extend to making rules or orders regulating the action of the Executive. But such orders cannot offend the provisions of the Constitution and should not be repugnant to any enactment of the appropriate Legislature. Subject to these limitations, such rules or orders may relate to matters of policy, may make classification and may determine the conditions of eligibility for receiving any advantage, privilege or aid from the State.” [13]
Therefore, when exercising executive powers under Article 162 of the Indian Constitution of India, the threshold is twofold. These powers can be exercised on those subject matters which are under the legislative domain of state legislature and these actions can be initiated on subject matters whether they are covered by any law or not. However, in case the executive powers are exercised on a subject matter covered by a statute, then the said executive action cannot be contrary to the provisions of the statute.
The Court in this case observed that the decision in the case of [14] T. Muralidhar Rao v. State of Andhra Pradesh applies squarely to the facts of the case. Given that there was a central law governing the field, i.e., through the Act the State Commission had the power to determine the tariff, the State Government in exercise of its executive power could not pass orders trenching upon or intruding in the area occupied by the State Commission.
Supreme Court Proceedings
Keeping in mind the submissions made by the parties, the Honourable High Court of Andhra Pradesh allowed the writ petitions and quashed the GO and the resultant letter. The DISCOMS were directed to avail statutory remedies if they believed that the tariff rates were high and not in line with the market position. However, when it came to the question of payments that were due, the High Court provided an interim arrangement to the parties to “balance the interest of both parties”, while finally disposing of the matter.
Interestingly, the Supreme Court has held that contracts entered pursuant to predetermined norms cannot be reopened even based on error in the initial assessment, or commercial difficulty. This was based upon the reason that those who execute contracts with open eyes must accept the burdens of the contract along with its benefits. [15]
The High Court observed that the petitioners required liquidity and consequential lubrication to keep the “windmills” moving, however, it took cognizance of the fact that the DISCOMS were running high losses. To balance the interest of both parties, the High Court directed the DISCOMS to honour the bills of the Generator and pay the same at the “interim” rate of Rs. 2.44 for solar power and Rs. 2.43 for wind power for all pending bills and future bills. The reasoning behind the same was that if the Generators were not paid their dues, they would be declared non-performing assets and insolvency proceedings would be initiated against them, and on the other hand, the DISCOMS were suffering significant losses. However, the High Court failed to provide any justification or reasoning behind reaching the quantum for interim arrangement. It appears that High Court while deciding interim arrangement relied upon the proposed tariff of the DISCOMs by way of their letter dated 12.07.2019, however, if the High Court itself has set aside the said letter of DISCOM and since there was no reasoning as to how the quantum was achieved, therefore, the Order suffered through lack of reasoning on the said aspect.
Conclusion
In November 2020, the respondents challenged the order of the High Court before the Supreme Court. While the Supreme Court has issued notice in the matter, the date of hearing was February 10, 2021.
About the Authors
Ashima Obhan QC, is a Partner at Obhan and Associates. She heads the Corporate and M&A practice at Obhan & Associates and is equally active in Finance and Real Estate.
ACI Arb Shivam Patanjali is an associate at Obhan and Associates and is an alumnus of the Jindal Global Law School (JGLS), Delhi.
Editorial Team
Managing Editor: Naman Anand
Senior Editor: Kanak Mishra
Associate Editor: Hamna Viriyam
Junior Editor: Janvi Johar
Preferred Method of Citation
Ashima Obhan, QC and Shivam Patanjali, “The Paradox of Finality: Retrospective Revision of Tariffs for a Concluded and Executed PPA” (IJPIEL, 17 February 2021)
<https://ijpiel.com/index.php/2021/02/16/the-paradox-of-finality-retrospective-revision-of-tariffs-for-a-concluded-and-executed-ppa/?et_fb=1&PageSpeed=off>
Endnotes
[1] India rapidly moves towards becoming one of green energy leaders in world; these projects in pipeline, FINANCIAL EXPRESS, (Dec. 31, 2020, 4:41 PM) https://www.financialexpress.com/economy/india-rapidly-moves-towards-becoming-one-of-green-energy-leaders-in-world-these-projects-in-pipeline/2161719/.
[2] Annual Report 2019-2020, Ministry of New and Renewable Energy, Government of India,
https://mnre.gov.in/img/documents/uploads/file_f-1597797108502.pdf.
[3] The Electricity Act, 2003, section 2 cl. (4), No.36, Acts of the Parliament, 2003.
[4] The Electricity Act, 2003, section 62, No.36, Acts of the Parliament, 2003.
[5] Southern Power Distribution Company of Andhra Pradesh Ltd. v. State of Andhra Pradesh, SLP(C) No. 013053/2020 (Diary No. 22484 of 2020).
[6] Uttar Pradesh Power Corporation Ltd. v. N.T.P.C Ltd., 2011 (12) SCC 400 (India).
[7] Gujarat Urja Vikas Nigam Ltd v. Solar Semiconductor Power Company (India) Pvt. Ltd. and Anr., (2017) 16 SCC 498 (India).
[8] State of Haryana v. Jage Ram, (1980) 3 SCC 599 (India).
[9] Bihar State Electricity Board, Patna v. Green Rubber Industries, AIR 1990 SC 699 (India).
[10] DDA & Anr. v. Joint Action Committee of SFS Flats, (2008) 2 SCC 672 (India).
[11] Gujarat Urja Vikas Nigam Ltd. v. Solar Semiconductor Power Company (India) Pvt. Ltd. and Anr., (2017) 16 SCC 498 (India).
[12] “Extraordinary circumstances” is defined in the explanation as arising out of a threat to the security of the State, public order or natural calamity or such other circumstances.
[13] Paul Manoj Pandian v. P. Veldurai, (2011) 5 SCC 214 (India).
[14] T. Muralidhar Rao v. State of Andhra Pradesh, (2010) 2 ALD 492 (India).
[15] Har Shankar & Ors v. The Dy. Excise & Taxation Commr. & Ors., (1975) 1 SCC 737 (India).
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