Introduction
Electricity is included in the concurrent list of the Indian Constitution. This means that both the Central government as well as the State Governments are authorised to pass regulations. Under the present electricity regime, electricity is traded between private parties and public sectors via executing a PPA (Power Purchase Agreement) for the same. A private generator can execute a PPA with a public transmission company (the off-taker) for long term sale of power at a fixed cost. Based on the said PPA, the transmission company will use its grid network to transmit electricity from one place to another or one state to another or one region to another.
Usually, in such a circumstance, a lot of concerns regarding where the issue had occurred and what is the appropriate forum for adjudication and relief arise. Further, since electricity prices are extremely volatile and keep changing every 30 minutes, on many occasions the fulfilment of a long term contract becomes impossible for the generator as the prevailing prices at that time is not at all feasible. In this article, we shall be discussing the landmark judgement given by the Supreme Court in the matter of Energy Watchdog and Ors. v CERC and Ors. [(2017)14SC C80] whereby such issues of jurisdiction, performance of long term contract when the act is impossible, and associated reliefs were addressed.
Facts
The appeals before the Supreme Court in this case arose from judgement dated 07.04.2016 delivered by the Appellate Tribunal for Electricity (APTEL).
Gujarat Urja Vikas Nigam Limited (GUVNL) is a holding company engaged in the business of bulk purchase and sale of electricity. As per the provision under S.63 of the Electricity Act (EA), the process of tariff determination can also be done through a ‘competitive bidding process’ whereby participating bidders decide the tariff by quoting and competing amongst each other. Thereafter, the Appropriate Commission ‘adopts’ the most suitable bid as the tariff.
On 01.02.2006, GUVNL issued a public notice inviting proposals for supply of power on long-term basis and the bidders were entitled to quote escalable and non escalable tariff or partly escalable and partly non escalable tariff to cover risks and obtain whatever returns are available to them. On 25.05.2006, Haryana Utilities also initiated a separate competitive bidding process for purchase of 2000 MW power on long term basis, and bidders could quote bids along the lines of GUVNL notice.
Keeping in view the multiple arrangements that Adani Enterprises had with different coal suppliers for long term supply of coal, GUVNL (dated 11.01.2007) selected ‘Adani Enterprises Consortium’ as a successful bidder for supply of 1000MW of power at a levelized tariff of Rs. 2.349/kwh and a Power Purchase Agreement (PPA) was entered into between GUVNL and Adani Power for this purpose. As regards Haryana, Adani Power submitted their bid for supply of 1425MW of power to Haryana Utilities at Rs. 2.94/kwh and energy charges quoted were non-escalable. Two separate PPAs were executed between two Haryana utilities and Adani Power for supply of 712MW of power to each utility. As required u/s 63, the tariff determined through transparent bidding process were duly adopted by both Gujarat State Commission and Haryana State Commission respectively.
In 2010 and 2011, a change in law took place in Indonesia due to which the export rates of coal from Indonesia sky-rocketed and aligned with international market prices (which was not the prevalent case in the past 40 years). This led Adani Power to file two petitions before the Central Commission (CERC) u/s.79 of EA seeking relief from the impact of change in regulation in Indonesia to either discharge them from performance of PPA on account of frustration or to evolve a mechanism to restore the petitioners to the same economic conditions prior to occurrence of change in law.
On 16.10.2012, the CERC held that both PPAs signed by Adani Power constituted a ‘composite scheme’ for generation and sale of electricity as envisaged on S.79(1)(b) of EA. This means the appropriate commission under the Act, and not the respective state commissions will have jurisdiction over the matter. Further, on 02.04.2013, CERC made an order holding the claim of Adani Power on grounds of force majeure or change in law to be inadmissible. However, with respect to powers u/s 79, CERC can provide redressal of grievances to generating companies and thereby, it constituted a committee to investigate grievances of Adani Power and find an acceptable solution. Based on the committee’s report, on 21.02.2014, the CERC proceeded to grant compensatory tariff. Multiple rounds of appeals and cross-appeals were filed against this order.
Finally, the APTEL passed the impugned judgement and held that the agreements between GUVNL and Haryana Utilities with Adani Power was a composite scheme u/s79(1)(b) and so, the CERC alone would have jurisdiction to proceed with the matter. The APTEL reversed the CERC’s order and stated that force majeure was made out on facts of these cases and reversed the CERC stating that regulatory powers u/s.79 could not be exercised once there is a PPA entered u/s.63 of the Act. Further, it held that change in law provisions do not apply to foreign law, and so change in Indonesian law would not come within scope of the provisions. APTEL remanded the matter back to CERC to find out impact of force majeure and grant compensatory tariff, which was determined by CERC via order dated 06.12.2016.
Issues
The major issues which came up for consideration before the Supreme Court were:
(1) Whether the state commissions will have jurisdiction to hear the matter, or the Central commission alone has jurisdiction to hear the matter?
(2) Is a claim for Force Majeure made out based on the rise in coal prices consequent to change in Indonesian law?
(3) Will the provisions for ‘Change in law’ apply in India, as regards to a change in law which occurred in Indonesia?
Rules (Electricity Act, 2003)
Section 3
This provision envisages that the Central government prepares the National Electricity Policy and the tariff policy with regards to the unions as well as the states. The Central Commission (CERC) as well as the State Commissions (SERCs) are obligated to discharge their functions in accordance with the National Electricity Policy and tariff policy determined by the Central government.
Section 63
It is primarily the role of the regulatory commissions to determine the tariff for electricity. However, there is another provision for determination of tariff by a transparent bidding process. S.63 has a non-obstacle clause, but it is a non-obstacle clause covering only S.62. Unlike S.62 read with S.61 and S.64, the appropriate commission does not determine tariff but only adopts tariff already determined by the bidders. Such adoption will only hold ground if it is done through a transparent process of bidding and this transparent process must be in accordance with the guidelines issued by the Central Government.
Section 79(1)(b)
S.79 enlists the functions of the CERC. S.79(1)(b) states that one of the functions of the CERC is to regulate tariff of private generating companies if such companies enter a composite scheme for generation and sale of electricity in more than one state. Herein, a composite scheme has been given an interpretation to simply mean a scheme for generation and sale of power in more than one states.
Analysis
(1) Jurisdiction of the Central Commission (CERC):
Based on S.79, there must be two criteria to be fulfilled for CERC to have jurisdiction over a matter. Firstly, the agreement should involve generation and sale of electricity in more than one state and secondly, there must be a ‘composite scheme’ between the contracting parties.
The appellants argued that even though the agreement is for inter-state generation and supply of power, since there was no uniformity in tariff under different PPAs, it cannot be said to be a composite scheme. The SC stated that state commissions will not have jurisdiction because the agreement is for inter-state generation and sale of power. The apex court observed that if it were to accept the Appellant’s contention, then neither the state commission nor the Central commission would have jurisdiction to hear the matter, which is total absurdity. So, the expression composite scheme u/s79(1)(b) does not mean anything more than a scheme for generation and sale of electricity in more than one state. Thereby, the SC held that the CERC alone had jurisdiction to hear the matter.
(2) Force Majeure:
The Respondents argued that since the procurement of coal (an essential raw material) became expensive to acquire, the performance of contract is disturbed by a force majeure event. The SC while going into the merits of this argument, referred to many case laws including Satyabrata Ghose v Mugneeram Bangur[1] which is a landmark judgement with respect to interpretation of contracts law in India.
Further, in view of the 31st edition of ‘Chitty of Contracts,’ the SC stated that a rise in cost or expense does not frustrate a contract. Similarly, the SC referred to ‘Trietel on Frustration and Force Majeure,’ whereby it is observed that a force majeure clause will not apply where contract provides for alternate mode of performance making it clear that doctrine of frustration cannot apply in the Adani Power case as the fundamental basis of the PPAs remain unaltered. The PPAs nowhere states that coal can only be procured from Indonesia. Hence, in the absence of any frustrating event and the presence of alternate modes of procurement, force majeure is said not to be attracted.
(3) Change in Law:
The Respondents have argued that the expression ‘change in law’ referred to in clause 13 of the PPA is to be is to be interpreted to mean any change in law impacting the cost or revenue of the business. The SC sated that it cannot accept this argument as the meaning of change in law under clause 13 cannot depend upon whether coal is sourced in a particular PPA from outside or within India. Thereby, under these circumstances, a change in law would only mean a change in Indian law which has impacted the cost or revenue of a business.
Conclusion
While delivering the judgement, the SC has upheld and maintained the absolute sanctity of a contract. If a contract has been entered among parties, its performance should not be hindered by mere disturbance of one source of raw material which is affecting the cost of a business. Further, by rise in coal prices in Indonesia, which was used by Adani Power to procure only a small part of the total coal procured, the fundamental basis of the contract remained unhindered or unaffected. Further, Adani Power had multiple other sources where it could have procured its coal from suggesting that these petitions were filed with a sight of escaping the performance of the contract simply because the performance had become minorly expensive for the business. This is not the purpose of a Force Majeure Clause.
The court interpreted the expression ‘composite scheme’ to mean any scheme for generation and sale of power in more than one states, the meaning of which was uncertain earlier. Further, the court took into consideration the observations made by Attorney General that the object of the Act should not be disturbed and that the National Electricity Policy and tariff policy should be kept in mind as it is binding on all statutory bodies.
[1] 1954 AIR 44
