Introduction
Players in the electricity sector majorly contract via Power Purchase Agreements (PPAs). The electricity market is volatile and unpredictable, where prices change as quickly as within 5 minutes. This makes the sector a very risky area for players to invest in. However, with PPAs, the unpredictability factor is reduced, and market risk is equally distributed among contracting parties. PPAs act as financial instruments to protect the rights of players by agreeing to a fixed cost of supply, usually on a long-term basis.
‘Change in Law’ is essentially an unprecedented event where via legislative (or quasi-judicial) action of the Government or the Commissions, the existing regulatory circumstances for doing business are altered leading to players being financially impacted. Most contracting parties include a ‘change in law’ clause in their PPA as a means of mitigating this risk. CIL clause provides a mechanism for compensating the affected party for either an ‘increase in costs’ or ‘decrease in revenue’ owing to such change/modification in existing regulations. Pursuant to such a clause, parties are required to approach the appropriate commission (Central ERC or State ERC) for approval and computation of compensation due to the impact of change in the law.
However, the approval and computation process by Commissions has proved to be extremely lengthy and exhausting, leading to losses not being recovered on time. This leads to fiscal imbalances for players, who thereafter, find it difficult to raise working capital for their business. In addition, if PPA does not stipulate a change in law clause, then the chances of receiving compensation get further impacted.
To ensure that generating companies or transmission licensees recover their losses owing to ‘change in law’ in a timely manner, Central Government notified the ‘The Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021’ (hereinafter, ‘CIL Rules’), which has been discussed further.[1]
What changes would qualify as an event of ‘Change in Law’?
Laying down of a law or statute is purely a legislative action, implying that all legislative actions can qualify as changes in the law. As famously laid down by Supreme Court in the Energy Watchdog case[2], only a change in Indian law (and not any foreign law) can qualify as a change in law for purposes of computing compensation. Although the change in law includes, but is not merely restricted to legislative action. Central and State Commissions are statutory authorities vested with powers to adjudicate disputes as well as make regulations, making them quasi-judicial in nature.[3] Thereby, any regulation made by the Commissions or an interpretation of regulation thereof, which can financially impact players would qualify as a change in law event.
CIL Rules, 2021 provides for a definition wherein ‘change in law’ can include promulgation, alteration, or abrogation of any legislation; any changes to its judicial interpretation; any adjustments to domestic taxes; and any modifications to terms of any license needed for purchase, supply, or transmission of electricity. Apart from this, change in law has also been defined in the ‘CERC (Terms and conditions of Tariff) Regulations, 2019.’ However, what is worth observing is that the definition provided in the 2019 Regulations has broader scope and ambit for what can qualify as a change in the law when compared to 2021 CIL rules.[4] This can imply that the recent intent of legislature has been to reduce the scope of change in law and associated compensations.
However, parties are free to alter the scope of the change of law by adding a clause in their PPA. The CIL rules expressly state that the definition of change in the law is ‘subject to provisions of the agreement.’ Thereby, an altered definition (wider or narrower) of change in law included in a PPA would take precedence over the definition contained in the 2021 CIL Rules.
The Electricity (Timely Recovery of Costs Due to Change in Law) Rules, 2021
The Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021, as released by the Ministry of Power (MoP), have come into force on 22nd October 2021 and is applicable to generating companies and transmission licensees.[5]
As per the MoP, the objective behind the promulgation of CIL Rules is to ensure timely recovery of compensation (due owing to a change in law event), as investments in the electricity sector depend heavily on the timely flow of payments. As per the rules, the affected party must be compensated so as to bring him to the same economic position as if the change in law never occurred. The affected party (either generator or transmission licensee) must provide the other party a three-week advance notice of any planned changes to the tariff or charges, whether positive or negative, that they intend to make in response to a change in the law.
Further, the affected party is required to provide the other party with a ‘computation’ of the impact in tariff to be adjusted and recovered (within time bound manner). Recovery of the proposed impact to the tariff will begin with the next tariff billing cycle. Subsequently, generating companies or transmission licensees are required to provide all pertinent documents and details of calculation to the Appropriate Commission for adjusting the amount of impact in the monthly tariff.
CIL Rules provide a formula for calculating adjustments in the monthly tariff due to the impact of change in the law. However, if PPA provides a method for calculating such adjustments, it can take precedence over the method mentioned in CIL Rules. This is based on Rule 3(5).
The CIL Rules were analyzed by CERC in the matter of Mahindra Renewable Pvt Ltd v Solar Energy Corporation of India Ltd[6], which is discussed further.
MRPL v SECI: Case Study
Through its order dated 6th December 2021, CERC clarified certain ambiguities relating to 2021 CIL Rules.
The Ministry of Finance issued a notification dated 29.07.2020 imposing a safeguard duty on the import of solar cells. Petitioners (MRPL) filed a plea seeking a declaration of CERC regarding such imposition being an event of a change in the law. Further, the plea sought approval of the quantum and mechanism of compensation (along with interest) in line with the methodology for computation provided by CERC via its order dated 20.08.202.
Issues that came for consideration were:
1) Will CIL Rules apply only in cases where ‘change in law’ is not defined in PPA?
2) Can CIL Rules have a retrospective application or is it only prospective in nature and intent?
CERC, considering all aspects of the matter held as under:
Issue 1
Petitioner’s claim that CIL Rules will only apply when ‘change in law’ is not defined in PPA is based on the phrase ‘unless otherwise defined in the agreement,’ used in Rule 2(1)(c) of CIL Rules. Meaning, if the agreement does not provide for a ‘change in law’ clause, change in law will have a meaning as defined in CIL Rules.
This certainly means that the definition provided in PPA will supersede the definition given in CIL Rules, either via broadening or narrowing its scope. However, the argument that CIL Rules will completely cease to apply in case PPA defines ‘change in law’ is incorrect. Even if PPA provides for a change in law clause, CIL Rules will continue to apply to such parties (provided, the PPA clause will take precedence).
Issue 2
CERC observed that no act can operate retrospectively unless the statute expressly provides for it. CIL Rules remain devoid of any such provision.
Further clarification on this issue came from the MoP, which stated that no retrospective application to CIL Rules has been intended. ‘Change in law’ events that transpired before notification of these rules will be handled in accordance with rules or positions prevalent at the time of occurrence of the event.
Conclusion
Previously, change in law and associated compensations were only a contractual provision, and it was the obligation of the parties to have mandatory inclusion of this clause in their PPA. However, with the advent of CIL Rules, recovery of dues owing to an event of a change in law has become a statutory relief available to contracting parties, even in cases where PPA does not provide for a change in law clause.
CIL Rules come as a huge relief for generators and transmission licensees, who had been majorly affected by untimely payment of dues. Further, as per Rule 3(2), recovery of dues is possible immediately after the other party is notified of the stipulated change in tariff. However, since the Rules do not provide for retrospective application, all parties affected before notification of these Rules will not be entitled to claim speedy recovery of dues under CIL Rules.
[1] https://egazette.nic.in/WriteReadData/2021/230629.pdf
[2] (2017) 14SC C80
[3] Sections 79 and 86, The Electricity Act 2003
[4] https://corporate.cyrilamarchandblogs.com/2021/11/recovery-of-change-in-law-impact-an-overdue-intervention/
[5] https://www.scconline.com/blog/post/2021/10/27/provisions-for-adjustment-of-tariff-in-cases-where-there-is-a-change-in-law-notified-vide-the-electricity-timely-recovery-of-costs-due-to-change-in-law-rules-2021/
[6] https://cercind.gov.in/2021/orders/228-MP-2021.pdf
