Energy Watchdog v. CERC: The Contractual Crisis Plaguing India’s Electricity Sector
[Ananaya Agrawal is a student at National Law University, Delhi.]
An introduction to electricity sector’s journey in the past decade
In the last decade, India has transformed from being an energy starved to a power surplus country. However, the shift has not been a path of roses, and the solutions to old problems have inadvertently opened a can of worms. One such emerging challenge is best understood through the case of Energy Watchdog v. Central Electricity Regulatory Commission (Energy Watchdog), which deals with classic contract law concepts of force majeure and contingent contracts in the specialized and dynamic niche of electricity law.
Previously, state electricity distribution companies or DISCOMs used to procure electricity via the Memorandum of Understanding route wherein the DISCOMs and power suppliers would agree to a fixed tariff rate determined by the appropriate Electricity Regulatory Commission under whose jurisdiction the DISCOMs fell. However, the same had several administrative constraints such as yearly recalculation of tariff after assessing the various factors such as efficiency, competition consumer interests, National Electricity Policy etc., making it unfeasible for the Indian economy which was facing a massive power crunch and needed to quickly build a lasting infrastructure for power. Therefore, in 2005-06, the policymakers decided to open up the channel of competitive bidding for the sector wherein the private power suppliers could bid for entering into a power purchase agreement (PPA) with government monopolized distribution companies. This process falls under Section 63 in the Electricity Act, 2003 which provides that Central or State Electricity Commissions (which are typically responsible for fixing tariff under Section 62) shall adopt (and not determine) the tariff decided by a transparent bidding process conducted in accordance with the guidelines issued by the Central Government.
Yet, as it is with almost every bureaucratic decision, the PPA process met some uncontemplated hurdles within four years after coming into existence and has seen widespread litigation ever since. Two major events are responsible for changing the tides. Firstly, in 2010 and 2011, the Indonesian government increased the export price of coal to international market levels, thereby almost doubling the cost borne by private power suppliers such as Adani Power Limited and Tata Power Company Limited. These companies, by virtue of having longstanding fuel supply agreements in Indonesia where prices had not changed for around 40 years, had won the PPA by placing a non-escalable (and therefore a more competitive) tariff bid. Since the price of coal had risen, power suppliers sought to get the tariff adjusted or discharged from performance of the PPA on grounds of frustration of contract. Secondly, in 2014, the Supreme Court of India (Supreme Court), in the case of Manohar Lal Sharma v. The Principal Secretary and Others, held that under the Mines and Minerals (Development and Regulation) Act, 1957 and the Coal Mines (Nationalization) Act, 1973, the Central Government did not have the power to grant allocation of coal blocks to private companies, and even assuming that it did have the power, because the allocation by the screening committee was arbitrary, unfair and affecting distribution of national wealth, most allocation of coal blocks were liable to be cancelled.
Why and how did the litigation take place?
Despite the talk and efforts around solar, hydro and wind energy, India is largely dependent on coal for power. Hence, it is no surprise that when coal became scarce in India, several of the PPAs to build prestigious energy projects in states like Haryana, Maharashtra, Gujarat, Rajasthan and others began to witness serious litigation in the central and state electricity commissions as well as the Appellate Tribunal for Electricity.
The private power suppliers pleaded force majeure (both in the PPA and as a general principle of contract law) as a ground for seeking relief by claiming that the rise in coal prices due to change in the Indonesian law had made the contract commercially impracticable and frustrated its basis or at least entitled them to compensatory tariff so that the heavy losses being suffered by them could be made good.
On what grounds did the proceedings take place?
For nearly five years, there were many simultaneous litigations ongoing in various tribunals for electricity. Ultimately, the matter was decided by the Supreme Court in a 2016 case: Energy Watchdog v. Central Electricity Regulatory Commission. Due to previous judgments in the case by lower tribunals, the power suppliers could no longer plead force majeure as a means to avoid performance of the contract but could argue it “in all its plentitude” to support an order that would quantify compensatory tariff.
Further, the court reiterated the ruling of the seminal case Satyabrata Ghose v. Mugneeram Bangur and Co., wherein it was held that where the contract itself impliedly or expressly contains a term stipulating the circumstances under which the contract would stand discharged, the dissolution of the contract would take place under the terms of the contract itself and under Section 32 of the Indian Contract Act (Act) providing for contracts contingent on the happening or non-happening of an event i.e. contingent contracts. However, if the frustration takes place dehors or outside the anticipation of the contract, it will fall under Section 56 of the Act which relates to agreements to do an impossible act. Thus, as was held in M/s Alopi Parshad & Sons Ltd. v. Union of India, a “vague plea of equity” does not allow parties to ignore express provisions of the agreement.
Indeed, a mere onerous turn of events would not attract Section 56 as unforeseen risks are part of the commercial risks undertaken through creation of a contract. The contract must be rendered so fundamentally different that the basis on which it was entered into is disturbed and it is no longer the contract the parties believed themselves to be undertaking to perform. The court noted that since the PPA nowhere stated that the coal needed to be imported from Indonesia, the rise in coal price was a risk the power suppliers knowingly took and thus the responsibility to pay and arrange for supply of coal was entirely upon the person who set up the power plant.
More so, the situation was neither covered by Clause 12.3 nor so covered by Clause 12.7 of the PPA which relate to force majeure events (natural or non-natural), and hence, Section 32 of the Act could not be applied either. As the final nail in the coffin for the force majeure argument, the court ruled that a plain reading of Clause 12.4 of the PPA indicated that changes in fuel cost would not count as force majeure, and hence, applying the aforementioned principle in Satyabrata Ghose, Section 56 would in any case be inapplicable.
However, the real punch in this case lies in the court’s ruling on the argument surrounding ‘change in law’ contained in Article 13 of the PPA which provided that any change in law would require the affected party to be put in the same economic position they would have been had such change in law not have occurred. The provision was initially added keeping in mind fluctuations in tax rates, but as we shall see, the court’s interpretation has greatly widened its scope.
In the Model PPA by the Central Government, ‘law’ has been defined as, “means, in relation to this agreement, all laws including Electricity Laws in force in India and any statute, ordinance, regulation, notification or code, rule, or any interpretation of any of them by an Indian Government Instrumentality and having the force of law and shall further include all applicable rules, regulations, orders, notifications by an Indian Government Instrumentality pursuant to or under any of them and shall include all rules, regulations, decisions and orders of the Appropriate Commission.”
The court observed that the expression ‘in force in India’ went with the words ‘all laws’ and thereby interpreted the above clause to mean that change in law included only a change in the Indian laws. This interpretation was supported by the fact that Clause 13.1.2 of the PPA defined “competent court” to mean only the Indian judiciary and hence the various kinds of ‘enactments’ contained in Clause 13.1.1 would also refer only to Indian law.
Thus, the change in Indonesian law did not clear the test either and the case appeared to be a clear victory for the DISCOMs and the consumer groups. However, the story does not end here. Interestingly, the last two years are witness to a surprising turn of events wherein the Energy Watchdog case has in fact resurrected or at least revitalized several other disputes between the DISCOMs and the private power suppliers on the very same grounds of force majeure and change in law.
How has the Energy Watchdog case impacted future cases in the electricity sector?
During the four years it took this issue to reach the Supreme Court, several other matters had been filed in electricity tribunals which were kept pending in the wait for the apex court to clarify the law. Since Energy Watchdog, there is a flood of judgments dealing with the same point of law. Ironically, despite winning the case in New Delhi, many state DISCOMS are poised to lose these other cases. This is because even though the Supreme Court held that “change in law” did not include foreign law, it laid down a broad scope for Indian law for the purpose of the PPAs by holding that any change in government policy (such as the Ministry of Coal amending guidelines for supply of coal as in the case of Energy Watchdog) would also count as ‘change in law’. This limited victory for the power suppliers in has proved to be their saving grace and might really reverse their fortunes.
Take for instance the recent case of Adani Power Maharashtra Ltd. v. MSEDCL, which has been remanded to the Maharashtra Electricity Regulatory Commission by the appellate tribunal because of the sea of developments that have taken place since the initial order in 2014. Adani Power is claiming both force majeure and change in law as grounds for seeking relief. Though both the issue on rise in price of Indonesian coal and the law on force majeure point are largely settled making them unlikely wins, Adani Power stand a good chance of compensation on the second contention since the Lohara coal block which was previously allocated to them by the Ministry of Environment and forest via a terms of reference has been subsequently cancelled and may be contended as a change in law.
Similarly, in the case of Adani Power (Mundra) Ltd. v. Uttar Haryana Bijli Vitran Nigam Limited and Ors., the Central Electricity Regulatory Commission held that the plaintiffs were entitled for relief under change in law as the notification of the Shakti Scheme was a change in government policy and thus a change in law.
The sequence of events demonstrates the dynamic, niche and risk-laden nature of the electricity sector which is perhaps why the court had to go out of its way in its interpretation ‘change in law’ because it could not disturb the well-settled contract law in trying to grant relief to the private power suppliers. If electricity distribution were not a government monopoly, this case would have perhaps never reached the courts. Even though a strict application of the contract negated any possibility for compensation or renegotiation, private players recognize the importance of preserving business relationships and would have preferred an alternate dispute resolution mechanism such as negotiation or mediation. However, DISCOMs, being government-owned, may not be able to enter into such private discussions out of transparency concerns. Here again, the role of the Indian judiciary as the neutral and ultimate resolver of disputes between the State and private individuals assumes significance.