CERC may allow amendments to PPAs of power firms by Dec-end in Gujarat

With the Supreme Court asking the CERC to look into power purchase agreements signed by various states with private firms, floodgates for tariff revisions may open up

A Supreme Court order last month allowing the Gujarat government to approach the Central Electricity Regulatory Commission (CERC) for amendments to power purchase agreements (PPAs) perhaps for the first time will see a review of government contracts, primarily driven by concerns of the private sector. So far, governments, on several instances, have not honoured contract conditions and even forced private parties like Reliance Industries and Vedanta Cairn to withdraw in “public interest” from arbitration proceedings.

Though the issue in itself is not very complicated, there is a legal ping-pong which has been played out over the last six years and is likely to continue for some time. As it stands, Adani, Tata and Essar are looking for relief in the form of higher tariff due to the rise in the cost of imported coal, which makes power generation at the agreed price unfeasible. The contentious issue here is that tariff for power plants were fixed after the projects were won through competitive bidding and any change in tariff means a change in the winning bid as well as the PPA. 

It is now expected that the CERC will allow amendments to the PPAs by December-end after hearing all stakeholders, resulting in relief to the three companies. “An increase in tariff payable to generating company would directly result in an increase in retail supply tariff. Since, tariff orders 

are issued pursuant to public hearings, a challenge to tariff revision is almost certain,” says Sujit Ghosh, partner, Advaita Legal.

Also, the Supreme Court order raises an issue that whether contracts should be reopened and how much flexibility can be built into them in order to prevent them from being abandoned. In cases, where these contracts form the basis for running of a public service or facility, then such abandonment adversely impacts the public wellbeing. “Keeping in view the business dynamics and the regulated nature of these sectors, it probably makes a business case that the contracts are kept flexible. However, what needs to be laid down is the nature and character of the flexibility — clearly demarcating business risks and regulatory risks,” says Ghosh.

Though the PPAs provide for a revision of tariff in cases of change in law and have a force majeure clause, the Supreme Court in its 2017 order disallowed the power generators the benefit saying that the change in an Indonesian law could not be counted as an unforeseeable circumstance that prevented them from fulfilling the contract. In 2010, the Indonesian energy regulations required the export price of coal to be benchmarked to domestic rate, leading to an increase in the price.

“This clause (12.4 of PPA) makes it clear that changes in the cost of fuel, or the agreement becoming onerous to perform, are not treated as force majeure events under the PPA itself,” the apex court held.

Ghosh says since most projects are financed on project finance basis, continued operation of the project is the only way to ensure that the invested public money is returned. “Therefore, it is imperative that the projects remain viable.”

Though allowing flexibility runs contrary to making contracts watertight, Ghosh says a contract cannot be departed from merely because one party is facing hardship, which is precisely what the Supreme Court said in the original order in the matter. “However, where changes, which could not have been anticipated at the time of entering into the contract, occur and impact the fundamental premise on which the contracts were based, the equities would have to be balanced again. Across the globe, there is a discussion over allowing mid-term review of long-term contract to cater for unforeseen events.”

In cases where the counterparty happens to be a government entity, as defined under Article12 of the Constitution, there are additional constitutional tests that such an entity must meet for its actions to pass the judicial muster, says Ghosh.

Changes in a contract cannot be the norm since the process itself may be vitiated or be driven by narrow interests. In fact, Ghosh says sanctity of the contract is a basic feature of the rule of law and courts have insisted on it in several cases. “Any deviation from a contract would alter the bargain between the parties, especially if the contract was awarded pursuant to competitive bidding. Hence the legal implications of reopening any contract, including PPAs, go to the very root of the contract, especially in cases where such reopening has commercial implications.”

On a macro regulatory perspective, the rules of the game have to be uniform in order to create a level playing field, says Ghosh. He cites Section 62 of the Electricity Act under which tariff determination is practically available to only PSUs, which can claim at least technically a tariff revision based on statutory right. Private sector players, which are largely governed by Section 63, are left with only a contractual right. “It, therefore, bears to reason that a slightly fungible contractual framework that insulates the business from unforeseen events may be considered-subject to limitations.”

How the CERC picks up from here on and interprets the clauses in the PPAs signed by five states with the three firms will set a template, as floodgates for tariff revisions in other cases are bound to open up.

10-year tariff war

2008: Commissioning of Adani's Mundra power project of 1980 MW

- PPAs with Gujarat and Haryana utilities for power to be sold at Rs 2.35/KWh

2010: Indonesian coal norms change, leading to cost escalation

2012:  Commissioning of Tata Power's 4000 MW UMPP, five years after it won bid in 2007

- PPA with Gujarat, Rajasthan, Maharashtra, Punjab & Haryana to sell power at Rs 2.26/KWh

- Adani and Tata move CERC seeking relief

2014  Febuary: CERC allows 52 paise per unit compensatory tariff for Tata and 41 paise for Adani

April: State-owned procurers move APTEL contesting the decision

July: APTEL upholds the decision, but procurers challenge it in SC

August: SC asks APTEL to expedite the matter 

2016 April: APTEL asks CERC to compute compensation under respective PPAs; says the regulator has no power to change tariff arrived through competitive bidding

December:  CERC allows power companies to charge the additional cost of coal 

2017 April: SC disallows any compensation to power units, asks CERC to compute relief as per respective PPA 

2018 September: High-powered committee of Gujarat government suggests cost escalation be shared by procurers, lenders and consumers 

October: SC asks CERC to work out higher tariff after taking stakeholder views