Supreme Court’s Compensatory Tariff Order: Game-Changer Or Myopic?

A coal fired power station. ( Photographer: Carla Gottgens/ Bloomberg)

Written by
Payaswini Upadhyay
Written by

Payaswini Upadhyay

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After successfully jumping through several hoops, power companies – Tata Power Ltd. and Adani Power Ltd. – lost the last lap in the Supreme Court.

Use of regulatory powers by the Central Electricity Regulatory Commission (CERC) and merit in force majeure argument at the Appellate Tribunal For Electricity meant that the power companies could claim compensatory tariff from state electricity commissions. The Supreme Court has put an end to this euphoria by denying compensatory tariff.

While the judgment may end up making the bidding process competitive, it might have killed the regulatory jurisprudence, lawyers told BloombergQuint.

CERC: Use Of Regulatory Powers

In 2013, the CERC had permitted Tata Power and Adani Power to revise tariffs in their power supply contracts as a result of increase in the cost of imported coal due to a change in Indonesian law. However, the power purchase agreement (PPA) signed by the electricity producers with the distributors permitted increase in tariff only in case of a force majeure situation.

Though the CERC had denied that a change in Indonesian law amounted to force majeure, it held that there are certain events which are beyond the contemplation of the parties and, if the impact of such events is not taken into account, it would render the contract unworkable.

Ifthe price escalation is on account of some event which was beyond thecontemplation of the parties, then the impact of price variation needs to beduly considered and addressed in order to enable the parties to continue toperform their obligations under the contract.

CERC Order, 2013

In saying so, the CERC had upheld the arguments of the power companies that if price escalation is not addressed, it would lead to frustration of contract.

Frustration of contract, by definition, means impossibility of performance; it does not mean difficulty, Mohit Saraf, senior partner at law firm Luthra & Luthra, pointed out.

Ifthe government of India makes a law that you cannot import coal into India – then the contract is impossible to perform. The frustration doctrine clearlyprovides that financial difficulty does not imply frustration.

Mohit Saraf, Senior Partner, Luthra & Luthra

APTEL: Merit In Force Majeure Argument

The CERC decision was challenged before the Appellate Tribunal for Electricity (APTEL), which also ruled in favour of power companies but for different reasons. The APTEL upheld the force majeure argument of power companies but held that the CERC had no regulatory power to grant compensatory tariff. It sent the case back to the CERC to determine the extent of impact of force majeure event and grant relief to power companies under their respective PPAs.

Accordingly, in 2016, the CERC granted compensatory tariff based on the force majeure provision.

SC: No Force Majeure; Yes Regulatory Powers

Aggrieved by APTEL's order, distribution companies and a consumer interest group knocked the doors of the apex court. The Supreme Court noted the language of the PPA and rejected the argument that increase in price of imported coal is a force majeure event.

Thisclause (12.4) makes it clear that changes in the cost of fuel, or the agreementbecoming onerous to perform, are not treated as force majeure events under thePPA itself.

Supreme Court Order, 2017

Senior Advocate Gopal Jain told BloombergQuint that the apex court's order does very little to the cause of regulatory jurisprudence which is more dynamic compared to the static nature of the law.

Regulatoryjurisprudence has to be looked at in the context of a particular sector and eachsector has its own story. It's different from laying down a straight-jacket lawand has to address the challenges of a particular sector. We are witnessing theproblem of non-performing assets in the infrastructure sector – that is alsonot in public interest.

Gopal Jain, Senior Advocate

The court could have interpreted the PPA but could've also acknowledged the existing problem with long-term contracts in India and given certain directions, he added. “Sometimes courts have to take a more solution-oriented, holistic, forward-looking approach which is what regulatory jurisprudence, unlike law, is all about – constantly evolving, changing to meet the varying circumstances,” Jain said.

Saraf, however, lauded the apex court's judgment and said it is important that people get a bitter lesson so that they are responsible in their corporate behaviour.

Whenwe are expecting trillions of dollars in the infrastructure specie, the biddingrules have to be fair so that international players can participate. I was representing an international utility company which pulled out at the end fromSassan and Mundra projects bidding because they couldn't understand how can youunderwrite coal prices. Similarly, there has been a lack of participation inroad and airport projects except recently where they have started bidding forthe solar projects because now the bidding conditions are becoming crystalclear.

Mohit Saraf, Senior Partner, Luthra & Luthra

This Supreme Court order sends a message to corporates that if they bid irresponsibly, they will incur losses, Saraf said. “Companies will stop bidding aggressively with the belief that they will be able to change the terms and conditions later on. It will lead to a transparent and fair bidding process across sectors,” he added.

Besides striking down the force majeure argument, the apex court partially upheld CERC's regulatory powers to alter tariffs. It held that CERC can exercise this power only in the absence of Central government guidelines or where the guidelines do not deal with a given situation.