Analyzing the implications of the Supreme Court’s decision in the Power Purchase Agreement dispute between Haryana Discoms and GMR Kamalanga Energy Limited
(Common Judgment dated 02.04.2023 in a batch of Civil Appeals)
Supreme Court’s Ruling on Change in Law Claims: Haryana Discoms vs GMR Kamalanga Energy Limited
On 20.04.2023, the Division Bench of the Supreme Court of India consisting of Justice B. R. Gavai and Justice Vikram Nath pronounced Judgment in the matter of GMR Kamalanga Energy Limited (“GMR”) and Anr. v. Central Electricity Regulatory Commission (“CERC”) & Ors., bearing Civil Appeal No. 6641 of 2019, wherein the Supreme Court, has disallowed GMR’s Change in Law claims pertaining to (a) Increase in Water Charges; (b) Shift from Useful Heating Value (“UHV”) to Gross Calorific Value (“GCV”) Methodology of pricing of Coal; (c) Increase in rate of Minimum Alternate Tax (“MAT”); and (d) Interest on Working Capital. The Supreme Court ruling on Haryana Discoms vs GMR was favourable wherein the Hon’ble Court observed that in view of the concurrent findings of two expert bodies, namely, CERC and the Appellate Tribunal for Electricity (“APTEL”), the Hon’ble Supreme Court should be slow in interfering with such findings on facts.
BACKGROUND OF THE CASE
Pursuant to the bid process, two (2) separate Power Purchase Agreements (“PPA/PPAs”) were executed by PTC India Limited (“PTC”) on 07.08.2009 with Haryana Discoms (namely, Uttar Haryana Bijli Vitran Nigam Limited and Dakshin Haryana Bijli Vitran Nigam Limited) for supply of 300 MW power from the generating station of GMR. Further, on 12.03.2009, PTC entered into a PPA with GMR as a back-to-back agreement to the PPAs dated 07.08.2008 entered into with Haryana Discoms.
In terms of Article 13 the PPA, if there occurs a change in law event resulting in increase in cost or decrease in revenue to the Generator (GMR), the quoted tariff under the Competitive Bid Process shall be adjusted to provide compensation to GMR for the adverse impact caused by such change in law, and vice-versa, in accordance with the principle of restitution. [ref. Principle of Restitution]
CERC vide its Order dated 03.02.2016, disallowed the change in law relief as claimed by GMR on the above-mentioned issues, with respect to the water charges, GCV, MAT and Interest on Working Capital. Similarly, APTEL vide its Order dated 27.05.2019 in Appeal No. 195 of 2016 (preferred by GMR), affirmed CERC’s findings and rendered concurrent findings on the said issues. While doing so APTEL placed reliance on its judgment dated 14.08.2018 in Appeal No. 111 of 2017, titled as GMR Warora Energy Limited v. CERC & Ors. wherein APTEL had observed and held the following:
- While disallowing the claim of Interest on Working Capital, APTEL held
“….that the tariff to be quoted was all-inclusive tariff and there provision for separately allowing IWC arising out of Change in Law events.” APTEL, further, observed that the fundamental essence underlying the Change in law Provision is to restore the reinstate the aggrieved party to the same economic position as if the change in law event had not occurred. Nevertheless, the said principle is contingent upon the diligent consideration of the relevant aspects, one of them being the Generator, acting as a bidder under a Section 63 Power Purchase Agreement (PPA), is obligated to propose an “all-inclusive tariff”
spanning for a period of 25 years.
- On the issue of MAT, APTEL, re-affirmed the findings of CERC, and denied relief pertaining to the said Change in Law claim.
- Similarly, with respect to the claim on the issue of shift from UHV to GCV based pricing mechanism, APTEL, rendered concurrent findings as CERC, and held the same to “not admissible under change in law”. In doing so, APTEL observed “that any change in base price of coal is not envisaged in the PPA and the same is reflected in the CERC escalation rate index published on half yearly basis….”, and such change in base price of coal can duly be taken care in the form of escalation i.e., escalable tariff. Furthermore, the inclusion of the coal price variation as a pre-existing factor in the Bidder’s risk assessment does not warrant any form of compensation.
In addition to the above principle, APTEL in Appeal No. 195 of 2016 while rejecting the Change in Law claim in respect of increase in Water Charges, observed that water charges (as consistently held) already form a part of the operating cost, and the Bidder at the time of the Bidding ought to have factored in all the expenditure and circumstances that may have a bearing on the quoted bid-tariff.
Thus, before the Hon’ble Supreme Court, the pivotal legal issue under consideration was whether the aforementioned occurrences/issues could be deemed as a Change in Law Event as defined in Article 13 of the PPAs, thereby impacting the rights of GMR to such claims.
SUBMISSIONS OF HARYANA DISCOMS
Haryana Discoms made the following submissions:
Increase in the rates of MAT
increase in MAT does not constitute ‘Change in Law’ under Article 13.1.1 of the PPA as they do not relate to the business of selling electricity. MAT is a post revenue appropriation of the operation profit i.e., appropriation is on operating profit or net profit as the case may be.
Interest on Working Capital
In a Competitive Bidding Process under Section 63 of the Electricity Act, 2003, the bidder is obligated to provide an all-inclusive tariff, thereby no claims can be considered for such individual tariff elements.
Shift from UHV to GCV methodology of pricing mechanism of coal
The price of coal being one of the elements of costs to be incurred by the generator and is part of the quoted energy charges by GMR. GMR had quoted a tariff for 25 years and therefore was expected to take into account increases in costs of inputs like taxes, duties and levies etc. That assuming there was any impact on the base price of coal due to change in methodology of pricing of coal from UHV to GCV, the same would have been considered in the escalation, had GMR quoted the energy charges as a part of the escalable tariff. However, in the present case even after having an option, GMR did not quote the energy charges as escalable, thereby, taking a business risk.
Water Charges
The said charges an input cost during the operating period ought to have been assessed and estimated by the bidder while quoting the tariff which would include any possible changes in the price for such inputs. The purpose of a competitive bid process under Section 63 of the Electricity Act, 2003 is to freeze the price for the distribution company against any such possible changes.
OBSERVATIONS AND FINDINGS OF THE SUPREME COURT
The Supreme Court by denying to interfere with the decision of CERC and APTEL, has re-affirmed their findings, and given finality to the position on ‘Change in Law’ disputes in respect of the afore-mentioned issues.
In addition to affirming the earlier position disallowing the change in law relief to GMR, it duly observed that in view of the concurrent findings of two expert bodies, namely, CERC and APTEL, the Supreme Court “should be slow in interfering with the concurrent findings of fact unless they are found to be perverse, arbitrary and either in ignorance of or contrary to the statutory provisions”. Reliance in this regard was placed on the decision of the Supreme Court in MSEDCL v. APML [ref. Para 120-123], wherein, after considering the statutory provisions of the Electricity Act, 2003 it was not inclined to render a decision in substitution of the views of the expert bodies on CERC and APTEL.
