On 25.09.2024, the Hon’ble Appellate Tribunal of Electricity (‘Hon’ble Tribunal’) pronounced the judgment in the matter between Adani Power Limited (formerly Udupi Power) (‘Adani Power’) and Punjab State Electricity Regulatory Commission (‘Punjab Commission’) wherein it was held that the approval of a Power Purchase Agreements (‘PPA’) by the Punjab Commission is not only a statutory requirement but also a condition precedent to the enforceability of the contract, irrespective of whether the same is not mentioned specifically in the PPA. While doing so, the Hon’ble Tribunal ruled in the favour of Punjab State Power Corporation Limited (‘PSPCL’) and observed that while the PPA continues to exist since it has not been terminated, however it cannot be acted upon/be enforceable until the same is approved by the State commission. The cases analyses the regulatory framework governing PPA in India, particularly under Section 86(1)(b) of the Electricity Act, 2003.
Statutory Approval of Power Purchase Agreement Under Section 86 (1) (B) of Electricity Act, 2003 Mandatory
Background
Adani Power entered into PPA dated 26.12.2005 with Karnataka Distribution Licensees for sale of 90% of the power generated from its 2 X 600 MW imported coal based power project in Udupi District, Karnataka and with PSPCL on 29.06.2006 for the remaining 10%. The two units of the Project were commissioned on 11.10.2010 and 19.08.2012. PSPCL had not entered into any Transmission Service Agreement for evacuation of power and the entire 1200 MW was being sold to the Karnataka Discoms.
In 2015, PSPCL sought to opt out of the PPA. In response, Adani agreed to sell power to third parties for a period of three years without any financial implications to PSPCL. In 2018, PSPCL requested that Adani continue to sell power to third parties, but Adani refused.
Thereafter, PSPCL filed Petition No. 41 of 2018 before the Punjab Commission seeking approval of the PPA dated 29.09.2006. The contention of Adani was that the parties are bound to discharge their respective obligation under the PPA irrespective of the date of approval of the PPA and the lack of approval of the PPA by the Punjab Commission does not affect the validity of the PPA. On the other hand, PSPCL’s main contention was that PPA is a contingent contract and it cannot be enforced until approved by the Punjab Commission in terms of the Electricity Act, 2003 and the applicable Rules/Regulations and the settled law.
The Punjab Commission vide its Order dated 07.08.2020, rejected Adani Power’s arguments in Petition No. 41 of 2018. It concluded that there was no necessity for PSPCL to procure power from Adani on a long-term basis, as doing so would not be economically viable. The Punjab Commission highlighted that cheaper power was available in the market, and approving the PPA would not be in the best interest of consumers in Punjab.
Submissions of the Parties Before the Hon’ble Tribunal
Adani Power asserted that the Punjab Commission’s decision that the PPA becomes effective only upon its approval is contrary to the settled position of law that parties are bound to discharge their respective obligations under the PPA, irrespective of approval of the same. That as per the settled position of law whenever a contracting party is obligated to obtain approval/permission to give effect to the agreement, the contract cannot be construed as being contingent upon such obligation being complied with. It was argued that Section 32 of Contract Act, 1872 applies only where the contract itself provides for the contingencies upon happening of which contract cannot be carried out and provides the consequences.
PSPCL’s main contention revolved around the fact that PPA becomes enforceable only upon the approval of the Punjab Commission which cannot be waived by the parties to the PPA either expressly or by conduct. PSPCL, also contended that the tariff order passed for Average Revenue Requirement (‘ARR’) and determination of tariff under the relevant Tariff Regulations, are distinct from the ‘Conduct of Business Regulations 2005’. Further, the information in respect of power procurement submitted by PSPCL in the ARR petition is considered only for the purpose of Energy balance and determination of cost of power for the relevant year, and therefore, it cannot be considered as approval of the power procurement on long term basis as intended in Section 86(1)(b) of the Electricity Act.
Observations and Findings
The Hon’ble Tribunal while appreciating the submissions of PSPCL held that the “We, therefore, reiterate the basic legal proposition that the approval of Power Purchase agreement by the State Commission is mandatory, condition precedent without which the PPA executed between a generating company and Distribution Licensee cannot become enforceable or effective. The rights and obligations under the PPA would flow only after it is approved or consented to by the State Commission.”
In addition to the above, the Hon’ble Tribunal, after examining the scope of Section 86(1)(b) of the Act, Rule 8 of the Electricity Rules, 2005, Power procurement Regulations notified by the State Commission and the decisions of the Hon’ble Supreme Court/Hon’ble Tribunal held that “Since the approval of the PPA by the State Commission is a mandatory statutory requirement under Section 86(1)(b) of the Electricity Act, 2003 before it would be enforceable, it logically follows that such a requirement cannot be waived off by any of the parties to the PPA. It is for the reason that there can be no waiver, either by conduct or expressly, on the part of any of the parties to the PPA to such statutory requirement. We may note that the basic object of the requirement of approval of PPA by the State Commission under Section 86(1)(b) of the Electricity Act, 2003 is to safeguard the public interest by ascertaining whether the projected need for power by the Distribution Licensee is genuine and the rate quoted in the PPA is reasonable as well as economical. Therefore, waiver of the requirement of approval of PPA by the State Commission would certainly go against the public interest and for that reason also, waiver is not permissible.”
The Hon’ble Tribunal delineated the role of the State Commission, namely that it for the Commission to determine whether the Distribution Licensee actually requires the power for supply to its consumers and whether the rate quoted in. the PPA is reasonable or in consonance with the market conditions. The Hon’ble Tribunal further concluded that the basic object of the PPA approval is to safeguard public interest.
The Hon’ble Tribunal further held that the provisional approval of projections in the Annual tariff Orders cannot be construed as approval of PPA which has to be done in accordance with the provisions of Section 86(1)(b) of the Electricity Act, 2003.
Thereafter, Hon’ble Tribunal rejected Adani Power’s argument regarding the delay by PSPCL in seeking approval of the PPA and held that although the PPA was signed in 2006, Adani Power did not sell any power to PSPCL until 2018. Instead, they sold all its power to Karnataka Discoms until 2015 and they continued to sell the power to third parties. This conduct indicates that the Adani Power was satisfied with this arrangement, possibly finding it commercially advantageous.
The Hon’ble Tribunal noted that the PPA dated 29.09.2006 still exists as none of the parties terminated or proceeded to terminate the same and that ‘it cannot be acted upon till it is approved by the State Commission.’
Thus, the Hon’ble Tribunal upheld the Impugned Order and dismissed the Appeal holding that the same is devoid of any merits.
Conclusion
Therefore, the case of Adani Power Limited v. Punjab State Electricity Regulatory Commission and Ors. emphasizes the fundamental principle that the approval of a PPA by the State Commission is not only a statutory requirement but also a condition precedent to the enforceability of the contract. Both the Punjab Commission and the Hon’ble Tribunal have unequivocally held the view that, without this approval, the rights and obligations under the PPA cannot take effect. This case reinforces the need for strict compliance with regulatory approvals to uphold the integrity and fairness of power purchase agreements.
