Supreme Court Upholds 'Change In Law' Compensation For Adani Power; Flays State DISCOMs For Taking A Stand Contrary To Union Govt

The Supreme Court has criticised the DISCOMS (Distribution Companies) for taking a stand contrary to that of the Union of India regarding grant of "Change in Law" compensation to power production companies.

The Court made this observation while dismissing a petition filed by Maharashtra State Electricity Distribution Company Limited challenging the ‘Change in Law’ compensation granted by the Appellate Tribunal for Electricity to Adani Power Maharashtra Limited and GMR Warora Energy Limited.

A Bench comprising Justice B.R. Gavai and Justice Vikram Nath noted that on account of the Change in Law, the generating companies are entitled to compensation so as to restore them to the same economic position, if the Change in Law had not occurred.

The Court took note of the fact that the DISCOMS (Distribution Companies) which are instrumentalities of the State had taken contrary view to that of the Union Government, which contemplates that the generators would be entitled to pass-through for the coal required to be imported or purchased from the open market on the ground of Change in Law. Referring to Central Warehousing Corporation v. Adani Ports Special Economic Zone Limited (APSEZL) And Ors. (2022), the Court observed that the Apex Court had deprecated the practice of different instrumentalities of the State taking contradictory/different positions/stands on the same issue. In this regard, the Court observed -

“We have come across a number of matters wherein concurrent orders passed by the Regulatory Body and the Appellate Forum are assailed. Such a litigation would, in fact, efface the purpose of the Electricity Act. As already discussed herein above, one of the major reasons for the enactment of the Electricity Act was the deterioration in performance of the State Electricity Boards.”

"we find that the stand taken by the DISCOMS that, since the loss being sustained by the generating companies is on account of non-fulfillment of obligation by CIL/Coal Companies, they should be relegated to the remedy available to them in law against the CIL/Coal Companies, is totally unreasonable. The claim is based on change of New Coal Distribution Policy(NCDP) 2007 by NCDP 2013, which, undisputedly, is covered by the term ‘Change in Law'"

Factual Background

Maharashtra State Electricity Distribution Company Limited (MSEDCL) entered into long-term Power Purchase Agreements (PPA) with Adani Power Maharashtra Limited (APML) pursuant to a competitive bidding process. One of the PPAs had a ‘Change in Law’ clause. On 18.10.2007, the Govt of India issued the New Coal Distribution Policy, 2007. According to the terms of the new policy APML applied for coal linkable to the Ministry of Coal. Western Coal Limited (WCL) and South Eastern Coal Limited (SECL) issued Letters of Assurance (LoAs) in favour of APML to supply coal. Accordingly, the Fuel Supply Agreement (FSA) was executed between APML and WCL for domestic coal linkage. Subsequently, the FSA was amended and the quantum of coal assured by WCL was transferred to SECL.

On 26.07.2013, the Ministry of Coal issued a memorandum approving revised arrangement for supply of coal to the identified Thermal Power Stations. On 31.07.2013, a letter was issued to the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions to consider as pass-through in tariff the cost of alternate coal, which was procured to meet shortfall in supply of domestic linkage coal on a case to case basis. APML filed a petition before the Maharashtra Electricity Regulatory Commission (MERC) claiming compensation on account of ‘Change in Law’. MERC approved a framework for determination of compensatory fuel change.

Thereafter, APML filed a petition before MERC for approving a framework for determination of compensatory tariff, which the MERC provided for. A review petition was filed before MERC which came to be dismissed. On 28.01.2016, the revised Tariff Policy was issued. APML filed appeals before the Appellate Tribunal for Electricity (APTEL) challenging the orders passed by the MERC. MSEDCL filed cross-appeals. APTEL remanded the matter back for fresh consideration. It allowed the claims of APML in view of the ‘Change in Law’, but with some restrictions. APML challenged the order passed by the MERC before the APTEL, which held - that APTEL was entitled to compensation on the ground of ‘Change in Law’ based on the Station Heat Rate (SHR) specified in the MYT Regulations 2011 of actual SHR achieved by APML,whichever is lower; compensation approved by MERC shall be computed based on the actual Gross Calorific Value (GCV) of coal received; under the NCDP, 2007, there was an assurance of 100% coal supply and as such, while granting compensation on the ground of Change in Law, it was not justified to restrict it to the maximum of 35% to 25% for the respective four years of the 12th Plan. Aggrieved, MSEDCL approached the Apex Court.

Similarly, GMR Warora Energy Ltd. (GMR), with whom MSEDCL had entered into PPP agreements also claimed compensation on account of impact of Change in Law during the Operation and Constitution period. Some of the claims were allowed while others were disallowed. GMR approached APTELin appeal and while it was pending GMR filed a petition before the Central Electricity Regulatory Commission (CERC). MSEDCL assailed the order of CERC passed in favour of GMR, before APTEL. Finding no merit in the appeal APTEL dismissed it. Thereafter, MSEDCL approached the Apex Court.

Analysis by the Supreme Court

The Court noted that the APTEL found that the SHR specified in the Tariff Regulations was a reference point and cannot be used as the basis for computing the coal shortfall requirement or the computing Change in Law compensation to the SHR mentioned in the bid documents. The APTEL held that the linkage of Change in Law compensation to SHR as mentioned in the bid documents would not be able to restitute the affected parties to the same economic condition prior to the Change in Law. With respect to GCV, APTEL held that ‘GCV as received’ and not ‘the middle value of GCV range of assured coal grade’ should be the appropriate basis to assess the quantum of shortfall in domestic coal and calculate the Change in Law compensation. SHR and GCV has to be taken into consideration as per the ‘actual’ or the Tariff Regulations, whichever is lower and as such, balanced the interests of generators as well as consumers. The Cabinet Committee on Economic Affairs (CCEA), an expert body, had also opined that GCV value has to be taken not only on ‘as received’ but on ‘as fired’ basis.The Court noted that it should be slow in interfering with decisions of experts in the field unless they are arbitrary and illegal.

On the issue of MERC’s method of assessing shortfall in domestic linkage coal, the Court opined that on account of the Change in Law, the generating companies are entitled to compensation so as to restore the party to the same economic position as if the Change in Law had not occurred. In this regard, it referred to its earlier decisions in Energy Watchdog v. CERC And Ors. (2017) and Jaipur Vidyut Vitaran Nigam Ltd. And Ors. v. Adani Power Rajasthan Limited And Anr. (2020). Had the Change in Law not occurred, the generating companies would have been entitled to the supply as assured by the CIL/Coal Companies under the FSA. It noted that in a different case MERC has taken a view that the Change in Law on the Auxiliary Consumption has to be as per the Norms laid down by the Commission or actual, whichever is lower. However, the same view was not taken in the present case.

Case details

Maharashtra State Electricity Distribution Company Limited v. Adani Power Maharashtra Limited And Ors. Civil Appeal No. 684 of 2021| 2023 LiveLaw (SC) 166 |Civil Appeal No. 684/2021| 3rd March, 2023| Justice B.R. Gavai and Justice Vikram Nath

Electricity Act 2003- The Court took note of the fact that the DISCOMS (Distribution Companies) which are instrumentalities of the State had taken contrary view to that of the Union Government, which contemplates that the generators would be entitled to pass-through for the coal required to be imported or purchased from the open market on the ground of Change in Law. Referring to Central Warehousing Corporation v. Adani Ports Special Economic Zone Limited (APSEZL) And Ors. (2022), the Court observed that the Apex Court had deprecated the practice of different instrumentalities of the State taking contradictory/different positions/stands on the same issue- We have come across a number of matters wherein concurrent orders passed by the Regulatory Body and the Appellate Forum are assailed. Such a litigation would, in fact, efface the purpose of the Electricity Act. As already discussed herein above, one of the major reasons for the enactment of the Electricity Act was the deterioration in performance of the State Electricity Boards - Para 150

Electricity Act 2003- Compensation for "Change in Law" clause in PPA - SC dismisses petition filed by Maharashtra State Electricity Distribution Company Limited challenging the ‘Change in Law’ compensation granted by the Appellate Tribunal for Electricity to Adani Power Maharashtra Limited and GMR Warora Energy Limited-we find that the stand taken by the DISCOMS that, since the loss being sustained by the generating companies is on account of non-fulfillment of obligation by CIL/Coal Companies, they should be relegated to the remedy available to them in law against the CIL/Coal Companies, is totally unreasonable. The claim is based on change of NCDP 2007 by NCDP 2013, which, undisputedly, is covered by the term ‘Change in Law - Para 151.