A full bench of the Appellate Tribunal for Electricity (Aptel) — the appeals forum of the Central Electricity Regulatory Commission (CERC) — delivered a historic judgment on April 7, 2016, establishing principles governing resetting of competitively bid out long-term power purchase agreements.
But first, some action replay.
Almost half-a-decade ago, the imperative to renegotiate contracts came up for two marquee investments in power generation — the 4,620 Mw power project developed by the Adani Group and the 4,000 Mw UMPP (Ultra Mega Power Project) developed by the Tata Group, both at Mundra. Both projects involve Power Purchase Agreements (PPAs) with states through a transparent tariff-based competitive bidding process. Both ended up (for differing reasons) with their projects generating power from Indonesian coal. With a sudden “change in law” in Indonesia in 2010 that increased the price of imported coal, they sought compensation from CERC to charge an appropriately higher price for the electricity they had contracted to supply. This post-win request for “compensatory tariff increase” began to be keenly watched by the power market, as it also impacted a group of other projects seeking similar treatment on the slippery slope of “sanctity” of bid processes vis-à-vis “balancing stakeholder interests post-bid”.
Faced with prospects of substantial losses, the jittery promoters petitioned CERC. Cutting through the thicket of ideological debates on the appropriateness, or otherwise, of tinkering post-facto with bid parameters, CERC took the bold step of accepting the fundamental premise of the two developers that their case for compensation had prima facie merit. CERC chose not to treat these bid-out contracts as untouchable but decided to salvage them from undeserved hardship. To take matters forward, CERC constituted a committee under Deepak Parekh involving all parties to the PPA to recommend the “compensatory tariff” required to offset the hardship due to the change in Indonesian laws, with clearly defined guidelines under which the extent of compensation had to be determined.
The Deepak Parekh Committee, after a set of intense deliberations with all stakeholders, gave its set of recommendations on the compensatory tariff which formed the basis of a final order issued by CERC in February 2014. (A commentary on this was published by this columnist under INFRATALK in Business Standard on September 24, 2013.)
Thereafter, the matter took a complicated turn with the procuring states, which had signed up at the originally contracted rates, refusing to accept the higher rates. These states appealed to Aptel. Pending the appeals, Aptel directed for interim payments as per the decision in July 2014. The procurers then appealed to the Supreme Court. The Supreme Court referred the matter back to Aptel.
This matter was decided on April 7, 2016, by Aptel, in a landmark 486-page judgment, which disallowed the claim for relief as “change in law” but allowed it as “force majeure”.
Amit Kapur, a leading lawyer in the infrastructure space who has been deeply involved in the legal processes surrounding this matter, explained to this columnist the basic ground rules laid out by Aptel. They are:
CERC cannot tamper with competitively bid tariffs outside the terms of the PPA: Aptel said that there is no overarching power of CERC or any state regulator to vary or alter the tariff determined through a competitive bidding process, except under the PPA terms like force majeure (unforeseeable circumstances).
Unforeseen “black swan” events: Aptel recognised that PPAs are long-term contracts. It may not be possible to envisage all possible risks over such a long period. As such, the intention of providing a force majeure clause is to save the performing party from the consequences of anything over which it has no control.
Doctrine of commercial impracticability: Aptel has observed that the Indonesian regulation wiped out the fundamental premise on which the generators had quoted their bids, thereby making their projects commercially unviable. Aptel held that the spiralling coal price due to (a) promulgation of Indonesian regulations in 2010 to change the coal price regime after 40 years, and (b) attendant shortages/non-availability in domestic coal supply to generating companies were both found to have an undeserved and uncontrollable adverse commercial impact on the generating companies, and thus qualify as force majeure under the PPAs of Adani and Tata. It thus recognised the doctrine of “commercial impracticability”.
Jurisdiction over composite scheme — CERC and state regulators: Aptel held that CERC is concerned with inter-state transmission of electricity and state regulatory commissions are concerned with intra-state transmission of electricity. Where there is an inter-state supply, CERC would have jurisdiction. Moreover, where there is supply of power to more than one state from the same generating station, it would qualify as a “composite scheme” and attract the jurisdiction of the CERC. This quashed the plea of the state procurers that CERC has no jurisdiction over these PPAs and only state regulators can decide such issues.
Having outlined these principles, Aptel referred the matter back to CERC to assess the adverse effect and grant relief of “force majeure” under the PPA within three months.
The next stage of this regulation saga over the last half a decade is now set to unfold. Watch this space!
The author is chairman, Feedback Infra.
vinayak.chatterjee@feedbackinfra.com;
Twitter: @Infra_VinayakCh
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
