Supreme Court: DISCOM to Pay ‘Change in Law’ Compensation to Power Generating Companies for all Additional Charges levied by State Instrumentalities

Supreme Court: DISCOM to Pay ‘Change in Law’ Compensation to Power Generating Companies for all Additional Charges levied by State Instrumentalities

The Supreme Court in a landmark judgment has ruled that Distributing Companies (DISCOMs) must pay ‘Change in Law’ compensation to Power Generating Companies for all additional charges levied by State instrumentalities.

The division bench Justices B.R. Gavai and Vikram Nath has affirmed that all additional charges which are payable on account of orders, directions, Notifications, Regulations, etc., issued by the instrumentalities of the State, after the cut-off date, will have to be considered to be ‘Change in Law’ events.

Senior Counsel CA Sundaram appeared for Dadra and Nagar Haveli DISCOM (DNH-DISCOM), while Senior Counsel Niranjan Reddy appeared for the Petitioner-GMR Warora Energy Ltd. (in short GWEL).

In this case, cross-appeals were preferred by various Distributing Companies (DISCOMS) against the judgment of the Appellate Tribunal for Electricity (APTEL) and by several power-generating companies which those DISCOMS awarded the Power Purchase Agreements (PPAs).

The power-generating companies had approached the Central Electricity Regulatory Commission seeking relief for certain ‘Change In Law’ events that had happened regarding the PPAs. During the appeal, the APTEL allowed certain claims and disallowed others.

The Supreme Court on perusal of the PPAs observed that, “the definition of the term ‘Law’ itself would clearly show that the term ‘Law’ would mean all laws including Electricity Laws in force in India and any statute, ordinance, regulation, Notification or code, rule, or any interpretation of any of them by an Indian Governmental Instrumentality and having force of law. It would further reveal that the term ‘Law’ shall also include all applicable rules, regulations, orders, Notifications by an Indian Governmental Instrumentality and shall also include all rules, regulations, decisions, and orders of the Central Electricity Regulatory Commission (in short) CERC and the Maharashtra Electricity Regulatory Commission (MERC).”

Therefore, the bench concluded that all additional charges which are payable on account of orders, directions, Notifications, Regulations, etc., issued by the instrumentalities of the state, after the cut-off date, will have to be considered to be ‘Change in Law’ events.

The Apex Court placed reliance in the case of Uttar Haryana Bijli Vitran Nigam Limited (UNHVNL) and Another. vs Adani Power Ltd and Others., (2019), that the ‘Change in Law’ events will have to accrue from the date on which Rules, Orders, Notifications are issued by the instrumentalities of the State.

In light of the same, it was held that the Generators would be entitled to compensation on the restitutionary principle on such changes occurring after the cut-off date.

The Court remarked that, despite this ruling the DISCOMS are pursuing litigations after litigations. It further observed that in some of the matters, the parties had filed the appeals only for the sake of filing the same.

Averting to the cross appeals, the bench dealt with the issues as to whether various taxes/charges imposed by various State Governments after the cut-off date specified in the PPAs, would fall under ‘Change in Law’ events or not

The bench noted that, “PPA itself provides a mechanism for payment of compensation on the ground of ‘Change in Law,’ unwarranted litigation, which wastes the time of the Court as well as adds to the ultimate cost of electricity consumed by the end consumer, ought to be avoided. Ultimately, the huge cost of litigation on the part of DISCOMS as well as the Generators adds to the cost of electricity that is supplied to the end consumers.”

The bench also dealt with other issues concerning with the levy of Forest Tax and the Ministry of Environment and Forest (MoEF) Notification on coal quality, could be considered as ‘Change in Law’ events.

While taking into consideration the MoEF Notification on coal quality, it observed that the MoEF vide notification dated 2nd January, 2014 had mandated power projects to use beneficiated coal with ash content lower than 34%. Prior to the cut-off date, the same was not a requirement, the bench noted.

The Court held that, it was clear that the said Notification dated 11th July 2012 and 2nd January 2014 would amount to “Change in Law’. Hence, it found, no fault with the finding of the learned APTEL that the same would amount to ‘Change in Law.’

Next, the bench dealt with the issue on increase in ‘Busy Season Surcharge, Development Surcharge on transportation of coal, and Port Congestion Surcharge’ by the Indian Railways, the Court appositely stated that the said Surcharges were increased from time-to-time wide Circulars/Notifications issued by the Ministry of Railways, through the Railway Board.

All these were charges under the Notifications issued by the Indian Railways, through the Railway Board which has been held to be State withing the meaning of Article 12 of the Constitution of India. As such, no error was found with the finding of the learned APTEL that they would amount to ‘Change in Law’ events, the bench observed.

Insofar, as far as the Forest Tax issue was concerned, the Court on pursual of the material, noted that, as on the cut-off date, there was no Forest Tax applicable on coal mined and transported from South Eastern Coalfields Limited (“SECL” for short) mines located in Forest area.

“For the first time, vide Notification of the Chhattisgarh State Government, Department of Forest, under the provisions of Chhattisgarh Transit (Forest Produce Rule) 2001, a fee at the rate of Rs.7 per ton was levied. Undisputedly, the said Notification is issued by the Forest Department of the Government of Chhattisgarh, which is an instrumentality of the State. As such, no error can be found with the finding of the learned APTEL in that regard,” the bench discerned.

Lastly, the issue on which there was a serious contest between the DISCOMS and the Generators was with regard to carrying cost.

The Apex Court again referred to the decision passed in case of f Uttar Haryana Bijli Vitran Nigam Limited (UNHVNL) and another v. Adani Power Limited and others., and held that restitutionary principles apply in case a certain threshold limit is crossed. It was further held that an in-built restitutionary principle compensates the party affected by such ‘Change in Law’ and the affected party must be restored through monthly tariff payment to the same economic position as if such ‘Change in Law’ had not occurred.

The Court emphasized, that once carrying cost has been granted, it cannot be urged that interest on carrying cost should be calculated on simple interest basis instead of compound interest basis.

It further held, that grant of compound interest on carrying cost and that too from the date of the occurrence of the ‘Change in Law’ event is based on sound logic.

It is aimed at restituting a party that is adversely affected by a ‘Change in Law’ event and restore it to its original economic position as if such a ‘Change in Law’ event had not taken place, the bench opined.

Therefore, in view of the consistent position of law and application of restitutionary principles and privity of contractual obligations between the parties as contained in the PPAs, the Court did not find that the view taken by the learned APTEL with regard to carrying cost warrants interference.

In light of the same, the Court appealed to the Ministry of Power to evolve a mechanism so as to ensure timely payment by the DISCOMS to the Generating Companies, which would avoid huge carrying cost to be passed over to the end consumers and accordingly dismissed the appeal.