Adani Power Ltd. v. Uttar Haryana Bijli Vitran Nigam Ltd.: CERC Affirms Change in Law Compensation under PPAs

Introduction

In the landmark case of Adani Power Limited v. Uttar Haryana Bijli Vitran Nigam Limited And Another, adjudicated by the Central Electricity Regulatory Commission (CERC) on February 6, 2017, Adani Power Ltd. (APL) sought compensation on the grounds of "Change in Law" as stipulated under Article 13 of its Power Purchase Agreements (PPAs) dated August 7, 2008. The crux of the dispute revolved around various legislative and regulatory changes that purportedly adversely impacted APL’s financial viability in supplying electricity to Haryana state utilities.

The parties involved included APL as the petitioner and Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) along with Dakshin Haryana Bijli Vitran Nigam Limited (DHBVNL) as respondents. APL operated the Mundra Power Project, a 4,620 MW thermal power plant situated in the Special Economic Zone (SEZ) at Mundra, Gujarat, supplying power through phases to various Procurers, including Haryana utilities.

Summary of the Judgment

CERC meticulously analyzed the 18 events cited by APL as "Change in Law," which encompassed legislative amendments, tax impositions, and regulatory changes post the bid cut-off date of November 19, 2007. These changes allegedly increased APL's operational costs and impacted its revenue structure.

After an exhaustive review, CERC allowed compensation for specific Change in Law events such as the increase in royalty rates on coal, levy of central excise duty, clean energy cess, and service tax on transportation of goods by railways. However, it disallowed claims related to commercial adjustments like busy season surcharges, sizing charges, and development surcharges imposed by railways, categorizing them as contractual and not statutory changes.

The Commission also deliberated on procedural aspects, including jurisdiction and compliance with PPA notification requirements, ultimately affirming its authority to adjudicate the dispute based on the composite scheme of APL supplying power to multiple states.

Analysis

Precedents Cited

GMR Kamalanga Energy Limited v. DHBVNL & Others (Petition No. 79/MP/2013)

In this case, CERC recognized changes in royalty rates as Change in Law, establishing a precedence for compensatory mechanisms under PPAs when statutory amendments affect project economics.

Sasan Power Limited v. MP Power Management Company Limited (Petition No. 153/MP/2015)

CERC allowed central excise duty on coal as Change in Law, further reinforcing the stance that legislative tax impositions affecting costs fall within the scope of Article 13.

South Eastern Coalfields Ltd. v. State of Madhya Pradesh (Civil Appeal No. 5135-5157 of 2013)

This judgment was pivotal in understanding the applicability of Change in Law, distinguishing between statutory obligations and commercial arrangements. CERC differentiated the present case from this precedent, focusing on the nature of obligations under the PPAs.

Sumitomo Heavy Industries Limited v. ONGC Limited (2010 SCC 296)

The Supreme Court held that reimbursement of tax liabilities could be enforced when there exists an explicit contractual obligation. CERC used this to demarcate cases where change in tax obligations were reimbursable.

Legal Reasoning

CERC's legal reasoning hinged on the definitions and provisions outlined in Article 13 of the PPAs, which encompasses statutory changes impacting costs or revenues. The Commission parsed each of the 18 Change in Law events to ascertain their eligibility for compensation:

• Allowed: Increases in royalty rates on coal, central excise duties, clean energy cess, and service tax on transportation were recognized as statutory changes directly affecting APL's cost structure.
• Disallowed: Adjustments like busy season surcharges and sizing charges were deemed part of commercial arrangements arising from contractual terms with railways, not statutory changes.

Additionally, CERC addressed jurisdictional challenges by affirming its authority under Section 79(1)(b) of the Electricity Act, 2003, citing the composite scheme nature of APL's operations across multiple states.

Impact

This judgment has significant implications for the electricity generation sector, particularly for companies operating under PPAs with Change in Law clauses. It clarifies that statutory tax and regulatory changes affecting costs are compensable, ensuring financial stability for power producers against unforeseen legislative shifts. However, it also delineates the boundaries by excluding purely contractual adjustments from such compensations, thereby maintaining a balance between legislative intent and commercial autonomy.

Future cases will likely reference this judgment to argue the applicability of Change in Law provisions, especially concerning tax impositions and regulatory amendments. It also underscores the importance of clearly distinguishing between statutory obligations and contractual agreements when framing compensation clauses in PPAs.

Complex Concepts Simplified

Change in Law: Refers to any statutory or regulatory changes after a specified date that impacts the costs or revenues of a party involved in a contractual agreement. Under Article 13 of the PPAs, such changes can entitle a party to compensation to restore their economic position.

Composite Scheme: A project supplying services or goods to multiple jurisdictions (e.g., multiple states) which allows a central regulatory body to oversee and adjudicate conflicts or disputes arising from such operations.

Minimum Alternate Tax (MAT): A tax imposed on companies where the standard tax liability is lower than a prescribed percentage of book profits, ensuring that companies contribute a minimum amount to the government's revenue.

Service Tax on Transportation: A tax levied on the service of transporting goods, which in this case, was applied to coal transportation by railways after the cut-off date.

Conclusion