No Private Tariffs: Supreme Court Affirms Mandatory State Commission Approval for PPAs and Tariff Modifications under Section 86(1)(b)

Case: M/s KKK Hydro Power Limited v. Himachal Pradesh State Electricity Board Ltd. and others (2025 INSC 1057)

Court: Supreme Court of India (Civil Appellate Jurisdiction)

Bench: Sanjay Kumar, J.; N.V. Anjaria, J.

Date: 29 August 2025

Disposition: Appeal dismissed; legal position clarified.

Introduction

This decision cements a critical principle of Indian electricity law: the price at which a distribution licensee procures power and the agreements embodying that price are not the subject of private bargain between a generator and a distribution utility. Section 86(1)(b) of the Electricity Act, 2003 mandates that both the power purchase agreement (PPA) and the tariff be reviewed and approved by the State Electricity Regulatory Commission. Any attempt to alter tariff or execute supplementary PPAs without such approval is legally infirm.

The controversy arose from M/s KKK Hydro Power Ltd.’s 3 MW small hydro project in Himachal Pradesh, later augmented to 4.9 MW. While the original 2000 PPA fixed a tariff of Rs. 2.50/kWh, subsequent regulatory developments (the Himachal Pradesh Electricity Regulatory Commission’s 2007 Regulations and tariff orders) catalyzed a dispute over entitlement to higher tariff and arrears. A supplementary PPA in 2010 purported to enhance tariff to Rs. 2.95/kWh without HPERC’s approval. HPERC rejected enforcement of that supplementary PPA; the Appellate Tribunal for Electricity (APTEL) partially allowed the generator’s appeal and fashioned a weighted average tariff across the 3 MW and 1.9 MW components. The Supreme Court has now clarified the governing legal principles while, on pragmatic grounds, leaving undisturbed the weighted-average arrangement that the parties and regulator later operationalized.

Key Issues

• Whether a generator and distribution licensee can, by mutual agreement, execute or modify a PPA (including tariff) without State Commission approval.
• How to treat augmentation of capacity (3 MW to 4.9 MW) where the original PPA predated the Commission and Regulations, but the expanded capacity was commissioned after the Regulations.
• Entitlement to arrears at higher tariff and enforceability of a supplementary PPA executed without regulatory approval.
• The scope of the Commission’s power to revisit or modify historical PPAs in light of changes in law or State policy.

Summary of the Judgment

• The Supreme Court affirmed the foundational rule under Section 86(1)(b) of the Electricity Act, 2003: State Commission approval is compulsory for both PPAs and the tariff specified therein. A generator and distribution licensee cannot privately stipulate or enhance tariff without such approval.
• HPERC was justified in refusing to enforce the 10.09.2010 supplementary PPA that unilaterally enhanced tariff from Rs. 2.50 to Rs. 2.95/kWh without Commission approval.
• The Court found APTEL erred in effectively giving effect to that unapproved supplementary PPA for the augmented 1.9 MW portion. However, since HPSEB did not appeal APTEL’s 2014 order and the parties have long acted under a Commission-determined weighted average tariff of Rs. 2.60/kWh (computation directed by APTEL; implemented by HPERC on 11.06.2015; embodied in a supplementary PPA dated 03.11.2015), the Supreme Court declined to disturb the settled arrangement.
• For future guidance, the Court expressly clarified: no PPA or tariff term is valid for supply within the State unless reviewed and approved by the State Commission under Section 86(1)(b).
• On the policy change in water royalty adversely affecting the generator, the Court pointed to HPERC’s amended Regulation 6 (12.11.2007) which empowers the Commission to review/modify PPAs in case of change in statutory laws/rules or State policy, and left it open to the generator to seek appropriate relief under that route.

Case Timeline (Concise)

• 30.03.2000: Implementation Agreement (IA) and PPA for 3 MW at Rs. 2.50/kWh; fixed for 40 years.
• 30.12.2000: HPERC constituted (after the original PPA).
• 05.08.2004: 3 MW commissioned.
• 05.07.2007: Supplementary IA for augmentation to 4.9 MW.
• 04.12.2007: HPERC conditionally approves draft PPA for 4.9 MW; makes it subject to 2007 Regulations.
• 11.03.2008: PPA executed (4.9 MW); tariff remains Rs. 2.50/kWh but “subject to” 2007 Regulations.
• 18.12.2007: HPERC tariff order for small hydro up to 5 MW at Rs. 2.87/kWh; later remanded by APTEL (18.09.2009).
• 09/10.02.2010: HPERC revises tariff to Rs. 2.95/kWh; directs only PPAs at Rs. 2.87 to be amended to Rs. 2.95.
• 10.09.2010: Generator and HPSEB sign supplementary PPA enhancing tariff to Rs. 2.95/kWh without HPERC approval.
• 05.07.2013: HPERC rejects arrears claim; refuses to enforce the unapproved supplementary PPA.
• 17.10.2014: APTEL directs tariff redetermination for the 1.9 MW addition under 2007 Regulations and a weighted average for the 4.9 MW project.
• 11.06.2015: HPERC computes weighted average tariff at Rs. 2.60/kWh.
• 03.11.2015: Supplementary PPA executed stipulating Rs. 2.60/kWh for entire 4.9 MW, effective 14.07.2008.
• 29.08.2025: Supreme Court clarifies law under Section 86(1)(b); declines to unsettle the long-acted weighted average arrangement.

Detailed Analysis

Statutory and Regulatory Framework

• Section 86(1)(b), Electricity Act, 2003: The State Commission regulates the purchase/procurement by distribution licensees, including the price, through PPAs for supply within the State. The provision squarely vests the power to review and approve both the PPA and tariff with the Commission. It removes tariff-setting from the realm of mere private contracting.
• HPERC (Power Procurement from Renewable Sources and Cogeneration by Distribution Licensee) Regulations, 2007:
  • Original framework for renewable procurement, including small hydro up to 5 MW.
  • Amended on 12.11.2007: Proviso to Regulation 6 authorizes HPERC to review/modify approved PPAs where there is (i) change in statutory law/rules or (ii) State policy, in order to promote renewables, with reasons recorded.
• Tariff Orders:
  • 18.12.2007: Levelized tariff at Rs. 2.87/kWh for small hydro up to 5 MW.
  • 09/10.02.2010: Post-APTEL remand, tariff increased to Rs. 2.95/kWh; HPERC directed amendment of PPAs “with the stipulation of Rs. 2.87” to reflect Rs. 2.95.

Precedents and Prior Orders Cited and Their Influence

• APTEL’s 18.09.2009 Remand: Led HPERC to reconsider and enhance small hydro tariff to Rs. 2.95/kWh in February 2010. However, HPERC limited automatic amendments to those PPAs already stipulating Rs. 2.87/kWh. This boundary was crucial; it meant KKK’s PPA at Rs. 2.50/kWh could not piggyback on that instruction and required a fresh, specific HPERC approval.
• HPERC’s 04.12.2007 Conditional Consent: Approved the 4.9 MW PPA draft, but expressly made tariff and terms “subject to” the 2007 Regulations. This framed a pathway: post-2007 changes would need to be canalized through HPERC’s approval processes, not through private supplementaries.
• APTEL’s 17.10.2014 Decision: Recognized the dual character of the project—3 MW (pre-regulatory) and 1.9 MW (post-regulatory)—and directed a weighted average tariff across both, while acknowledging the invalidity of the unapproved supplementary PPA in principle. The Supreme Court agreed with the illegality of private tariff modification but chose to preserve the weighted average outcome due to finality and reliance concerns.

The Court’s Legal Reasoning

1. Regulatory Supremacy over PPA and Tariff:
   • Section 86(1)(b) requires State Commission oversight of both the PPA and the price of electricity purchase. The generator and licensee cannot self-help by substituting tariff through a private supplementary PPA.
   • Because KKK’s 11.03.2008 PPA specified Rs. 2.50/kWh (albeit “subject to” the Regulations), and HPERC’s 09.02.2010 order only directed conversion of Rs. 2.87 PPAs to Rs. 2.95, the parties were obligated to seek specific HPERC approval before any enhancement. They did not. Hence, HPERC was right to refuse enforcement of the 10.09.2010 supplementary PPA.
2. Duality of Project and Applicability of Regulations:
   • 3 MW segment: Original PPA (2000) predated Commission and Regulations; tariff fixed at Rs. 2.50/kWh. As a rule, such pre-Commission PPAs are not reopened under the 2007 Regulations.
   • 1.9 MW augmentation: Commissioned after the 2007 Regulations and tariff order; in principle, the regulatory tariff regime applies. But even here, any change must be formalized through Commission approval, not by private agreement.
3. Judicial Restraint and Reliance:
   • Although APTEL erred by effectively validating the unapproved supplementary PPA for the 1.9 MW component, HPSEB did not appeal. The parties acted on HPERC’s 2015 weighted average computation and executed a further supplementary PPA at Rs. 2.60/kWh that has governed for years.
   • To avoid unsettling long-settled arrangements and in light of the licensee’s acquiescence, the Court preserved the status quo while clarifying the correct legal position for the future.
4. Change in Law/Policy and Royalty Relief Pathway:
   • HPERC’s amended Regulation 6 empowers review/modification of PPAs where there is a change in law or State policy. If water royalty policy changes adversely impact the generator, the correct route is a petition before HPERC under this mechanism. The Court expressly left this avenue open.

Weighted Average Tariff: Pragmatism vs Principle

APTEL directed a common, weighted average tariff for the entire 4.9 MW project because the 3 MW and 1.9 MW units injected power through the same bus bars. The Supreme Court did not endorse this as a general legal rule; it allowed the arrangement to stand due to HPSEB’s failure to appeal and the parties’ long reliance. The doctrinal takeaway is therefore narrow: weighted averaging in such cases is not a binding legal rule; it was a pragmatic, case-specific solution preserved for finality, not a precedent overriding Section 86(1)(b).

Impact Analysis

• For Distribution Licensees:
  • No private tariff commitments. Any PPA or tariff modification must be routed through the State Commission for review and approval before execution or enforcement.
  • Payments made under unapproved supplementary arrangements risk being legally unenforceable. Institutionalize compliance workflows that trigger regulatory filings for all PPA changes.
• For Generators (IPPs/RE Developers):
  • Secure explicit Commission approval for any tariff change or supplementary PPA—even if the utility agrees and even if a generic tariff order exists.
  • Where original PPAs predate the Commission/Regulations, use the amended Regulation 6 “change in law/policy” route for any relief necessitated by policy changes (e.g., water royalty), rather than unilateral supplementary agreements.
  • Augmentations or expansions commissioned post-regulations will be treated under the prevailing regulatory regime, but only through Commission-determined tariffs or approvals.
• For Regulators:
  • Reinforced authority under Section 86(1)(b): regulate the procurement process, scrutinize PPAs, and approve tariffs. Clarify, through orders, how augmentations to pre-regulatory projects should be treated procedurally.
  • Use amended Regulation 6 to address equity in cases where policy changes affect legacy PPAs, while maintaining regulatory discipline.
• For Lenders and Investors:
  • Regulatory approval of tariff and PPA is a non-negotiable bankability condition. Legal and financial due diligence must verify Commission approval for every PPA and subsequent modification.
  • Beware of “without prejudice” supplementary PPAs: they do not substitute for regulatory approval and may not be enforceable.
• For Future Litigation:
  • The decision is likely to be invoked to resist enforcement of unapproved supplementary PPAs and to insist on Commission-sanctioned tariffs. It also serves as a guide on judicial restraint when reliance interests and lack of appeal by an affected party warrant preserving an operational arrangement.

Complex Concepts Simplified

• PPA (Power Purchase Agreement): Contract between a generator and a distribution licensee specifying sale of electricity, key terms including tariff, tenure, scheduling, metering, and payment.
• Section 86(1)(b): Provision that vests the State Commission with authority to regulate power procurement by distribution licensees, including approving the PPAs and the price.
• “Subject to the Regulations” Clause: A PPA term acknowledging that the agreement and tariff must conform to the applicable regulations and Commission orders; it does not obviate the need for specific regulatory approval for modifications.
• Levelized Tariff: A single, constant tariff figure computed to reflect the present value of costs/revenues over the life of the project.
• Weighted Average Tariff: A combined tariff computed based on the capacities or energy shares of different components (e.g., 3 MW and 1.9 MW) multiplied by their respective tariffs, divided by total capacity or energy, to produce a single blended rate.
• Bus Bars: Electrical conductors within a substation or plant where multiple generators/units connect; when units evacuate power through common bus bars, operationally a single evacuation point exists, sometimes prompting blended tariff considerations.
• “Without Prejudice” Clause: Language that reserves a party’s rights; it cannot validate a contractual arrangement that requires statutory or regulatory approval.
• Change in Law/Policy: Events such as statutory amendments or State policy changes (e.g., royalty on water usage) that may alter project economics; under HPERC Regulation 6 (as amended), the Commission may review/modify PPAs to address such changes to promote renewables.

Practical Guidance and Compliance Checklist

1. Before signing any new PPA or supplementary PPA:
   • Prepare a draft incorporating the intended tariff and terms.
   • File a joint application (or separate if required) seeking Commission review and approval under Section 86(1)(b).
   • Ensure the PPA references and complies with the latest regulations and tariff orders.
2. When tariff changes follow a generic tariff order:
   • Check whether the Commission’s order expressly applies to your category of PPA (e.g., only PPAs already at Rs. 2.87/kWh).
   • If uncertain or outside the express scope, seek a specific Commission order approving the revised tariff for your PPA.
3. For capacity augmentation to legacy projects:
   • Treat the augmented capacity as a distinct component for regulatory purposes if commissioned post-regulation.
   • Seek Commission approval on how tariff for the augmented portion will be determined; do not rely on private agreements.
4. On change in law or State policy (e.g., water royalty):
   • File a petition under the amended Regulation 6, documenting the change, its date, and demonstrable impact on costs.
   • Request appropriate relief (tariff adjustment or contractual modification) with reasons and supporting data.
5. Arrears and interest claims:
   • Arrears premised on unapproved tariff modifications are vulnerable; secure Commission approval first to strengthen enforceability.

Conclusion

This judgment crystallizes a clear and stringent norm: in-State electricity procurement is a regulatory domain, not a private marketplace. Under Section 86(1)(b), State Commission approval is mandatory for both PPAs and tariffs, and any modification in tariff must be sanctioned by the Commission. Supplementary PPAs that alter tariff without regulatory approval are unenforceable in law.

While the Supreme Court allowed the APTEL-crafted weighted average tariff to stand for this project—owing to HPSEB’s failure to appeal and long-standing reliance—it emphasized that this outcome is not a general precedent for bypassing regulatory approval. For legacy PPAs predating the Commission or Regulations, the proper avenue for redress in the face of policy changes lies in the Commission’s power under the amended Regulation 6 to review/modify PPAs to promote renewables.

Key takeaways: utilities must not commit to tariffs privately; generators must not rely on unapproved supplementary PPAs; regulators should continue to assert supervisory primacy; and financiers should insist on documentary proof of Commission approval for any PPA or tariff change. The decision thus strengthens regulatory discipline, enhances certainty, and provides a structured route to address legitimate hardships arising from changes in law or policy.