Recognition of 'Change in Law' for Emission Norms and In-Principle Approval of Capital Expenditure in Electricity Regulatory Proceedings

Introduction

The case of Lalitpur Power Generation Company Limited Through Its Authorised Signatory Bajaj Bhawan v. Uttar Pradesh Electricity Regulatory Commission Through Its Secretary And Another presented before the Appellate Tribunal for Electricity on November 13, 2020, marks a significant development in the realm of regulatory compliance and financial facilitation within the power generation sector. The appellant, Lalitpur Power Generation Co. Ltd. (LPGCL), challenged the Uttar Pradesh Electricity Regulatory Commission's (UPERC) order dated February 7, 2020, which disallowed the in-principle approval of additional capital expenditure required for the installation of Flue Gas Desulfurization (FGD) systems in compliance with the Ministry of Environment, Forest and Climate Change's (MoEFCC) Notification dated December 7, 2015.

The core issue revolved around whether the MOEFCC's amended emission norms constituted a "Change in Law" event, thereby entitling LPGCL to seek in-principle approval for the associated capital expenditures under its Power Purchase Agreement (PPA) with Uttar Pradesh Power Corporation Ltd. (UPPCL).

Summary of the Judgment

The Appellate Tribunal for Electricity, presided over by Justice Ravindra Kumar Verma, meticulously analyzed the appellant's challenge against the state's regulatory order. The Tribunal concluded that the MoEFCC's Notification indeed represented a "Change in Law" by imposing new emission standards post the effective date of the existing PPA and environmental clearances. Recognizing the substantial financial implications of complying with these new norms, the Tribunal held that UPERC had erred in denying the in-principle approval for additional capitalization.

The Tribunal emphasized the necessity of regulatory certainty for power generation companies to secure financing for mandatory compliance measures. It underscored the broad regulatory powers vested in state commissions under the Electricity Act, 2003, allowing them to adapt procedures to meet statutory objectives even in the absence of explicit provisions within their regulations.

Consequently, the Tribunal set aside UPERC's disallowance, directing the state commission to reconsider LPGCL's petition in light of the recognized Change in Law event and to expedite the approval process to facilitate timely compliance with emission norms.

Analysis

Precedents Cited

The judgment extensively cited several landmark Supreme Court cases to delineate the scope and interpretation of regulatory powers:

Dwaraka Das v. State of M.P (1999) 3 SCC 500: Affirmed that once an order is passed, the court or tribunal becomes functus officio and cannot alter its terms.
Deputy Director, Land Acquisition v. Malla Atchinaidu [AIR 2007 SC 740]: Highlighted that procedural aspects cannot hinder substantive justice.
Chhattisgarh State Power Distribution Company Limited v. Chhattisgarh State Electricity Regulatory Commission (2015) Appeal No. 57 of 2015: Discussed the non-eligibility of revisiting settled regulatory positions.
Energy Watchdog v. CERC (2017) 14 SCC 80: Clarified the breadth of regulatory powers, especially in the absence of specific guidelines.
PTC India Ltd. v. Central Electricity Regulatory Commission (2010) 4 SCC 603: Addressed the validity of regulations as delegated legislation.

Legal Reasoning

The Tribunal's legal reasoning unfolded in several layers:

Change in Law Defined: Under Article 13.1.1 of the PPA, a Change in Law includes any new legislation, interpretations by competent authorities, changes in consents/licenses, or modifications in the cost of implementing environmental measures post the effective date of the agreement.
Recognition of MOEFCC Notification: The Tribunal deemed the 2015 Notification as a Change in Law since it introduced new emission norms not previously stipulated in the Environmental Clearance (EC) or existing regulations.
Regulatory Powers and Flexibility: Emphasized that state commissions possess inherent regulatory powers allowing them to address gaps and adapt procedures to fulfill the objectives of the Electricity Act, 2003.
Procedural Compliance: Critiqued UPERC's rigid adherence to its regulations, noting that LPGCL had followed prior directives by seeking guidance from the Central Electricity Authority (CEA) and aligning with central regulatory expectations.

Impact

This landmark judgment paves the way for greater flexibility and responsiveness of state regulatory commissions in accommodating unforeseen regulatory changes that significantly impact power generation projects. It underscores the necessity for regulatory bodies to ensure that their frameworks can adapt to mandatory compliance requirements, thereby facilitating the financial and operational sustainability of power projects.

Moreover, the judgment reinforces the principle that regulatory certainty is paramount for infrastructure projects, especially those with long-term agreements like PPAs. By acknowledging the Change in Law doctrine, it provides a clear pathway for generating companies to seek timely approvals for additional expenditures necessitated by environmental compliance.

Complex Concepts Simplified

Change in Law: This term refers to any new or amended legislation, judicial interpretations, or regulatory changes that occur after a contractual agreement is in place, potentially impacting the parties' obligations and financial commitments.

In-Principle Approval: A preliminary approval granted by a regulatory body, subject to future verification, allowing a party to proceed with certain actions based on estimated or projected expenditures.

Functus Officio: A Latin term meaning "having performed its office," indicating that a court or tribunal has completed its function and cannot modify its previous decisions.

Prudence Check: A regulatory review process to ensure that proposed expenditures or tariff adjustments are reasonable, justified, and in line with statutory and regulatory frameworks.

Conclusion

The Tribunal's decision in favor of LPGCL signifies a progressive interpretation of regulatory frameworks, emphasizing the need for adaptability in the face of evolving environmental mandates. By recognizing the MoEFCC's Notification as a legitimate Change in Law event, the Tribunal not only upheld the contractual and legal rights of the power generation company but also highlighted the essential role of regulatory bodies in fostering an equitable and sustainable energy sector.

This judgment serves as a precedent for future disputes where unforeseen regulatory changes necessitate financial adjustments by infrastructure projects. It reinforces the balance between stringent regulatory compliance and the pragmatic facilitation of essential economic activities, ensuring that environmental sustainability and industrial growth progress hand in hand.