Reimbursement of Fixed Charges Is Distinct From Compensation for Diverted Power; Half‑Hourly Computation Valid When Adopted by Parties Despite No Formal PPA Amendment

Introduction

This commentary examines the Supreme Court of India’s decision in Gujarat Urja Vikas Nigam Limited v. Essar Power Limited, 2025 INSC 1160 (Supreme Court of India, 25 September 2025), a significant ruling in the electricity law and regulatory contract space. The dispute, originating in 2005, concerns Essar Power Limited’s (EPL) diversion of power from the share allocated to Gujarat Urja Vikas Nigam Limited (GUVNL) under a 1996 Power Purchase Agreement (PPA), thereby supplying additional power to Essar Steel Limited (ESL), EPL’s sister concern, in violation of the agreed proportion of allocation (300 MW for GUVNL and 215 MW for ESL, i.e., 58:42).

The case presents intertwined questions of contract interpretation and regulatory remedies under the Electricity Act, 2003, including:

• Whether GUVNL is entitled only to “compensation” for diverted power based on an energy charge methodology, or whether it is also entitled to “reimbursement” of fixed charges proportionate to the shortfall in its allocated supply.
• Whether computation of diversion should be on an hourly basis (as per the original PPA) or on a half-hourly basis after the parties adopted Central Electricity Authority (CEA) recommendations without formally amending the PPA.
• The treatment of Deemed Generation Incentive (DGI), Delayed Payment Charges (DPC), and outstanding factual reconciliations.

The decision builds on the Court’s earlier ruling in Gujarat Urja Vikas Nigam Limited v. Essar Power Limited (2016) 9 SCC 103, which had restored the 2009 order of the Gujarat Electricity Regulatory Commission (GERC), but left the quantification to be undertaken in subsequent proceedings.

Summary of the Judgment

The Supreme Court partly allowed GUVNL’s appeals under Section 125 of the Electricity Act, 2003, modified the GERC order dated 27.12.2019 and the APTEL judgment dated 21.03.2025, and laid down the following key holdings:

• Reimbursement of Fixed Charges (Restitution): GUVNL is entitled to reimbursement of fixed charges proportionate to the shortfall in receipt of its allocated share (58% of declared availability), in addition to compensation for diverted power. This reimbursement is not part of “compensation” but a separate entitlement flowing from the PPA and the restitutionary principle that the generator cannot retain fixed charges for power not supplied.
• Compensation for Diversion (Energy Charge): Compensation remains payable on the methodology accepted in para 9.13 of GERC’s 2009 order—i.e., HTP‑1 Tariff Energy Charge less variable cost—for units diverted to ESL in breach of the proportionate principle.
• Time Block for Computation: Though the PPAs defined availability in hourly blocks, the Court held that from 21/23 February 2005 onward, diversion must be computed on a half‑hourly basis, because EPL sought and the parties adopted CEA’s recommendation to that effect and acted upon it, even without a formal written PPA amendment.
• DPC and DGI:
  • DPC is payable as simple interest per Article 5.3.4 of the PPA. If EPL ultimately secures a ruling for compound interest in parallel proceedings, parity must be afforded to GUVNL.
  • DGI already paid between Sept 2002 and May 2006 must be refunded; precise quantum (₹36.62 cr vs ₹34.42 cr) and certain invoice deductions are remanded to GERC for verification.
• Limitation and ₹64 crore: Claims prior to 14 September 2002 are time-barred (except the ₹64 crore diversion settlement period up to September 2004 already factored by the parties). The ₹64 crore was not a final settlement, but the compensation methodology underlying it is binding.
• Remand: The Court sustained limited remand directions to GERC for re‑computation, verification of DGI quantum, and reconciling invoice deductions; but corrected APTEL/GERC’s error in denying fixed‑charge reimbursement and in rejecting half-hourly computation after 21/23.02.2005.

Detailed Analysis

1) Precedents and Procedural History

• GERC Order (18.02.2009): Found that EPL must declare capacity for the entire 515 MW station, allocation is on a proportionate 58:42 basis, and wrongful diversion to ESL attracts compensation. It also stated that if GUVNL does not schedule its share, EPL may sell to ESL subject to reimbursement of proportionate annual fixed charges (para 9.11). It endorsed compensation methodology (HTP‑1 energy charge less variable cost) and hourly computation (para 9.13).
• APTEL Judgment (22.02.2010): Partly reversed GERC; held EPL need not declare entire plant availability, denied loss to GUVNL, and negatived reimbursement of fixed charges.
• Supreme Court (2016) 9 SCC 103: Set aside APTEL 2010 and restored GERC 2009, affirming proportionate allocation, capacity declaration obligation, and the compensation methodology; held the ₹64 crore was not a final settlement.
• GERC Order (27.12.2019): On working out amounts, accepted half‑hourly computation from 23.02.2005; granted compensation based on HTP‑1 energy charge less variable cost; awarded DPC (simple interest) and DGI refund; denied fixed‑charge reimbursement.
• APTEL Judgment (21.03.2025): Affirmed compensation methodology; reversed half-hourly computation citing lack of PPA amendment; affirmed simple-interest DPC with parity caveat; remanded factual quantifications; did not allow fixed‑charge reimbursement.
• Supreme Court (present, 2025): Corrected the denial of fixed‑charge reimbursement and reinstated half‑hourly computation post‑CEA adoption; maintained compensation methodology and remand directions for verification; clarified the hermeneutics of its 2016 decision.

2) Legal Reasoning and Principles Applied

a) Proportionate Allocation and Fixed Charges

The Court reaffirmed that the PPAs (GUVNL–EPL for 300 MW and EPL–ESL for 215 MW) embodied a proportionate allocation regime. Under Article 7.1 and Schedule VII:

• Fixed charges are payable monthly (1/12th of annual fixed charges) for the allocated capacity, subject to year-end adjustment if generation is less than the capacity allocated.
• Variable charges reflect fuel usage and cost per kWh.
• Incentives include Deemed Generation Incentive.

Building on GERC para 9.11 (2009) and its own 2016 ruling, the Court held that fixed charges must track actual receipt of the allocated share. Where GUVNL does not receive its proportionate supply—whether because it declined to schedule or because EPL diverted the power—EPL must reimburse GUVNL the fixed charges corresponding to the shortfall. This works on two, mutually reinforcing, bases:

• Contractual peg: The PPA pegs fixed charges to allocated supply, with year-end adjustments.
• Restitutionary principle: EPL cannot recover fixed charges twice: once from GUVNL for power GUVNL did not receive and again from ESL for excess power supplied to it. That would amount to unjust enrichment.

Crucially, the Court distinguished “compensation” (for breach/diversion) from “reimbursement” (of fixed charges paid but not actually due), rejecting the lower fora’s conflation of the two. Reimbursement of fixed charges is not an element within the compensation formula of para 9.13, but an independent consequence of the PPA and restitution.

b) Compensation Methodology for Diversion

The Court reaffirmed GERC para 9.13 (2009), binding after the 2016 restoration: for diverted units, compensation equals HTP‑1 Tariff Energy Charge less variable costs. That methodology emerged from the parties’ earlier settlement for April 1998–September 2004 (₹64 crore) and was considered fair for later periods too. The Court refused to expand compensation under Section 73 of the Indian Contract Act, 1872, beyond the adopted regulatory-contractual methodology already affirmed in 2016.

c) Time Block: Hourly vs Half‑Hourly

While both PPAs defined the “Availability Period” as 24 hourly blocks, EPL itself sought CEA’s advice (letter 24.01.2003), and the CEA recommended half-hourly recording on 21.02.2005. GUVNL, EPL and ESL accepted and acted upon this recommendation from 23.02.2005. The Court held that:

• Parties’ adoption of half‑hourly metering for supply and evacuation, on EPL’s behest, binds them for computation of diversion as well, notwithstanding the absence of a formal written PPA amendment.
• APTEL’s rejection of half-hourly computation on the “no formal amendment” ground elevated form over substance and ignored the parties’ conduct and the regulatory recommendation they invoked and implemented.

This is not an unqualified endorsement of informal contract variations, but a recognition that where a regulatory recommendation is adopted and implemented by both sides and relied upon for physical operations, it can appropriately inform the computation methodology for liabilities that depend on those very measurements.

d) Delayed Payment Charges (DPC) and Deemed Generation Incentive (DGI)

• DPC: GERC’s application of simple interest per Article 5.3.4 stands. However, the Court preserved a parity caveat: if EPL secures compound interest for its own delayed payments in parallel proceedings, GUVNL must receive the same treatment for DPC here.
• DGI refund: Refund is payable for Sept 2002–May 2006; precise quantum is remanded for verification (₹36.62 crores as per GERC versus EPL’s assertion of ₹34.42 crores paid).

e) Limitation and the ₹64 Crore Episode

Limitation is settled by earlier proceedings: claims prior to 14.09.2002 are time-barred, save for the period covered by the parties’ prior diversion settlement (₹64 crore for April 1998–September 2004). While that amount was not a final settlement, the methodology underpinning it was endorsed and is binding for the computation of compensation for later periods.

f) Hermeneutics of Prior Supreme Court Decisions

The Court cautioned against cherry-picking sentences and paragraphs, emphasizing the need to read judgments as a whole to ascertain the ratio. In particular, lower fora and parties had overlooked that the 2016 decision, by restoring GERC 2009, carried with it both para 9.11 (fixed-charge reimbursement) and para 9.13 (compensation methodology). The present decision corrects that oversight.

3) Impact and Prospective Significance

• Segregation of Remedies: A pivotal precedent: in power PPAs with proportionate allocations, reimbursement of fixed charges (restitution) is distinct from and in addition to compensation (damages) for wrongful diversion, unless the contract expressly provides otherwise.
• Operational Adoption vs Formal Amendment: Where parties jointly adopt and act upon a regulator-recommended metering/time‑block regime, courts may respect that operational reality for computations, even if the PPA’s formal amendment clause (e.g., requiring written amendments) was not used. Parties should still prefer formal amendments to avoid disputes.
• Regulatory Deference and Consistency: State Commissions and APTEL must implement the Supreme Court’s restored orders in full: not just compensation but also fixed‑charge reimbursements envisaged by the PPA and earlier findings.
• Unjust Enrichment Guardrails: Generators cannot “double‑recover” fixed charges—from the discom on allocated capacity not actually supplied and from a third party on excess supply. The restitutionary check will apply.
• Damages Under Contract Act: Parties seeking to rely on Section 73 ICA must demonstrate why established contractual or regulatory methodologies are inadequate. Where such methodologies have been judicially affirmed, courts are reluctant to re-open them.
• Data Quality and Time Blocks: Accurate time‑block data (here, half-hourly post‑CEA adoption) is critical. Contractual entitlements and liabilities increasingly turn on high‑resolution metering and dispatch logs.

Complex Concepts Simplified

• Allocated Capacity and Proportionate Principle: The PPA allocated 300 MW to GUVNL and 215 MW to ESL (58:42). All declarations of availability and subsequent dispatches had to respect this proportion. If availability was lower than 515 MW, the supply still had to be split 58:42.
• Declared Availability and Dispatch Instructions: The generator declares how much capacity will be available for the coming week; the beneficiaries then issue dispatch instructions. Availability is the basis for scheduling and billing.
• Fixed Charges vs Variable Charges:
  • Fixed charges recover capital and fixed O&M costs tied to capacity availability; billed monthly as 1/12th of annual fixed charges, with year-end adjustment based on actual generation relative to allocation.
  • Variable charges recover fuel costs per kWh actually generated and supplied.
• Compensation vs Reimbursement:
  • Compensation pays for the loss caused by breach (here, diversion to ESL), calculated as HTP‑1 energy tariff (energy charge) minus variable cost, multiplied by diverted units.
  • Reimbursement of fixed charges restores money paid for capacity that was not actually received; it prevents unjust enrichment and is separate from compensation.
• Deemed Generation Incentive (DGI): An incentive payable under the PPA in certain circumstances, here found to have been wrongly paid for a period and therefore refundable; exact amount to be verified.
• Delayed Payment Charges (DPC): Interest on sums not paid by the due date. Under Article 5.3.4, it is simple interest; parity with compound interest may arise only if another binding decision so holds for the counterpart’s claims.
• Time Blocks (Hourly vs Half‑Hourly): The PPA originally used 60-minute blocks. Following CEA’s 21.02.2005 recommendation (solicited by EPL), the parties switched to half-hourly recording for ESL’s load and evacuation. That operational shift must also inform diversion computations for that period.

Practical Implications and Guidance

• For Discoms:
  • When facing diversion or short‑supply against an allocated share, claim both: (i) reimbursement of fixed charges for the shortfall and (ii) compensation per the agreed methodology for diverted energy.
  • Maintain granular metering data consistent with the operational time block actually used.
  • Ensure that any settlements are explicit on whether they are final, and on the precise methodology for future periods.
• For Generators:
  • Do not assume compensation formulae subsume fixed‑charge entitlements; reimbursement obligations may remain independent.
  • Where operational changes (metering/time blocks) are adopted, consider formal PPA amendments to pre‑empt disputes.
  • Avoid double recovery; courts will enforce restitutionary adjustments.
• For Regulators (SERCs/APTEL):
  • When implementing a restored order, give effect to the entire suite of holdings (e.g., both compensation methodology and fixed‑charge reimbursement).
  • Recognize parties’ adoption of regulator‑recommended operational changes when computing liabilities anchored in those measurements.

Checklist for Re‑Computation on Remand

1. Identify total declared availability for each relevant period; determine GUVNL’s 58% entitlement.
2. Compute actual supply to GUVNL and ESL for each time block:
   • Hourly blocks up to 21/23.02.2005.
   • Half‑hourly blocks from 21/23.02.2005 onward (as adopted per CEA’s recommendation).
3. Quantify shortfall for GUVNL’s share:
   • Reimbursement of fixed charges = monthly fixed charge paid by GUVNL × (shortfall units in the month ÷ GUVNL’s entitled units for the month), with year‑end reconciliation as per PPA.
   • Compensation for diversion = ∑ (diverted units per block × (HTP‑1 energy charge − variable cost)).
4. Apply DPC = simple interest per Article 5.3.4 (subject to parity caveat).
5. Verify DGI refund quantum and invoice deductions against primary records.
6. Respect the limitation cut‑off (claims prior to 14.09.2002 barred, save for the already reckoned settlement period).

Conclusion

This judgment clarifies two enduring issues in electricity PPAs and regulatory adjudication:

• Dual Path to Monetary Relief: Discoms are entitled to both the restitutionary reimbursement of fixed charges for non‑receipt of allocated power and the compensatory energy‑charge‑based damages for wrongful diversion. Conflating the two undercuts the contractual allocation of fixed cost risk and permits unjust enrichment.
• Operational Reality Matters: Where parties, at the generator’s instance and in reliance on a regulator’s technical advice, transition to a new metering/time‑block regime and act on it, courts can apply that regime to related computations even absent a formal written amendment—especially when the very liabilities depend on those measurements.

By insisting that its 2016 decision be read holistically (not piecemeal) and by realigning the remedial architecture (reimbursement plus compensation), the Supreme Court enhances doctrinal clarity at the intersection of contract and regulation. For the power sector, the ruling promotes fairness in capacity cost allocation, deters opportunistic diversions, and underscores the importance of documenting and, preferably, formally amending PPAs to reflect operational changes triggered by regulatory guidance.

In sum, this judgment is a robust reaffirmation of proportionate allocation discipline, restitutionary fairness in fixed‑charge recovery, and the legal significance of parties’ conduct in implementing regulator‑recommended technical changes. It will likely guide future disputes over allocation, metering granularity, and monetary remedies across long‑term PPAs in India’s electricity market.