Denial of carrying costs
1. Introduction
Electricity Regulatory Commissions (ERCs) have been denying the claim of carrying costs raised by developers in various change in law petitions (“CIL Petition”) if their power purchase agreements (“PPAs”) do not have restitution clause i.e. a specific clause which states that the affected party should be restored to the same economic condition as was prior to occurrence of the change in law. For denying carrying costs claim, ERCs cite pronouncement of the Supreme Court in the matter of “Uttar Haryana Bijli Vitran Nigam Limited & Anr. Vs. Adani Power Limited & Ors.” in Appeal №6190 of 2018 (“Adani Power SC Judgment”). ERCs are of the view that Adani Power SC Judgment in clear terms held that parties cannot claim carrying costs for its change in law petition in absence of specific restitution clause. I beg to differ from this view. I will first attempt to give a background of the dispute by a case study.
2. Case Study
To understand it in a layman terms, let us take following example:
a) X Power Private Limited (“GENCO”) participated in a bidding process and quoted an amount “Y” for supplying power to procurer (“Procurer”) for 25 years from its solar plant.
b) GENCO was declared successful bidder to supply power to procurer/DISCOM.
c) Post completion of the bid, Government of India (“GoI”) imposed a duty on the import of solar modules from certain geographical territory (“Duty Affected Territory”). GENCO had participated in the bid considering landing cost of the solar modules from Duty Affected Territory.
d) Post imposition of the duty, landing cost of the modules got increased. To offset the adverse impact of the duty, there is an inbuilt mechanism given in most of the PPAs.
e) However, GENCO is required to pay such duty on modules at the time of delivery of such modules. Reimbursement of such cost by Procurer/DISCOM takes place post following a detailed procedure prescribed in the PPAs. Most of the PPAs contain a clause namely “Change in Law”. Change in Law clause lays down procedure to claim additional costs incurred by GENCO for supplying power to Procurer/DISCOM post imposition of the duty by GoI.
f) There are fair chances that there will be substantial gap between the “Payment of the duty by GENCO to GoI” and “Reimbursement of such costs by Procurer”.
g) It is a well-known fact that the corporates will make the required payments either through Equity or Debt. Both Equity deployment and Debt deployment will have its cost. Till the time Procurer/DISCOM does not reimburse cost, GENCO will have to carry the cost of such Equity deployment or Debt deployment. In ideal circumstances, GENCO would required to be reimbursed all such expenditures which it had to incur due to “Change in Law”. ERCs have a different view. ERCs have divided such claim in two parts:
First Part: Time Period between payment of duty by GENCO to GoI and pronouncement of order in favour of GENCO;
Second Part: Time period between pronouncement of Order in favour of GENCO and date of the reimbursement by Procurer/DISCOM.
ERCs have held the if PPA contains a restitutive clause then only GENCO will be entitled to claim reimbursement for the amount GENCO incurred for carrying costs (Equity or Debt) till the pronouncement of the order.
h) ERCs heavily rely Adani Power SC Judgment to claim that issue concerning carrying cost has been settled and if PPA does not specifically state that generator should be restored to the same economic position prior to the occurrence of the change in law then claim of carrying costs cannot be allowed.
In my respectful submissions, ERCs are narrowly interpretating findings of Adani Power SC Judgment. GENCOs are entitled for claiming carrying costs unless there is no specific provision in the PPA excluding such claim.
3. Where ERCs Went Wrong
ERCs failed to consider following aspect of the issue:
A. Supreme Court in Adani Power SC Judgment was concerned with a limited question, whether generator can claim carrying cost if there is a specific restiutionary clause in the PPA. In Adani Power matter, CERC did not grant carrying cost on restitutive principle from the date of change in law till the date of decision on the ground that there was no provision in the PPA for payment of carrying cost. APTEL reversed the order of the CERC and held that Article 13.2 of the PPA which allowed restoring the GENCO to the same economic position as if Change in Law had not occurred is in consonance with the principle of ‘restitution’. Supreme Court merely affirmed the
finding of APTEL that Article 13.2 allows payment of carrying costs. Supreme Court specifically held at various places of this order that it will not dwell upon the issue that whether carrying costs can be allowed if there is no specific clause in the PPA.
B. Prima facie reading of the order may lead to the conclusion that there has to be a specific restitutive clause to claim carrying costs. However, detailed analysis of the judgment will suggest that the Hon’ble Supreme Court was answering a specific query presented before it, that whether Article 13 of the PPA allows carrying costs to be paid or not. Following instances from the Supreme Court order will further clear the doubt:
i. Supreme Court in the instant matter was only concerned with the interpretation of Article 13 of the PPA and held that Article 13 allows carrying cost to be paid. At various places in the order, Supreme Court clearly spelled out its tasks in hand and refused to answer any other queries/propositions raised by both sides. For example, at para 15 of the order, Supreme Court refused to dwell upon any general principal argument of the party and reminded parties that in the present case, they are only concerned with the interpretation of Article 13 of the PPAs.
ii. Hon’ble Supreme Court in the matter of “Indian Council for Enviro-Legal Action vs. Union of India & Ors.” (2011) 8 SCC 161 emphasised the importance of time value of money and held that with restitution, so long the deprivation of other party is not fully compensated for, injustice to that extent remains.
APTEL relied on the ratio of this judgment to hold that carrying costs should be allowed. Supreme Court refused to dwell upon ratio of “Indian Council for Enviro-Legal Action v. Union of India and Ors.,” on the ground that if there is a specific clause in the PPA for providing carrying costs, there is no need to read this judgment. (Para 14 of the SC Order)
However, at no place of this order, Supreme Court has held that if there is no specific restitution clause then the parties are not entitled for carrying costs.
C. Electricity Commissions are blindly reading order of the Supreme Court and are ignoring other provisions of the PPA and are even forgetting their regulatory power given to them under the Electricity Act, 2003.
Most of the SECI PPAs require Central Commission to acknowledge change in law and it also requires Central Commission to spell out the date from which this change in law would be effective (Mostly at clause 12.2 of the SECI PPAs).
Central Commission should exercise its regulatory power to restore developer to the same economic condition prior to occurrence of the change in law. Supreme Court in its various dictum has held that the regulatory power is a very wide power and it can be used to secure the ends of justice.
D. ERCs may also draw their strength from Hon’ble Supreme Court Judgment of “Kavita Trehan vs Balsara Hygiene Products” (1994) 5 SCC 380 wherein the Hon’ble Supreme Court held that the jurisdiction to make restitution is inherent in every court and will be exercised whenever the justice of the case demands. Hon’ble Supreme Court in “Indian Council for Enviro-Legal Action vs. Union of India & Ors.” reiterates the same principle. It is important to note that in Adani Power Judgment, Supreme Court did not dwell upon the findings of Indian Council for Enviro-Legal judgment on the ground that if PPA contains restitutive principal clause then there is no benefit in reading equity principles laid down by this judgment. It means question of applicability of the equity principle to grant carrying cost was not touched by the Supreme Court.
Conclusion
Therefore, in my submission, Electricity Commissions should not blindly rely on the Supreme Court Judgment and should exercise its regulatory power read with other dictums of the Supreme Court. However, I am not submitting that the Electricity Commissions should allow carrying costs in all cases, it should exercise its power to allow it on case to case basis and also should take into consideration the conduct of the parties so that Procurers/DISCOMS should not be burdened for negligence of the generators.
