CERC Order in the Adani Power Case

Last
week, the Central Electricity Regulatory Commission (CERC) passed an order
relating to Adani Power that has significant implications for the power sector
in India. Adani Power, which had entered into power purchase agreements (PPAs) with
state utilities in Gujarat and Haryana for sale of power, approached the CERC
with a request for relief on account of escalation of imported coal prices due
to a change in regulations in Indonesia, where its principal fuel source was
located. By a 3:1 majority, the CERC granted temporary relief to Adani Power
through a “compensatory tariff” to be paid to it. The majority order is
available here,
while the dissenting order is here.
Facts
Adani
Power had entered into separate PPAs with Gujarat Urja Vikas Nigam Limited and two
Haryana utilities under which Adani Power had agreed to supply power to these state
utilities. Under these arrangements, and the bidding process that preceded
them, Adani Power was to assume responsibility to tie up the fuel linkage. Due
to issues in procuring fuel from domestic sources, Adani Power established
arrangements with entities in Indonesia for supply of coal at reasonable
prices. However, in 2010, the Indonesian Government issued a set of regulations
stipulating that holders of mining permits in Indonesia will be permitted to
sell coal only benchmark prices accepted in the international markets. These
Indonesian regulations had a significant impact on export prices of coal from
Indonesia, which were higher than the contracted prices, due to which it became
unviable for Adani Power to supply power at agreed prices to the state
utilities in Gujarat and Haryana. Since this was unforeseen, Adani Power
approached the CERC for relief.
Issues
After
taking on record the submissions of the parties, the CERC identified three
broad issues for consideration:
(i)         Whether due to the effect of the
Indonesian regulations and the non-availability of domestic coal-linkage, it
has become impossible for Adani Power to supply power to the state utilities at
the tariff set by the PPAs;
(ii)        Whether the situation faced by Adani
Power falls within the scope of force
majeure
or “change in law” in the PPAs thereby requiring relief; and
(iii)       Whether the CERC possesses general powers
under the Electricity Act, 2003 and the National Electricity Policy and tariff
policy to grant the requested relief to Adani Power.
Decision
The
first question is largely a factual matter that the CERC considered in detail.
It found that the non-availability of coal from domestic sources and the lack
of attractiveness of sourcing from the international markets meant that the
Indonesian markets were the most feasible. However, due to the Indonesian
regulations, the viability of sourcing coal from Indonesia has been put to
serious doubt as it has altered the basic premise upon which Adani Power had
quoted the tariff to the state utilities.
Given
the affirmative response of the CERC to the first question, it became necessary
to deal with the legal matters that arose in the second question, i.e. whether the
force majeure or “change in law”
provisions in the PPAs would be attracted in this case. The CERC interpreted force majeure narrowly such that it can
be invoked only “where any event or circumstance or combination of events or
circumstances wholly or partly prevents or unavoidably delays the affected
parties in the performance of its obligations”. Since there is no prohibition
as such on Adani Power buying coal from Indonesian sources, the CERC came to
the conclusion that the force majeure
clause is not attracted. Mere rise in price of a commodity does not result in impossibility
of performance. As regards “change in law”, the CERC interpreted the terms of
the PPAs. “Law” was defined to mean the laws in India, and was not meant to
include foreign laws. Hence, a change in Indonesian law was not covered by the “change
in law” clause. No protection was afforded to Adani Power on account of such
measures that would have resulted in a situation akin to a frustration of
contract.
That
led to the CERC’s determination in the third question of whether it had inherent
powers under law to accord relief to Adani Power. The CERC found that since
there was no price escalation clause in the PPAs, in its view “ways and means need to be found to compensate
[Adani Power] for the loss or additional expenditure incurred by it on account
of procurement of coal from Indonesia as the international benchmark price …”
[emphasis added]. The CERC analyzed the objective and scheme of the Electricity
Act and related laws and policies, and rationalized its decision as follows:
82.
The common threads running along the length and breadth of the statutory scheme
under the Act and the statutory instruments framed thereunder are the
protection of the consumers’ interest and ensuring adequate return on the
investments in the sector. The consumers’ interest is protected not only by
fixing competitive tariff but it is equally imperative to ensure continuous,
uninterrupted and reliable supply of electricity. … Therefore, in the final analysis,
the recovery of costs of the investors serves the consumers’ interest by
attracting investments in the sector by improving quality of supply of electricity
to the consumers. Thus, twin objectives of protection of consumers’ interest
and recovery of cost of services provided are complementary. All the authorities
established under the Act, have to strive towards achieving these objectives.
This Commission as the apex regulatory body for power sector has the additional
responsibility for meeting the objectives of law.
Relying
upon “its statutory responsibility to balance the interest of the consumers
with the interest of the project developers while regulating the tariff of the
generating companies”, the CERC granted a compensatory tariff to Adani Power.
It also ordered the establishment of a committee to undertake a consultative
process to find an acceptable solution in the form of the compensatory tariff.
The
dissenting order, however disagrees with the majority on the first issue, i.e. on
the impact of the Indonesian regulations on Adani Power’s ability to continue
with its obligations under the PPA. However, it agrees with the majority as
regards the non-applicability of the force
majeure
and “change in law” clauses. More importantly, the dissenting view
finds that the case primarily involves an adjudication of specific disputes and
does not justify a general exercise of regulatory power by the CERC as it “amounts
to an invasion on the exercise of free will by the parties”.
Analysis
While
the CERC order has enormous implications for the power industry and possibly
other infrastructure sectors in India, it also raises important legal
questions. First, it erodes the principle
of sanctity of contract. While courts and regulators are generally hesitant to
interfere in contractual understandings between the parties, in this particular
case the CERC has stepped in to alter the contractual relations between the
parties. Of course, it can be argued that a PPA is not a plain-vanilla
contract, but one that is susceptible to industry regulation, the extent to
which freedom of contract can be violated is an open question. This is also a
significant point of dissent in the minority opinion.
Second, CERC’s interference comes in
not through the contract, but rather through exercise of its general powers as
an industry regulator. For example, contractual principles of frustration and
their practical manifestations in contracts in the form of force majeure and “change in law” clauses were held inapplicable
here. CERC’s use of its general powers to intervene in contractual matters
would lend an element of subjectivity to commercial contracting in the sector.
In its zeal to resolve a dispute in an existing situation, it remains to be
seen whether it has opened a Pandora ’s Box that is likely to cause some
uncertainty in the sector. In seeking to protect the commercial viability of
the electricity sector and the access to power to the populace in the two
states involved, the CERC may very well have dampened the sentiment. If this
principle is extended, surely power generators may themselves carry the risk
that they might find themselves to be at the wrong end of the CERC
interference, which may cause additional concerns to the sector.
Finally, the issue of moral hazard has already
been
raised
. The question remains whether such developments would shift undue
risk to the state utilities, and thereby engender excessive risk-taking amongst
the power producers. The classic way of addressing risk is through contract,
but if the freedom of contract is constantly eroded as it has been in this case,
the risk allocation mechanisms will be determined by the regulator rather than
left to the wisdom of the parties.
Surely,
there are lessons to be drawn from this case. Not the least among them might be
the need to capture more details (as is reasonably possible in a cost-effective
and timely manner) in contracts regarding the obligations and responsibilities
of parties on matters such as fuel linkages.

For more, The Firm –
Corporate Law in India has an
interesting
debate
on the CERC order.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

2 comments

  • The majority has introduced into Indian contract law the doctrine of hardship. Indian law does not recognise the doctrine of hardship simpliciter unless it comes within the purview of Section 56 Contract Act. Besides, if a strict view is taken, even the hardship doctrine would not apply as Adani had deliberately taken the risk of providing for fixed fuel costs (without escalation) at the time of bidding. Consumers have to bear the burden for Adani's folly.

  • The viewpoints aired but with a different stroke in another published article @ the blogs. economic times…/an-unequal-battle,
    make for an interesting reading.

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