Energy Watchdog v. Central Electricity Regulatory Commission and Others
"A rise in the cost of performance, even a steep one, does not frustrate a contract or constitute force majeure where the parties have allocated that risk; and 'change in law' in Indian power purchase agreements means Indian law, so a change in Indian coal policy may qualify for relief while a change in foreign law does not."
Issues Before the Court
- (i)
Whether the Central Electricity Regulatory Commission had jurisdiction, under the 'composite scheme' limb of Section 79(1)(b) of the Electricity Act, 2003, over generating companies supplying power to more than one State?
- (ii)
Whether a steep rise in the price of Indonesian coal, caused by a change in Indonesian law in 2010, was force majeure under the power purchase agreements, or frustrated them under Section 56 of the Indian Contract Act, 1872?
- (iii)
Whether that change in Indonesian law, or the change in India's domestic coal distribution policy in 2013, was a 'change in law' entitling the generators to relief?
Law & Rules Applicable
- (i)
Electricity Act, 2003, Section 63 (tariff determined through transparent competitive bidding) and Section 79(1)(b) (regulation of the tariff of generating companies with a composite scheme for generation and sale of electricity in more than one State).
- (ii)
Indian Contract Act, 1872, Section 56 (frustration by impossibility).
- (iii)
The force majeure and change in law clauses of the power purchase agreements, read with the competitive bidding guidelines.
Application to Facts & Circumstances
Generating companies, including Adani Power and Tata Power, had won long-term contracts to supply electricity from plants at Mundra in Gujarat at tariffs discovered through competitive bidding, relying on imported Indonesian coal. In 2010 Indonesia required its coal to be sold at international market prices, sharply increasing their costs. The CERC granted compensatory tariff, and the Appellate Tribunal for Electricity treated the change as force majeure.
Writing for the Court, Nariman J. held that the CERC had jurisdiction: a 'composite scheme' means no more than a scheme for generation and sale of electricity in more than one State.
A rise in price that makes a contract more onerous to perform does not frustrate it or amount to force majeure. The agreements excluded changes in the cost of fuel from force majeure, the bidders had chosen to quote non-escalable tariffs, and alternative sources of coal remained available; the fundamental basis of the contracts had not gone.
'Change in law' in the agreements referred to Indian law, so the Indonesian regulation did not qualify. But the New Coal Distribution Policy of 2013, which reduced the domestic coal available to the generators, was a change in Indian law, and they were entitled to relief to the extent that it affected them.
Conclusion & Ruling
- (i)
The orders granting compensatory tariff on the basis of the Indonesian regulation were set aside.
- (ii)
The CERC was directed to determine the relief due under the change in law clause on account of the change in India's domestic coal policy.
- (iii)
A mere rise in the cost of performance does not frustrate a contract or constitute force majeure; the decision is a leading authority on Section 56 and on change in law clauses in long-term contracts.