Appellate Tribunal Rules in Favor of Exit Clause Added in Amended Hydropower PPA

The Appellate Tribunal of Electricity (APTEL) has discarded the order passed by the Haryana Electricity Regulatory Commission (HERC) in which it had directed the amendment of a power purchase agreement (PPA) for a hydropower project.

The Tribunal also dismissed the Commission’s directive to delete the clause related to the ‘exit option.’ It also directed the Commission to pass the order afresh within three months.

Background

The Haryana Power Purchase Center (HPPC) had filed a petition with the Appellate Tribunal seeking to set aside the order dated March 08, 2019, passed by the HERC. The Commission had directed the amendment of the PPA, negotiated and mutually agreed to by the parties, and delete the clause related to the ‘exit option.’


HPPC was designated as the nodal agency for the procurement of power on behalf of the distribution licensees in the state of Haryana, namely Uttar Haryana Bijli Vitaran Nigam Limited (UHBVNL) and Dakshin Haryana Bijli Vitaran Nigam Limited (DHBVNL).

DANS Energy Private Limited had established a 96 MW Jorethang loop hydropower project at Jorethang in Sikkim. The project was allocated to DANS Energy, and the implementation agreement was executed on December 05, 2005, with the state government.

DANS Energy approached HPPC for the sale of hydropower from its project. HPPC approached the Commission for approval of the power procurement. The Commission approved the procurement of power from the Jorethang Project at a tariff to be determined by the Commission, with a ₹4.71 (~$0.06)/kWh ceiling for the first 25 years of the PPA.

The Commission said that the draft PPA did not incorporate several details, and therefore the PPA should be recast and submitted for approval within one month.

HPPC and DANS Energy negotiated and finalized the terms of the PPA and submitted it for the approval of the Commission.

In the draft PPA, the parties agreed to an ‘exit option’ to either party to terminate the PPA in case the tariff determined by the Commission was not acceptable.

Later, the state government’s Steering Committee of Power Planning decided to incorporate a time period of 30 days in the exit clause for the option of termination of the PPA after the tariff determination by the Commission.

However, later, the Commission did not accept the term related to exit option, calling it “unprecedented” and directed to remove it from the PPA.

HPPC argued that when two parties agreed to the terms of the contract, the Commission cannot modify the terms and compel the parties to accept a different contract.

The state DISCOM stated that the parties might negotiate the terms depending on the facts of each case, and further, there may be new terms introduced, keeping with the practical realities faced by the parties.

The State Commission observed that it was not reasonable that HPPC could terminate the PPA in case the tariff determined was higher compared to any other source of power available.

In its order, APTEL noted that the fundamental point in a contract is the free will of the parties. The parties who are signing the contract should do so with free will without any compulsion. In the PPA, the tariff is the most important aspect, which in this case is not known initially and is determined by the Commission at a later stage. It is because of this reason that the parties have reserved their right regarding the continuation of tariffs and have included the exit option within 30 days after the determination of tariffs.

The Tribunal stated that the Commission had to examine the PPA submitted to it from all angles of law. On the contrary, the Commission, by giving the direction to delete the ‘exit option,’ had conveyed that irrespective of the fact whether the parties are satisfied or not with the tariff determined by the Commission, they will have to continue with the PPA.

APTEL said that if the exit clause exists, there is no certainty of the procurement of power. Uncertainty cannot be the problem for the simple reason that the ‘exit’ clause in question gives power to the parties to go back on the contract only within 30 days if they are not satisfied with the tariff fixed by the Commission.

In this case, the Commission was fully aware that the parties have mutually agreed to include the exit clause. Still, it had ignored this important aspect and directed to amend the PPA by deleting the exit clause. Accordingly, the Tribunal said that the direction passed by the Commission regarding the deletion of the exit option is bad in law and wrong.

Last year, Mercom reported that HPPC had asked the Commission to review its order passed on March 8, 2019, in which it allowed the deletion of an exit clause in the power purchase agreement. The petition was for a 36 MW hydropower project which HPPC purchased power from. The project is owned by IA Hydro Energy. However, the Commission pointed that retaining the exit clause was likely to put both parties at risk and ordered the removal of the clause.

In March this year, APTEL had allowed an appeal by Azure Sunrise Private Limited and had set aside an order passed by the Karnataka Electricity Regulatory Commission, reducing the approved timeline extension for the commercial operation date of a 50 MW solar project in the state.