Lack of Restitution Clause in Solar PPAs Must Not Lead to Rejection of Carrying Costs Claims

Electricity Regulatory Commissions (ERCs) have been denying the claim of carrying costs raised by developers in the various change in law petitions (CIL Petition) if their power purchase agreements (PPAs) do not have a restitution clause.

A restitution clause specifies that the affected party should be restored to the same economic condition that existed before the occurrence of the change in law.

For denying the claim of carrying costs, ERCs cite the pronouncement of the Supreme Court in the matter of “Uttar Haryana Bijli Vitran Nigam Limited & Anr. Vs. Adani Power Limited & Ors.” in Appeal No. 6190 of 2018 (Adani Power SC Judgment). ERCs are of the view that this judgment held that parties cannot claim the carrying costs for its change in law petition in the absence of a specific restitution clause. I differ from this view. I will first attempt to give a background of the dispute with a case study.

Case Study


To understand it in layman terms, let us take the following example:

a) X Power Private Limited (GENCO) participated in a bidding process and quoted an amount “Y” for supplying power to the Procurer for 25 years from its solar plant.

b) GENCO was declared a successful bidder to supply power to Procurer/DISCOM.

c) Post completion of the bid, the government of India imposed a duty on the import of solar modules from a certain geographical territory (Duty Affected Territory). GENCO had participated in the bid considering the landing cost of the solar modules from Duty Affected Territory.

d) Post imposition of the duty, the landing cost of the modules increased. To offset the adverse impact of the duty, there is an in-built mechanism given in most of the PPAs. However, GENCO is required to pay such duty on modules at the time of delivery of the modules. Reimbursement of the cost by Procurer/DISCOM takes place after a detailed procedure prescribed in the PPAs. Most of the PPAs contain a clause, namely “Change in Law.” Change in Law clause lays down the procedure to claim additional costs incurred by GENCO for supplying power to Procurer/DISCOM post imposition of the duty by the government of India.

e) There are fair chances that there will be a substantial gap between the “Payment of the duty by GENCO to the government of India” and ‘Reimbursement of such costs by Procurer.’

f) It is a well-known fact that the corporates will make the required payments either through equity or debt. Both equity and debt deployment will have their costs. Until the time Procurer/DISCOM does not reimburse the cost, GENCO will have to carry the cost of such equity or debt deployment. In ideal circumstances, GENCO would be required to reimburse all such expenditures which it had to incur due to Change in Law. ERCs have a different view. ERCs have divided the claim into two parts:

• The time between payment of duty by GENCO to the government of India and pronouncement of order in favor of GENCO
• The time between pronouncement of order in favor of GENCO and date of the reimbursement by procurer/DISCOM.

ERCs have held that if the PPA contains a restitution clause, only then will GENCO be entitled to claim reimbursement for the amount it incurred for carrying costs (equity or debt) until the pronouncement of the order.

g) ERCs heavily rely on the Supreme Court judgment in the Adani Power case to claim that the issue concerning carrying costs has been settled and if PPA does not specifically state that generator should be restored to the same economic position before the occurrence of the change in law, then the claim of carrying costs cannot be allowed.

In this case, ERCs are narrowly interpreting the findings of the Adani judgment. GENCOs are entitled to carrying costs unless there is no specific provision in the PPA excluding such claims.

Where ERCs Went Wrong

ERCs failed to consider the following aspects of the issue:

A. The Supreme Court in the Adani Power judgment was concerned with a limited question: whether or not the generator can claim the carrying costs if there is a specific restitution clause in the PPA. Central Electricity Regulatory Commission (CERC) did not grant carrying costs on the restitutive principle from the date of the change in law until the date of the decision on the ground that there was no provision in the PPA for payment of carrying costs. The Appellate Tribunal for Electricity (APTEL) reversed the CERC’s order and held that Article 13.2 of the PPA allowed restoring the GENCO to the same economic position as if Change in Law had not occurred aligns with the principle of ‘restitution.’ The Supreme Court merely affirmed APTEL’s finding that Article 13.2 allows payment of carrying costs. The Supreme Court specifically held at various places in this order that it will not dwell upon the issue of whether carrying costs can be allowed if there is no specific clause in the PPA.

B. A 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, a detailed analysis of the judgment will suggest that the Supreme Court was answering a specific query presented before it: whether Article 13 of the PPA allows carrying costs to be paid or not. The following instances from the Supreme Court order will further clear any doubts:

i. The 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 costs to be paid. It spelled out its tasks on hand at various places in the order and refused to answer any other queries/propositions raised by both sides. For example, at para 15 of the order, it refused to dwell upon any general principle 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. The Supreme Court in the matter of “Indian Council for Enviro-Legal Action vs. Union of India & Ors.” (2011) 8 SCC 161 emphasized 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. The Supreme Court refused to dwell upon the 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.
However, at no place in this order has the Supreme Court held that if there is no specific restitution clause, then the parties are not entitled to carrying costs.

C. Electricity Commissions are blindly reading the Supreme Court’s order and are ignoring other provisions of the PPA. They are even forgetting their regulatory power given to them under the Electricity Act, 2003.

Most of the Solar Energy Corporation of India (SECI) PPAs require the CERC to acknowledge the change in law. They also require the Commission to spell out the date from which this change in law would be effective (mostly at clause 12.2 of the SECI PPAs).

The Commissions must exercise their regulatory power to restore the developer to the same economic condition before the occurrence of the change in law. The Supreme Court in its various dictums has held that regulatory power is a very wide power that can be used to secure the ends of justice.

ERCs may also draw their strength from the Supreme Court judgment in the “Kavita Trehan vs Balsara Hygiene Products” (1994) 5 SCC 380 case wherein the Court held that the jurisdiction to make restitution is inherent in every court and will be exercised whenever the justice of the case demands.

The Supreme Court reiterates the same principle in the “Indian Council for Enviro-Legal Action vs. Union of India & Ors.” case. It is important to note that in the Adani Power judgment, the Supreme Court did not dwell upon the findings in the Indian Council for Enviro-Legal judgment on the ground that if PPA contains restitutive principle clause, then there is no benefit in reading equity principles laid down by this judgment. It means the question of applicability of the equity principle to grant carrying cost was not considered by the Supreme Court.

Conclusion

Electricity Commissions should not blindly rely on the Supreme Court judgment but exercise their regulatory power, read with other dictums of the Supreme Court. However, this does not mean that the Electricity Commissions should allow carrying costs in all cases, but they should exercise their power to allow it on a case-to-case basis. They should also take into consideration the conduct of the parties so that procurers/DISCOMS should not be burdened for the negligence of the generators.

(The author is a regulatory practitioner at Link Legal India Law Services. He can be reached at adityak.singh@linklegal.in)