India: The Tariff War: Tussle Between The Regulatory Regime And Party Autonomy

"DISCOM HAS TO ADHERE TO THE TARIFF POLICY AND CANNOT NEGOTIATE ON TARIFF WITH A GENERATING COMPANY"

Introduction

The Electricity Act, 2003 ('the Act') was enacted to consolidate and upgrade the then existing laws relating to generation, transmission, distribution, trade and use of electricity; for taking measures conducive to development of electricity as an industry; to promote competition therein and to protect the interest of consumers; rationalize tariff and promote efficient and environment friendly policies besides creating different regulatory and appellate bodies to deal with highly complex technical issues and disputes with regard to production, distribution and sale of electricity including fixation of tariff.

The Act provides for Regulatory Commissions at both central and state levels viz. Central Electricity Regulatory Commission² and State Electricity Regulatory Commission,³ respectively. An appellate mechanism is also provided in the Act in the form of Appellate Tribunal for Electricity ('APTEL')⁴. Orders passed by the Central and State Commissions can be challenged before APTEL.⁵ An appeal from APTEL lies before the Apex Court.⁶

The Tussle

One of the options with the Power generating companies is to sell their generated power to State Distribution Company ('Discoms') and in order to do so they enter into Power Purchase Agreements ('PPA') with the said Discoms. PPA is essentially a contract and the principles of contract law stipulate that the parties entering into an agreement choose the terms (including consideration) with their own free will and such agreed terms are binding to the parties. However, will this party autonomy flowing from contractual law principles also give power to the parties to a PPA to negotiate the consideration (tariff in this case)? And further, can a Discom negotiate tariff and enter into a PPA which stipulates a tariff which is lower from the tariff determined in the Tarif Order?

Legal status of Tariff Orders

To answer the above question, it is essential to determine legal status of Tariff Orders. Under the Act Appropriate Commission has been delegated with the function of tariff determination. Part VII of the Act deals with the issues related to tariff. The Act enshrines the power of determining the tariff on the Appropriate Commission⁷, wherein an 'Appropriate Commission', as defined in the Act, is either the Central Regulatory Commission or the State Regulatory Commission as the case may be. The Act provides for analogous provisions for fixation of tariff by the Central Commission⁸ and the State Commission⁹.

A reading of the provisions of the Act would go to show that apart from fixation of tariff in a "situation of open access" or in a situation of competitive bidding covered by Section 63 of the Act, determination and fixation of tariff is a statutory function to be performed by the Appropriate Commissions, and exercising powers in consonance with the principles enunciated by the Act. The State Regulatory Commissions in exercise of their powers under Section 62 read with Section 86 of the Act, issue Tariff Orders time to time to determine and fix tariff which is applicable on the energy generated from the plants within their jurisdiction. The tariff so fixed by the Appropriate Commission has the force of law and thus as a necessary consequence, it must be adhered to. Thus, parties to a PPA cannot indulge in negotiation of the tariff. However, a situation may arise where parties have already executed a PPA containing tariff different from the Tariff Order. What is the fate of such PPAs?

Powers of the Commission

To answer the above question, we need to examine powers of the Commissions under the Act. Section 79(1)(b) and 86(1)(b) of the Act (both analogous provisions containing powers of Central and State Commissions respectively) use the term 'regulate', indicating that the Regulatory Commissions have the power and it is the primary function of the Commission to regulate the procurement and purchase of power. The term 'regulate' has been given a very wide connotation in a catena of judgments.¹⁰ The Regulatory Commissions are empowered to regulate the procurement of power and its well within the ambit of its power to reopen a PPA and revise the tariff to bring it in consonance with the tariff determined/fixed by the Commission. This view finds support from various judicial pronouncements. The Apex Court in PTC India Limited v. CERC¹¹, while discussing the Regulations made by Central Commission under Section 178 of the Electricity Act has held that both existing and future contracts of the regulated entities i.e. the Discoms, must be in accordance with the Regulations and there cannot be any deviation from the same. It is pertinent here to note that Section 181 which provides for the power of State Commission is analogous to Section 178 of the Act.

The exact question of whether in the matter of determination of tariff, the principles governing Section 61 and 86 of Act should be overlooked if the parties enter into agreement by and between themselves with regard to purchase price, was before the APTEL, in the case of Tarini Infrastructure Limited v. Gujarat Urja Vikas Nigam Limited¹². The Hon'ble Appellate Commission categorically held that the Electricity Commission has the power to revisit the PPA and modify it in such cases. It was held that fixation of tariff is a statutory function of the regulatory commission as per the provisions of the Act and if any PPA is not in conformity with the Act, it will lose its legal force. The said finding of APTEL was upheld by the Apex Court in Gujarat Urja Vikas Nigam Limited v. Tarini Infrastructure Limited & Ors.¹³, wherein it was held that the Commission has the power to reopen a PPA and tariff be determined as per the applicable regulatory mechanism.

Moreover, APTEL in the case of Gujarat Urja Vikas Nigam Limited v. Green Infra Company¹⁴, has held that the determination of tariff is a statutory function which is outside the purview of the contract and the Commission has the power to determine and also amend the tariff. It was held that any agreement between the parties cannot denude the State Commission of its power to exercise its statutory function to determine and fix tariff for sale of power. The will of parties cannot eclipse the statutory function of the regulatory commissions. In M/s Junagarh Power Projects Private Limited v. Gujarat Urja Vikas Nigam Limited & Ors.¹⁵, the Hon'ble APTEL came to the conclusion that the State Commission has powers to revise the tariff in a concluded PPA.

Conclusion

Therefore, it is clear that a PPA is subordinate to and cannot take precedence over the regulatory regime prescribed by the Act. It is the Act which confers the power of determination of tariff onto the Appropriate Commission, therefore, the tariff in a PPA have to be in accordance with the tariff so determined by the Commission.

Parties are free to enter into a contact for supply of power defining quantity, quality and the manner in which the supply can be made, however, the price fixation for the sale is vested on the Appropriate Commission, by the Act. If a tariff decided by the parties to a PPA, which is not in accordance with the tariff fixed by the Appropriate Commission, is given effect to then the entire purpose/regulatory function of the Commission prescribed by the Act would be rendered futile and redundant. The Commissions, thus have been bestowed upon the power to re-open, amend/modify a PPA already entered into between the parties so as to bring the PPA in harmony with the tariff so fixed by the Commission, viz. the law, as the contrary provision in the PPA would be rendered void if it is contrary to the law. However, such contradiction would not nullify and void the whole PPA as that would be against the object of the Act.

Footnotes

1 * The authors are partners at RPV Legal [www.rpvlegal.com] and they regularly advise and appear for power generating companies.

2 Section 76 of the Electricity Act, 2003 read with Section 3 of the Electricity Regulatory Commissions Act, 1998.

3 Section 82 of the Electricity Act, 2003 read with Section 17 of the Electricity Regulatory Commissions Act, 1998.

4 Part IX of the Electricity Act, 2003.

5 Section 111 of the Electricity Act, 2003.

6 Section 125 of the Electricity Act, 2003.

7 Section 62 of the Electricity Act, 2003.

8 Section 79 of the Electricity Act, 2003.

9 Section 86 of the Electricity Act, 2003.

10 See V.S. Rice Oil Mills & Ors. v. State of Andhra Pradesh AIR 1964 SC 1781; K. Ramanathan v. State of Tamil Nadu & Anr. (1985) 2 SCC 116

11 (2010) 4 SCC 603

12 2012 SCC OnLine APTEL 119

13 (2016) 8 SCC 743

14 2015 ELR (APTEL) 1316

15 2014 ELR (APTEL) 521

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