Supreme Court Dismisses Appeals of Haryana Utilities in Power Supply Dispute: Upholds CERC and APTEL Orders on Coal Cost Sharing by Chief Justice B.R. Gavai and Justice K.V. Viswanathan

This paper discusses one of the landmark Supreme Court of India dispersals in a case involving the Haryana Power Purchase Centre (HPPC) versus GMR Kamalanga Energy Limited (GKEL), and the appeal of the same case by GRID Corporation of Orissa Limited (GRIDCO). The case focused on the complicated conflict of electricity generation costs, namely the allocation of coal from various sources. The case provides an insight into the division of costs when varied situations occur at a power generator, which is not foreseeable by other power purchasers and the case is referred to as a Change in Law. The decision rejects the notion that one power utility may assert a priority right to low-cost fuel and reaffirms the principle of fair share.

Case and Dispute Factors.

The controversy started with GMR Kamalanga Energy Limited (GKEL), a power-generating corporation, as it was engaged in supplying electricity to three power distribution companies (DISCOMS): Haryana Utilities, GRIDCO and Bihar Utilities. The power plants at GKEL were coal-fired. To this effect, the company had been granted a “firm linkage” for coal, which is a long-term and guaranteed supply from Mahanadi Coalfields Limited (MCL). A tapering linkage available to the company was also a transitory one until coal produced in a captive mine reached the market.

As time passed by, a number of events of Change in Law happened and these are changes in government policies or laws that make business more expensive. These were the introduction of a clean energy tax, an increment in coal royalty and other duties. Because of a deficit in the firm and emptying the linkage coal, GKEL had to purchase costly coal on the open market in order to satisfy its supply requirements.

GKEL claimed that these extra expenses incurred at such events should be compensated for in the DISCOMS. The Central Electricity Regulatory Commission (CERC) concurred and ordered Haryana Utilities to pay additional bills. By so doing, the CERC held that the pro-rata sharing of the linkage coal of the firm’s and tapering nature is to be done in the three DISCOMS (Haryana Utilities, GRIDCO, and Bihar Utilities). The extra expenses of open-market coal prices must also be distributed on a proportionate scale.

Haryana Utilities and GRIDCO objected to this decision claiming that they did not have to incur the cost of these expenses. The Appellate Tribunal for Electricity (APTEL) dismissed their appeals at the beginning.

The Legal Problems and Points.

The legal question before the Supreme Court was whether the expenses incurred as a result of a Change in Law event namely the necessity to purchase more costly coal, could be distributed on a pro-rata basis among all power buyers or whether any of the buyers enjoyed a special right to the less expensive, so-called firm linkage, coal.

Haryana Utilities had the defense that their Power Purchase Agreement (PPA) did not rely on anything except firm linkage coal and they should not bear any shortfall and consequent incremental costs. They argued that the extra costs of tapering and open-market coal had to be transferred to the other DISCOMS, namely GRIDCO and Bihar Utilities because these were the sources to provide them.

GRIDCO also made a similar claim by arguing that as their agreement was the first to be operationalized they enjoyed the first right to the power produced by the firm linkage coal. They further contended that they were not duly represented as a party in the original proceedings despite the fact that their rights were implicated.

On the contrary, GKEL and Bihar Utilities uphold the ruling of CERC and APTEL. They claimed that the governmental allocation of coal was to power plants in general and not to any particular PPA or DISCOM. As such, all coal resources were necessary to undertake the whole project, and were to be distributed proportionately to all intended beneficiaries. They also emphasized that Haryana Utilities had earlier acknowledged the pro-rata allocation methodology in a like case indicating their shift in position.

Final ruling of the Supreme Court.

Both appeals submitted by Haryana Utilities and GRIDCO were rejected and the Supreme Court affirmed the ruling made by CERC and APTEL. The court determined that the factual and legal premises basis did not exist to back the argument about the existence of a priority right by any DISCOM over cheaper and firm linkage coal. The court’s examination affirmed that the government distribution of coal was with regard to the whole power project and not allocated to a particular buyer.

One of the main aspects of the court’s rationale was to later defer to the decisions of expert organizations such as CERC and APTEL. According to the court, it would be slow to intervene from the judgment of such expert entities, except in cases where they had made the decision arbitrarily, unlawfully or on extraneous grounds. The simultaneous decision of CERC and APTEL that the expenses apportioned must be apportioned must be in pro-rata terms was declared to be reasonable and fair. The Supreme Court also indicated that it would be unjust to dismiss the claims of the appellants and subject consumers in other states, i.e. Odisha and Bihar to an undue burden.

The court has come to the conclusion that the power plant as a whole must be subjected to the supply of coal by all modes of procurement and the cost must be divided between all three DISCOMS in proportion to the energy supplied to them.

Consequences of the decree.

This Supreme Court ruling has great consequences for the Indian power sector. It strengthens the value of fair cost-sharing in electricity contracts, particularly in contracts that are obtained by way of competitive bidding. The decision sets a clear precedent according to which in case of a Change in Law that results in escalated fuel prices, distribution of the cost will be just to all parties that will benefit from a power plant. This helps to avoid any party usurping intentions to have a specific fuel source because of their PPA, which otherwise may be taken advantage of to escape the liability of higher costs. This ruling further highlights the relevance of CERC and APTEL as professional tribunals whose judgement shall be followed by the superior courts. On the whole, the decision enhances equity and balance in long-term contracts for power purchase so that risks and expenses can be fairly shared among all stakeholders.