Supreme Court Enforces Contractual Free Power Duties Over Statutory Limit, Giving Primacy to Regulator

The Supreme Court of India gave its verdict in Civil Appeal No. 12883 of 2024, State of Himachal Pradesh & Anr. Vs. JSW Hydro Energy Limited & Ors. on Wednesday, 16 July 2025, solidifying the difference between statutory tariff orders and independently negotiated terms regarding free power supply in the power sector and reaffirming the primacy of regulatory forums over High Courts for this purpose.

Introduction

The controversy was about the generating company’s duty to provide free electricity to the State of Himachal Pradesh under a project-specific agreement and the interplay between said contractual duty and subsequent statutory directions limiting the quantum of free power to 13% under CERC (Terms and Conditions of Tariff) Regulations, 2019. The controversy became important once the High Court intervened and brought the contract in line with the regulatory limit upon a petition by JSW.

Facts

• The State awarded the Karcham Wangtoo Hydroelectric Project to Jaiprakash Industries Ltd. (now replaced by JSW Hydro Energy) in 1993, under a contractual commitment to provide a portion of the generated power free to the State.
• These agreements, through subsequent addendums, required supply of 12% free power for 12 years from commissioning (2011–2023) and 18% for the following 28 years (2023–2051).
• At the same time, the Central Electricity Regulatory Commission (CERC) issued orders in 2019 setting a tariff calculation cap to the effect, “free energy to home State (FEHS) shall be taken as 13% or actual, whichever is less.”
• In 2022, CERC, taking into account JSW’s request for a relaxation of the same cap to 18% (to account for their contractual obligation), denied this, citing the rules dominated tariff calculations, but did not explicitly prohibit private obligations over that cap.
• JSW then moved the High Court to get its contract with the State “bracketed” under the 13% regulatory top.

Arguments

Appellant (State of Himachal Pradesh)

• Argued that the 18% free power clause is a product of freely negotiated contracts which is unaffected by subsequent CERC regulations that only determine tariff calculations and not quantum of free supply itself.
• Emphasized that regulation 55 Note 3’s 13% is only for tariff pass-through and does not invalidate separate and higher contractual obligations.
• Asserted that the High Court improperly exercised writ jurisdiction in rewriting an unambiguous contract.

Respondent (JSW Hydro Energy Ltd.)

• Argued that performance of the contract should be under “Law”, which contractually encompasses subsequent regulations.
  • Stood firm on the position that the regulatory ceiling automatically supersedes the contract which renders the 18% clause unenforceable to the extent it is in excess of 13%.
  • Argued that the State, being a “deemed licensee” under the Act, is a regulated party and subject to regulatory amendments.

Judgment

With due consideration, the Supreme Court overturned the High Court ruling emphasising some legal principles:

• The Regulatory Cap of CERC Does Not Invalidate Obligations Under Contract: The regulation’s 13% cap only limits what can be taken into account for tariff calculation (“pass-through” to other beneficiaries/consumers), but does not ban or invalidate greater obligations incurred by a generator to the State as a kind of “royalty” for harnessing public assets such as rivers. Therefore, contractual supply over the regulatory cap is valid and enforceable.
  • Exclusive Regulatory Jurisdiction: The Court reiterated that issues of interpretation falling under technical electricity regulations and tariff are the exclusive jurisdiction of the specialized regulator (CERC/State Commissions), whose orders are appealable only to the APTEL and in exceptional cases, to the Supreme Court itself. Intervention by the High Court by way of a writ jurisdiction, particularly where an alternative forum is special was inappropriate.
  • No Automatic Contractual Realignment: The Court explained that regulatory amendments do not re-write contracts unless the rule specifically mentions so. Here, only tariff calculation was statutorily impacted and the quantum of free power supply agreed voluntarily continued to be independently enforceable.
  • No General Supremacy of Statutory Regulation Over All Contractual Arrangements: The ruling identifies how regulatory norms will supersede contracts and are limited only to the subject matter specifically dealt with (e.g., tariff pass-through), unless otherwise provided in the contract or legislation.

Analysis

This judgment is important for several reasons:

• Reminds Regulatory Discipline: It reiterates the centrality and self-reliance of regulation in the power industry, affirming that courts should exercise deference and avoid piecemeal or parallel intervention.
• Explanatory Regulatory Vs. Contractual Dynamics: The Court’s subtle strategy harmonizes regulatory goals (discipline in the energy market, protection of consumers) with freedom of contract which enables negotiated “royalty” to the State to prevail even when not sanctioned for tariff calculation.
• Forecloses Forum-Shopping: The ruling precludes commercial players from evading unfavourable regulatory determinations by obtaining judicial relief elsewhere.
• Greater Significance: This ruling gives clarity to all power sector agreements involving “free power” differentiating obligations of statutory tariff from generalized negotiated advantages entered into as a quid pro quo for State benevolence or resource allotment.
• Deemed Licensee Debate: While contested by parties, the Court declined to decide whether the State is a “deemed licensee”, considering it irrelevant to resolve the core issue.

Conclusion

In this judgement, the Supreme Court has brought back to the interpretation of regulatory and contractual relations within the Indian power industry, clarity and discipline. By refusing to permit the judiciary to reorder contracts ex post facto with regulatory limits, the Court not only reaffirmed the harmonious but separate coexistence of subordinate legislation and contracts, but also revived trust in regulatory processes which is a vital insight for India’s changing infrastructure and public-private partnership models.

Coram

Justice Pamidighantam Sri Narasimha

Justice Joymalya Bagchi

Sources

1. State of Himachal Pradesh & Anr. Vs. JSW Hydro Energy Ltd & Ors. [2025] INSC 857 (SC).