In Public Interest

Supreme Court orders discoms not to terminate PPAs

In welcome news for power generators, which have been mired in legal battles with discoms over contractual sanctity, the Supreme Court recently passed a landmark judgment referring to a case bet­ween power producer Hinduja Natio­nal Power Corporation Limited (HNPCL) and Andhra Pradesh’s state discoms. In its judgment, the Supreme Court has stated that every decision of the state is required to be guided by “public interest” and its power is to be exercised for public good. It also noted that the state discoms have acted contrary to public interest by purchasing power at a higher rate.

Background of the case

HNPCL had entered into an MoU with the erstwhile Andhra Pradesh State Elec­tricity Board (APSEB) on July 17, 1992, to establish the 1,040 MW (2×520 MW) Vizag power plant at Visakhapatnam, and to ge­nerate and supply the electricity to APSEB. An initial power purchase agreement (PPA) was signed by APSEB and HNPCL in 1994, and an amended and restated PPA was signed in 1998. Between 1998 and 2007, the amended and restated PPA was not implemented. Subsequently, in 2007, HNPCL approached the Govern­me­nt of Andhra Pradesh to revive the po­wer project, structuring it as a merchant plant, offering 25 per cent of the power generated to the state and the balance 75 per cent to third parties. The state government offered to purchase 100 per cent of the power generated from the plant, which was accepted by HNPCL.

Then, in 2013, HNPCL informed that the estimated capital cost of the power project was Rs 60.98 billion as against Rs 55.45 billion estimated in June 2010. The discoms, vide communication dated May 17, 2013, expressed their concerns about the capital cost. However, on the same day, a memorandum of agreement was signed between the state discoms and HNPCL, deciding to continue the amen­d­ed and restated PPA.

In 2015, HNPCL filed an addendum ap­plication, enhancing the capital cost of the project to Rs 80.87 billion. In 2016, the Andhra Pradesh Electricity Regulatory Commission (APERC) re­determined the provisional tariff at the rate of Rs 3.82 per unit. This was to operate until further or­ders, but was extended from time to time, with the last extension granted till Jan­uary 31, 2018. The discoms then filed an application for the withdrawal of the amended and restated PPA, and dismissal of the petition filed by HNPCL for the determination of the capital cost. Thereafter, APERC dismissed the petition filed by HNPCL for the determination of the capital cost. Aggrieved by the same, HNPCL approached the Appellate Tribu­nal for Electricity (APTEL), which directed the parties to maintain status quo as prevalent prior to January 31, 2018. The order was challenged before the Andhra Pradesh High Court, but the court refused to interfere. Therefore, the disco­ms approached the Supreme Court.

It was submitted by the discoms that since the reinitiation of the project in 2007 by HNPCL as a merchant plant, it can sell the power to third parties. Hence, the discoms should not be compelled to purchase power from HNPCL, which would be at a very high price. Further, the capital cost of the project, which was initially estimated at Rs 46.28 billion, has now gone up to Rs 80.87 billion, which will have a direct effect on the purchase price of electricity by the discoms, which will ultimately be a loss to consumers.

Supreme Court’s observations and order

The Supreme Court has remarked that po­wer discoms are instrumentalities of the state, within the meaning of Article 12 of the Constitution of India, and every holder of public office is a trustee, whose highest duty is to the people of the country. Hence, discoms should not terminate PPAs in view of public interest and public good.

The Supreme Court noted that while the discoms could have purchased the power from HNPCL at the rate of Rs 3.82 per unit in view of the orders passed by APTEL, they have chosen to purchase the power at a higher rate from va­rious generators including KSK Maha­nadi, from whom the power is being purcha­s­ed at Rs 4.33 per unit.

The Supreme Court has now asked APERC to resolve the pleas pending before it within six months from the date of the judgment. It has further directed that till the pleas are decided by the state commission, the discoms must start purchasing power from HNPCL at the rate of Rs 3.82 per unit. Meanwhile, the determination of the capital cost of the project and the tariff are subject to regulatory co­n­trol of the state commission. The court also noted that HNPCL had revived its project as a merchant plant and offered 25 per cent of electricity to the state, and it was the state that offered to purchase 100 per cent power from HNPCL.

Outlook

The issue of discoms not honouring contracts is not new to the sector. Last year, in November 2021, the Punjab state cabinet unanimously passed the Punjab Energy Security, Termination of PPAs and Redetermination of Power Tariff Bill, 2021, which was condemned by industry bodies as it jeopardised investments wor­th nearly Rs 270 billion. Net, net, the Supreme Court judgment on the HNPCL case is critical for the sector as well as thermal and renewable energy generators, which have been facing issues of renegotiation and termination of PPAs.

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