Business

Adani Group Suffers a Setback As Supreme Court Rejects Compensatory Power Tariff

The court said that an unexpected rise in the price of coal imported from Indonesia will not absolve the Adanis from performing their part of the contract.

Billionaire Gautam Adani speaks during an interview with Reuters at his office in Ahmedabad April 2, 2014. Credit: Amit Dave/Reuters/Files

Billionaire Gautam Adani speaks during an interview with Reuters at his office in Ahmedabad April 2, 2014. Credit: Amit Dave/Reuters/Files

New Delhi: In a huge blow to the Adani group, the Supreme Court on Tuesday (April 11) set aside an order by the Central Electricity Regulatory Commission awarding compensatory power tariff, because of a rise in price of coal imported from Indonesia.

Disposing appeals filed by Energy Watchdog challenging the orders of the commission, a bench of justices Pinaki Chandra Ghose and Rohinton Nariman said, the fact that the fuel supply agreement has to be appended to the power purchase agreement (PPA) is only to indicate that the raw material for the working of the plant is there and is in order. It is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract, because when they submitted their bids, this was a risk they knowingly took.

Writing the judgment for the bench, Justice Nariman rejected the argument that the rise in price of coal consequent to a change in Indonesian law would be an unforeseeable circumstance which would entitle the respondents (the Adanis) to claim a compensatory tariff.

The court held that a contract is not frustrated merely because the circumstances in which it was made have been altered. The courts have no general power to absolve a party from performing its part of the contract, merely because its performance has become onerous on account of an unforeseen turn of events. A contract is never discharged merely because it may become onerous to one of the parties.

In these batch of cases involving the Adani Enterprises Consortium, Prayas (Energy) Group and others, the main issue relayed is the escalation of the cost of coal. It was argued that a rise in the price of Indonesian coal was unforeseen, inasmuch as the rise took place only in 2010 and 2011, while the PPAs were entered into, sometime in 2006 to 2008. Such a rise in price is also not within their control at all and, therefore, they are entitled to a compensatory power tariff.

Attorney general Mukul Rohatgi, appearing for the Centre, made it clear that he was only appearing in order to apprise the court that the electricity sector, having been privatised, has largely fulfilled the object sought to be achieved by the 2003 Electricity Act – which is that electricity generation, being de-licenced, should result in production of far greater electricity than was earlier produced. He urged the court not to disturb the delicate balance sought to be achieved by the Act – to ensure that producers or generators of electricity set up power plants, he argued that the Act allowed that they be entitled to a reasonable margin of profit and a reasonable return on their capital, so that they are induced to set up more and more power plants.

On January 2 and January 4, 2007, the Adani Enterprises Consortium submitted its bid for generation and supply of 1000 MW to Gujarat Urja Vikas Nigam Limited (GUVNL), quoting a levelised tariff of Rs 2.3495/kWh (Rs.1/kWh as the capacity charge and Rs.1.3495/kWh as non-escalable energy charge). The Consortium was awarded the contract. Similarly, it also obtained a contract from Haryana Utilities. With the contract still in force, the coal price was increased by Indonesia.

As a result in both the cases, Adani Power filed a petition before the Central Electricity Regulatory Commission seeking relief on the score of the impact of the Indonesian Regulation to either discharge them from the performance of the PPA on account of frustration, or to evolve a mechanism to restore the petitioners to the same economic condition prior to occurrence of the change in law. The commission, taking note of the report of an expert committee, awarded the compensatory power tariff.

The bench pointed out that the price of coal is the price of raw material, and if prices go up, a contract does not get frustrated merely because it becomes commercially onerous, as the PPA itself states. In any event, the fundamental basis of the PPAs between the parties was not premised on the price of coal imported from Indonesia.

The bench set aside the orders of the commission and Electricity Appellate Tribunal, which remitted the matter to the commission. The court asked the Central Electricity Regulatory Commission to go into the matter afresh and determine what relief should be granted to those power generators.