19 November 2021
Introduction
Power purchase agreements (PPAs) are generally long-term contracts that are vulnerable to legislative or judicial interventions. These interventions have the potential to impact the cost of establishing or operating generation plants over the life of the PPA. In order to address this risk, PPAs (and many other long-term contracts) incorporate a provision for ‘Change in Law’, which seeks to provide a mechanism to compensate the affected party for increase in cost or decrease in revenues, occasioned by changes in rules/ regulations governing the setting up and operation of the generation plant.
Most PPAs in India vest the authority to decide the admissibility and quantum of change in law compensation in the State Electricity Regulatory Commission (SERC) or the Central Electricity Regulatory Commission (CERC), set up pursuant to the Electricity Act, 2003, which have jurisdiction to determine or approve tariff under the PPAs. However, the compensation claiming process, due to impact of change in law, has historically been lengthy and often litigious for a variety of reasons, including absence of any formula in the PPA for awarding compensation for change in law, the need for each change in law claim to be adjudicated by the SERC/ CERC and the appeals preferred by the PPA counterparties in almost routine manner. As a result of the lengthy claims process, generating companies have had to bear the brunt of change in law events, resulting in cashflow mismatches, increased working capital costs and in some cases, even defaults under financing agreements. In addition, where there is no specific change in law clause in the PPAs, getting compensation for increase in costs or loss of revenues is unlikely.
In order to ensure timely recovery of recurring/ non-recuring costs arising due to change in law, the Ministry of Power has recently introduced the Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021 (hereinafter the “CIL Rules”)[1]. Relief for change in law event, which hitherto was a contractual remedy only, has now been elevated to a statutory remedy and would be available to the affected party, irrespective of a specific change in law clause in the PPAs.
What Constitutes Change in Law
The CIL Rules define “change in law” to include enactment, amendment or repeal of any law, a change in interpretation of any law by a competent court, change in any domestic tax or change in any condition of any permit or license required for purchase, supply or transmission of electricity. Expectedly, the CIL Rules cover change in laws only within the territory of India. Therefore, a change in any foreign law, impacting the cost of generation of electricity is not covered by the CIL Rules. However, the definition of “change in law” under the CIL Rules is subject to provisions in the agreement and therefore, a wider (or a narrower) definition of “change in law” contained in a PPA or a transmission service agreement would prevail over the definition contained in the CIL Rules. Interestingly, the definition contained in the CIL Rules is somewhat narrower than the definition of “change in law” contained in the CERC (Terms and conditions of Tariff) Regulations, 2019.
Who are covered by the Change in Law Rules?
The CIL Rules apply to generating companies and transmission licensees whose tariff is determined under Section 62 or Section 63 of the Electricity Act, 2003
(hereinafter the “2003 Act”). The 2003 Act provides for determination of tariff for supply of electricity by a generating company to a distribution licensee under Section 62 or Section 63 of the Act. By implication, therefore, captive generating plants, captive consumers, commercial and industrial consumers having bilateral PPAs with generating companies, trading PPAs with no corresponding or back-to-back Power Supply Agreements (PSAs) with distribution utilities are not covered under the CIL Rules.
Cut-off Date for Change in Law Claims
Most PPAs concluded under Section 63 of the 2003 Act have provision for change in law impact, which begins seven (7) days prior to the bid date. The intent is to protect bidders/ generating companies from the adverse impact of any change in law, after it has finalised its price bid for supply of power to a distribution utility. While the CIL Rules apply prospectively and would not impact the existing PPAs, these Rules appear to change the cut-off date to the date of tariff determination under Section 62 or Section 63 of the 2003 Act. Tariff determination usually occurs at a much later date after the bid submission in case of Section 63 PPAs. This change is, therefore, likely to negatively impact the generating companies or transmission licensees in future bids.
Time period for making Change in Law Claims
Rule 3(3) of the CIL Rules provides for making a change in law impact claim (i) within thirty (30) days from the occurrence of change in law or (ii) expiry of three weeks from the date of notice to be given under Rule 3(2) of the proposed impact on tariff or charges to be recovered from the other party, whichever is later. While the intent of the provision is to expedite recovery of compensation for change in law, in many cases, generating companies or transmission licensees may not be in a position to assess or quantify the impact of change in law within thirty (30) days from the introduction of change in law. For example, the requirement by the Ministry of Environment, Forest and Climate Change to install flue-gas desulphurization (FGDs) equipment in thermal power plants qualifies as change in law. However, until the generating companies have placed firm orders for FGD equipment or, have completed the installation, they would not be in a position to assess the financial impact of the change in law.
Commencement of Recovery for Change in Law Impact
The objective of the CIL Rules is to simplify and expedite the recovery of change in law impact for generating companies and transmission licensees. Rule 3(3) of the CIL Rules makes provision to commence recovery of change in law impact in tariff from the next billing cycle falling after the notification of proposed impact in tariff or charges under Rule 3(2). This seems to suggest that no prior approval or confirmation of change in law impact from the Appropriate Commission is required before the recovery commences. However, Rule 3(7) provides that the generating company or the transmission licensee shall, within 30 days of coming into effect of the “recovery of impact of change in law”, furnish all relevant documents along with details of calculation to the Appropriate Commission for adjustment of the amount of the impact in the monthly tariff or charges. Rule 3(8) thereafter provides that the Appropriate Commission shall verify the calculation and adjust the amount of impact in the monthly tariff or charges within sixty (60) days from the submission of relevant documents under Rule 3(7). Given the propensity of distribution utilities to delay or challenge recovery of change in law claims, they may seek to interpret Rules 3(7) and 3(8) so as to allow recovery to commence only after the Appropriate Commission has verified the calculation of change in law impact and confirmed the calculations submitted by the generating company/ transmission licensee. In addition, given the actual time taken by SERCs/ CERC to dispose matters, it is doubtful whether the time period of sixty (60) days, prescribed in Rule 3(8), would be adhered to in practice.
Rule 3(9) further provides that after adjustment of the amount of the impact in the monthly tariff or charges under sub-rule (8), the generating company or transmission licensee shall adjust the monthly tariff or charges annually, based on the actual amount recovered to ensure that the payment to the affected party is not more than the yearly annuity amount. It is, therefore, not entirely clear as to whether the Appropriate Commission has been given only a post-facto verification role and if found necessary, to order an adjustment of the monthly recovery commenced, pursuant to application of Rule 3(3). Further, the schedule containing the formula for recovery of change in law impact requires an annual true-up of the monthly tariff, based on actual generation achieved during the year. It is not clear from the CIL Rules as to whether this true-up is a bilateral exercise between the generating company and the distribution utility or, it will need the confirmation/ ratification of the Appropriate Commission.
Rule 3(6), in addition, creates an ambiguity as to whether a non-recurring impact of change in law is permissible to be recovered through monthly tariff adjustments for transmission projects since Rule 3(6)(a) mentions only generation projects.
Conclusion
The introduction of the CIL Rules is a welcome step to mitigate the suffering of the generating companies and transmission licensees, which have been involved in a prolonged legal battle to recover the increased costs due to change in law. The scheme of the CIL Rules does away with the constant source of dispute/ friction with the PPA counterparties, i.e., recovery of interest/ carrying cost on change in law impact since recovery can start almost immediately after the proposed impact in tariff is notified to the other party under Rule 3(2). However, since the CIL Rules have prospective application, it would not assist in expedited recovery of the existing claims for change in law by generating companies or transmission licensees. In addition, some of the ambiguities in the CIL Rules, as discussed above, warrant a clarification or amendment to ensure that the objectives of the CIL Rules are realised in letter and in spirit and result in greater investor confidence in the Indian electricity sector.
For further information, please contact:
Ramanuj Kumar, Partner, Cyril Amarchand Mangaldas
ramanuj.kumar@cyrilshroff.com
[1] Rules were notified in the Official Gazette on October 22, 2021.
