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PPAs, possible renegotiation, and way forward

Changed circumstances may often compel parties to a contract – or at least one party to a contract – to seek certain modifications in contractual terms to make the contract workable.

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Last week, the Supreme Court of India allowed renegotiation of power purchase agreements (PPAs), and thus, amendment of power tariff to be undertaken by the electricity regulator. It is a good step and a definite move taking parties forward on the learning curve.

Changed circumstances may often compel parties to a contract – or at least one party to a contract – to seek certain modifications in contractual terms to make the contract workable. But, allowing such change, legally, when both the parties are not agreeable to make the change, goes against the basic tenets of the contractual mechanism. The fundamental purpose of a contract is make the parties move from a 'zone of uncertainty' to a 'zone of certainty', which typically is not absolutely certain, but certain to a large degree with only an infinitesimally small uncertainty typically built-in the contractual scheme of things.

Thus, allowing any modification in the terms of a contract by the court – when one party opposes to such change – goes against the spirit of the contract law and is clearly avoidable intervention by any court. 

However, this is true only when considered from the perspective of strict legality. The moment one blends it with administrative law in a welfare state, the things start looking different with newer measuring rod to judge contractual terms. Public interest becomes paramount, and the focus shifts from the mutual interest of the parties and the terms they had agreed upon to the interest of the public at large. The instant case highlights these issues.

In the wake of allowing private companies in power generation and related activities, companies such as Tata, Adani, Essar, and others were allowed to set up power generation units in Gujarat after the change in electricity policy about a decade and a half ago.

Noticeably, most of them relied on thermal power generation with coal as the major fuel. India has large deposits of coal, but that coal is of inferior quality and causes too much environmental damage and also gives lesser energy when compared with coal imported from Australia, Indonesia, and other countries. 

Most of these private companies formulated their strategy keeping in mind the cheap coal available from Indonesia, and used the low price in calculation so as to be eligible for L-1, the lowest bidder, which is the essential condition in government contracts.

As luck would have it, after a short period of time, the Indonesian government changed its coal policy – any sovereign can do that – making importing coal from Indonesia financially unviable for Indian companies. But, they had already made firm commitments in PPAs with transmission companies of several states regarding power tariff which consumers must bear. Here comes the role of the electricity regulator – Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERCs), which have been created to take care of the consumers' interests together with the long-term interest of companies. This is undoubtedly a tight-rope walk requiring expertise and keen sense of balancing the current and future requirements of both the parties – service providers and consumers.

It has usually been experienced that electricity regulators give priority to consumers' interest and public welfare, and rightly so, but if the service provider will not make a profit or at least break-even, there is no point in continuing doing business.

On the assumption that the PPA did not have enough flexibility and elasticity to take into consideration the changed situations – steep rise in imported coal price in this case – the electricity regulator finds its hands tied behind its back. There is hardly anything which can be done within the agreed contract. If the regulator allows hike in power tariff, then it makes the previously agreed upon agreement of no meaning and defeats the very purpose of the entire exercise of bidding and choosing the lowest eligible bidder.

The Supreme Court's view will make life easier for the companies, regulator and the government, but the consumer will have to pay more. If the increase is reasonable, it should be acceptable. The future PPAs need to be drafted in a manner that guided and monitored renegotiation is contractually allowed under special circumstances.

The author is a professor at IIM-A, akagarwal@iima.ac.in

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