Electricity Distribution Dispute: Supreme Court Rejects MSEDCL’s Appeal on Late Payment Surcharge

The Supreme Court of India recently delivered a crucial verdict in a dispute between the Maharashtra State Electricity Distribution Company Limited (MSEDCL) and power-generating companies regarding the applicability of Late Payment Surcharge (LPS) under the terms of Power Purchase Agreements (PPAs). The case raised important legal questions about whether changes in RBI’s interest rate mechanisms could be classified as a ‘Change in Law’ under the PPAs and whether MSEDCL’s financial distress could exempt it from contractual obligations.

Background of the Case

The MSEDCL is the primary electricity distribution company in Maharashtra. It procures electricity from various power-generating companies, including Adani Power Maharashtra Ltd., JSW Energy Ratnagiri Ltd., GMR Warora Energy Ltd., and Rattan India Power Ltd. These PPAs include provisions specifying the calculation of LPS, a penalty imposed for delayed payments.

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According to the agreements, LPS was calculated as 2% above the State Bank of India’s Prime Lending Rate (SBAR) for one-year maturity loans. However, over the years, the Reserve Bank of India (RBI) introduced significant changes to the interest rate framework. In 2010, the Prime Lending Rate (PLR) was replaced by the Base Rate, and in 2016, the Marginal Cost of Funds Based Lending Rate (MCLR) became the standard. MSEDCL argued that these changes should be considered a ‘Change in Law’ under the PPA, necessitating a revision in how LPS was computed.

Arguments Presented by the Petitioner (MSEDCL)

Senior Advocate Mr. Vikas Singh, representing MSEDCL, presented the following key arguments:

• The introduction of the Base Rate and MCLR by the RBI fundamentally altered the financial landscape, requiring the recalibration of LPS rates in the PPAs.
• The RBI’s shift from PLR to Base Rate and then to MCLR constitutes a ‘Change in Law,’ and therefore, the methodology for computing LPS should be revised.
• Continuing to calculate LPS based on the outdated SBAR resulted in an excessive financial burden on MSEDCL, unfairly enriching the power-generating companies.
• The COVID-19 pandemic and regulatory disallowances imposed by the Maharashtra Electricity Regulatory Commission (MERC) had severely impacted MSEDCL’s financial stability, justifying a reconsideration of LPS terms.

Arguments Presented by the Respondents (Power-Generating Companies)

The power-generating companies, represented by Senior Advocates Mukul Rohatgi and Dr. Abhishek Manu Singhvi, countered these claims with the following arguments:

• The SBI continued to publish its Prime Lending Rate (SBAR), meaning that the basis for LPS computation remained unchanged.
• The PPAs explicitly stated that LPS would be calculated based on SBAR, which was a contractual commitment that MSEDCL had willingly accepted.
• The regulatory changes in banking interest rates did not automatically impact contracts in the electricity sector, particularly since RBI’s notifications did not mandate any changes to contractual agreements.
• LPS was not part of the electricity tariff structure but a penalty for delayed payments, and thus, ‘Change in Law’ provisions under the PPA did not apply.

Supreme Court’s Key Observations

The Supreme Court, after reviewing the arguments, upheld the decisions of MERC and the Appellate Tribunal for Electricity (APTEL). The Court made the following key observations:

• The RBI’s transition from PLR to Base Rate and then to MCLR did not amount to a ‘Change in Law’ under the PPAs, as the SBAR remained a notified benchmark.
• The methodology for calculating LPS was explicitly defined in the PPAs, and no regulatory change had invalidated the agreed-upon terms.
• The imposition of LPS was intended to deter delays in payments by distribution companies and was not linked to the calculation of tariffs.
• Financial distress, even if caused by external factors such as the COVID-19 pandemic, did not exempt MSEDCL from fulfilling its contractual obligations.
• The petition did not raise any substantial legal question warranting interference under Section 125 of the Electricity Act.

Final Judgment and Implications

The Supreme Court dismissed MSEDCL’s appeal and upheld the binding nature of LPS as per the PPAs. The judgment reaffirmed that:

• Contractual obligations under power purchase agreements cannot be altered based on financial hardship faced by one party.
• Regulatory changes in the banking sector do not automatically alter existing agreements unless explicitly stated.
• Distribution companies must adhere to timely payment obligations to avoid penalties.

Conclusion

The Supreme Court’s decision reinforces the principle that contractual obligations in the energy sector must be honored as per agreed terms. This ruling ensures stability in the power purchase framework and discourages arbitrary attempts to alter contract terms based on financial constraints or regulatory changes. By upholding the sanctity of contracts, the judgment also provides clarity for future disputes involving LPS calculations and electricity distribution agreements.

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Petitioner Name: Maharashtra State Electricity Distribution Company Limited.
Respondent Name: Maharashtra Electricity Regulatory Commission & Ors..
Judgment By: Justice Indira Banerjee, Justice V. Ramasubramanian.
Place Of Incident: Maharashtra.
Judgment Date: 08-10-2021.

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