Fixed Cost Recovery in Power Purchase Agreements: Supreme Court Ruling in Haryana Power vs. Magnum Power

The case of Haryana Power Purchase Centre vs. Magnum Power Generation Limited & Anr. revolves around the dispute over fixed cost payments in a Power Purchase Agreement (PPA) signed between the parties. The Supreme Court ruled in favor of the power generator, Magnum Power Generation Ltd., directing Haryana Power Purchase Centre (HPPC) to pay the fixed charges as per the agreement, despite no electricity being supplied.

This judgment clarifies the obligations of power purchasers in long-term contracts and reinforces the principle that contractual commitments must be honored even when electricity supply is restricted by regulatory authorities.

Background of the Case

• A Power Purchase Agreement (PPA) was signed on August 12, 1998, between Haryana Power Purchase Centre (HPPC) and Magnum Power Generation Ltd. for the supply of electricity.
• The contract had a tenure of 15 years and included a clause mandating payment of a fixed cost component, irrespective of whether power was drawn from the generating plant.
• The Haryana Electricity Regulatory Commission (HERC) issued a Tariff Order on August 12, 2003, directing that no electricity should be sourced from Magnum Power due to high costs.
• Despite this restriction, the Tariff Order specified that Magnum Power was still entitled to the fixed charges as per the contract.
• Haryana Power, however, refused to make payments, leading to legal proceedings before the HERC, the Appellate Tribunal for Electricity (APTEL), and ultimately the Supreme Court.

Key Legal Issues Considered

• Was Haryana Power obligated to pay the fixed charges under the PPA despite not drawing power?
• Did the Tariff Order of HERC override the contractual obligations in the PPA?
• Was Magnum Power entitled to claim fixed costs as per the agreed rate?
• Did the decisions of the regulatory bodies and tribunals misinterpret the contract terms?

Arguments of the Petitioner (Haryana Power Purchase Centre)

• Haryana Power argued that since no electricity was purchased from Magnum Power, no payment was due.
• They contended that the Tariff Order of 2003 prevented them from sourcing electricity from the plant.
• The state authority also claimed that requiring payment for unused power would burden consumers with excessive costs.
• They further argued that Magnum Power failed to meet the 75% Plant Load Factor (PLF) requirement under the agreement.

Arguments of the Respondents (Magnum Power Generation Ltd.)

• Magnum Power asserted that the PPA clearly mandated payment of fixed charges regardless of electricity supply.
• They pointed out that Haryana Power had already collected these charges from consumers under the Fuel and Power Purchase Cost Adjustment (FPA) formula but failed to pass them on to the generator.
• They argued that non-payment of fixed costs amounted to a breach of contract and unjust enrichment for Haryana Power.
• They also highlighted that the regulatory order did not waive the state’s obligation to honor the contract.

Supreme Court’s Observations

• The Supreme Court ruled that the Tariff Order of 2003 clearly recognized the fixed cost obligation and directed payment, even if electricity was not procured.
• It emphasized that the PPA contract was binding and Haryana Power could not refuse payments based on a regulatory restriction.
• The Court noted that Haryana Power had already recovered fixed costs from consumers but had not transferred them to Magnum Power.
• The judgment stated: “The fixed costs must be paid despite no supply, as these obligations arise from the PPA and are independent of actual electricity purchases.”
• The Court rejected the argument that the 75% PLF requirement must be met before fixed costs were payable, stating that this applied only in case of power generation, not when regulatory orders prevented supply.

Final Judgment

The Supreme Court set aside the decisions of the HERC and APTEL, ruling in favor of Magnum Power with the following directives:

• Haryana Power must pay the fixed cost at the agreed rate of ₹1.29 per unit for the contract period.
• All outstanding dues must be cleared within three months from the date of judgment.
• If payments are delayed, Haryana Power will be liable to pay 3% simple interest per annum, increasing to 6% per annum if not paid within the stipulated period.

This ruling reinforces the binding nature of long-term power purchase agreements and ensures that power generators are compensated for their contractual commitments, even when regulatory decisions impact power procurement.

Petitioner Name: Haryana Power Purchase Centre.
Respondent Name: Magnum Power Generation Limited & Anr..
Judgment By: Justice R. F. Nariman, Justice V. Ramasubramanian.
Place Of Incident: Haryana, India.
Judgment Date: 21-01-2020.

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