Supreme Court Rules on Power Purchase Agreements: Tariff Revision and Regulatory Authority

The case of Gujarat Urja Vikas Nigam Limited vs. Tarini Infrastructure Ltd. & Ors. along with connected appeals addressed the authority of the State Electricity Regulatory Commission in revising tariffs under Power Purchase Agreements (PPA). The Supreme Court clarified the extent to which a tariff fixed under a PPA could be reviewed and modified in light of changing circumstances.

Background of the Case

The key issue before the Supreme Court was whether a tariff fixed under a Power Purchase Agreement is sacrosanct and beyond review by the State Electricity Regulatory Commission (SERC). The case involved power producers who sought revisions in their agreed-upon tariff due to unforeseen infrastructural costs.

In one case, Tarini Infrastructure Ltd., which had installed hydro power projects, entered into a PPA in 2008 with Gujarat Urja Vikas Nigam Limited (GUVNL) at a tariff of ₹3.29 per unit. However, prior to commissioning, the company sought an increase in tariff to ₹4.70 per unit due to additional transmission infrastructure costs that were not originally anticipated.

Similarly, in another case involving Junagadh Power Projects Pvt. Ltd., the company had signed a PPA in 2010 at a tariff approved by the SERC. Later, it sought a revision citing higher fuel costs.

Legal Issues Raised

• Does the SERC have the authority to review and revise tariffs incorporated in a PPA?
• Are PPAs absolute contracts, or do they remain subject to regulatory oversight?
• Can unforeseen infrastructural costs justify tariff revisions?

Arguments of the Petitioner (Gujarat Urja Vikas Nigam Limited)

The power distribution company, Gujarat Urja Vikas Nigam Limited, argued:

• That a PPA, once signed and approved by the SERC, must remain inviolable.
• That any review or modification would disrupt contractual certainty.
• That the SERC’s refusal to alter the tariff was correct in law.
• That past Supreme Court rulings, including Gujarat Urja Vikas Nigam Ltd. vs. EMCO Ltd., had established that PPAs cannot be reopened unilaterally.

Arguments of the Respondents (Power Producers)

The power producers countered:

• That tariff fixation is a statutory function of the SERC under the Electricity Act, 2003.
• That the costs associated with power generation had changed significantly, making the original tariff non-viable.
• That under Section 86(1)(b) of the Electricity Act, the SERC has a duty to regulate electricity procurement, including pricing.
• That allowing revisions in cases of genuine hardship would prevent plant shutdowns and ensure a continued power supply.

Supreme Court’s Observations

The Supreme Court considered the provisions of the Electricity Act, particularly Sections 61, 62, and 86, which empower the SERC to determine and regulate tariffs. The Court made the following key observations:

• “The power to regulate tariff is a statutory function of the SERC. This power is not extinguished merely because a tariff has been incorporated in a PPA.”
• “A rigid interpretation that prevents tariff revision in all cases would be against public interest.”
• “PPAs should not become an inflexible contract that does not account for legitimate cost increases.”

Key Extracts from the Judgment

The Supreme Court ruled:

“The State Electricity Regulatory Commission has the power to review and revise tariffs under exceptional circumstances. This power is derived from the Electricity Act, 2003, which mandates the Commission to safeguard consumer interests while ensuring the economic viability of power producers.”

The Court further observed:

“If a power producer is forced to sell electricity at a non-viable tariff, it may be compelled to shut down, affecting long-term energy security. Therefore, in cases of drastic cost changes, tariff revisions should be considered.”

Final Judgment

The Supreme Court made the following rulings:

• That the SERC has the authority to revise tariffs if significant cost escalations are demonstrated.
• That the appeals by Gujarat Urja Vikas Nigam Limited were dismissed, and the orders of the Appellate Tribunal allowing tariff revisions were upheld.
• That the power producers must provide evidence of cost escalations before any revision is granted.

Impact of the Judgment

This ruling has several implications:

• It affirms the role of the SERC in regulating power procurement and pricing.
• It prevents power producers from being bound by tariffs that become unviable due to unforeseen cost increases.
• It ensures consumer interests are balanced with the financial viability of power producers.
• It clarifies that PPAs are subject to regulatory oversight and not absolute contracts.

Conclusion

The Supreme Court’s decision in Gujarat Urja Vikas Nigam Limited vs. Tarini Infrastructure Ltd. underscores the flexibility needed in power sector contracts. By affirming the SERC’s authority to revise tariffs in exceptional cases, the ruling balances contractual stability with economic realities. The judgment sets an important precedent for power sector regulation in India, ensuring both investor confidence and consumer protection.

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Download Judgment: Gujarat Urja Vikas N vs Tarini Infrastructur Supreme Court of India Judgment Dated 05-07-2016-1741873094077.pdf

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