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Discoms cannot unplug contracts

Jhe Appeals Chamber of the Andhra Pradesh High Court has intervened to stop the practice of tariff renegotiations by electricity distribution companies (discoms). In the case of Walwhan Renewable Energy Limited v State of Andhra Pradesh and Others, the high court ruled that the terms of power purchase agreements (PPAs) cannot be renegotiated or changed either by the parties or by a court. The court also considered that the financial difficulties of a party could not constitute a reason for terminating the contract or reducing the tariff within the framework of the PPAs concluded. The court ordered the discoms to make payment of all pending and future amounts at the rates agreed to in the PPAs. Payment of arrears and outstanding invoices was to be made within six weeks of the judgment.

Abishek Tripathi
Managing Partner
Sarthak Lawyers and Advocates

The factual background was that discoms had run PPAs with wind and solar power generators in 2016 following a request for proposals from the state government of Andhra Pradesh. Under Section 63 of the Electricity Act 2003 (the Act), the relevant State Electricity Regulatory Commission must approve tariffs for the supply of electricity if such tariffs are determined by the through a transparent bidding process. In this case, the tariffs under the signed PPAs have been approved by the Andhra Pradesh Electricity Regulatory Commission (APERC). However, as the discoms were in financial difficulty and in order to reduce the tariffs, the state government, by its order of July 1, 2019, set up a high-level committee to review the PPAs and renegotiate the terms of the agreements. .

The discoms then sent a letter dated July 12, 2019 to the producers requesting a reduction in prices with retroactive effect, that is to say from the dates of commissioning of the projects, failing which the discoms threatened the producers with terminate PPAs. The actions of the discoms, the government decree and the letter of July 12, 2019, have been challenged by the producers in the case of ReNew Power Limited v State of Andhra Pradesh & Ors. The Single Judge, while granting an order in favor of the producers, observed that electricity is a competing list subject and that, in view of central government legislation, the state government cannot make an order in the exercise of its executive powers which is contrary to central legislation. The court further observed that PPAs are agreements made between two contracting parties, the producers and the discoms. The state government, being a third party, cannot change the terms of PPAs, let alone do so unilaterally. However, in ruling on the motions, the court ordered the discoms to make payment of the amounts owed at an interim rate different from that provided for in the PPAs.

Shivika Agarwal, Sarthak Advocates & Solicitors, Discoms Can't Unplug Contracts
Shivika Agarwal
Sarthak Lawyers and Advocates

In this context, a batch of cases have been appealed to the Appellate Bench of the Andhra Pradesh High Court by the generators against the part of the order in which, despite having authorized the motions for an order, the court would have acted beyond its jurisdiction by ordering the discoms to pay the amounts owed at the interim tariff determined by the court. The Appeals Chamber, in annulling the order, considered that after granting the requests, the single judge was not justified in ordering interim measures when none of the parties to the proceedings had appealed. such measures.

The Appeals Chamber further held that once the terms of the PPAs have been agreed to by the parties and approved by APERC, they cannot be changed by either the parties or the court. The appeals chamber ruled that the financial difficulty of the government or the discoms cannot be grounds for terminating the contract or reducing the tariff. The Appeals Bench also quashed two motions pending before APERC on the tariff issue on the grounds that it was not open to the parties or the Board to rescind the agreed tariffs through an appeals process. call for tenders and approved under article 63 of the law.

It is time for state governments to realize that the success of public-private partnerships depends on recognizing the sanctity of contracts. Unilateral changes to infrastructure contracts resulting from changed government policies or circumstances deter private parties from participating in long-term projects. By upholding the contract terms, the High Court sent the right message to state governments and private investors. The state government should not take this fight any further.

Abhishek Tripathi is Managing Partner and Shivika Agarwal is Partner at Sarthak Advocates & Solicitors.

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