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CHANGE IN LAW IN INDIA’S POWER SECTOR

INTRODUCTION

With ever-increasing demand and generation of power, the Indian Power sector has emerged as one of the largest and fastest-growing energy markets in the world. Just like any other market Energy in the power sector is sold and purchased through the execution of agreements and contracts which are popularly known as Power Purchase Agreements (PPAs) which are the soul and life of the Energy trade in this sector and lot depends upon the nature of such agreements.PPAs are generally a long-term agreement extending up to 25 years[1] between the transmission entities which could be  State Discoms and IPP(Independent power producer) often PPAs become the basis for the financing of setting up new power Plant as there is the assurance of purchase of energy over a long term and thus ensuring the flow of cash thus PPAs play an Important role in India’s power sector. Since PPAs are long-term agreements extending up to years they could be impugned with a lot of problems such as changes in law i.e Introduction of a new legislature or new judicial interpretation of existing laws which could impact the functioning and operation of such power plants drastically or may escalate the cost of functioning which could increase or decrease the revenue of impacted entities.[2] Thus to bring clarity to such issues GOI issued Electricity (TimelyRecovery of Costs due to Change in Law) Rules, 2021 dealing with such issues popularly known as Change in Law[CIL] rules.

SCOPE AND DOMAIN OF “CHANGE IN LAW” RULES

Sub-rule (3) Of Rule 1 of CIL rules explicitly mentions that these rules apply to a generating company and transmission licensee who have engaged with each other under section 62 and section 63 of the electricity act 2003 for fixing up tariff costs.[3]This then means that there are no CIL rules applicable to entities which are directly in contact with Power generating companies for their commercial use such as the Manufacturing plant which is in direct contract with IPP, Captive power generators or captive power consumers also not included in its purview. Further, the rules had Prospective nature and were not applicable retrospectively.[4]

WHAT ENCOMPASSES “CHANGE IN LAW”?

The Rules[5] while Describing the term “Change in Law” explains it under the context of tariff and further leaves the scope of the definition to be one as specified or stipulated in individual PPAs nonetheless in absence of one such clear definition it shall mean “any enactment or amendment or repeal of any law, made after the determination of tariff ”[6] under the purview and legal limits of Electricity act 2003 which results into a change in the cost of the tariff but is not limited to so and also includes factors such as a:-[7]

i) change in tax (including cess, duty, surcharge etc.) charged by any of the central or state authorities which cause a change in the cost of the tariff

ii)Any change in clause or condition for seeking any procedural clearance or licenses for purchase, supply or transmission of electricity until specifically excluded in PPAs itself and if it results in a change in the cost of the tariff

iii)Change in the interpretation of law or any competent authority which costs change in tariff.

* But this “change in law” does not include where there is a change in terms of Deviation settlement charges or Frequency Intervals by the relevant authority or In a matter of any impact of Withholding Tax upon the income or dividends of the shareholders of the involved company.

COURSE OF REMEDY

Under the new CIL rules, the party impacted by the ‘change in law’ and one who intends to recover the change in cost could do so by firstly providing advance notice to another party against the proposed possible impact in tariff or charges and the charges which need to be recovered.[8] Thereafter Coming to the cut of date before which the affected party has to furnish up the estimated impact and the change in cost due to it in a quantified calculated way which has to be recovered shall be submitted to another party “within thirty days of the occurrence of the change in law or on the expiry of three weeks from the date of the notice sent earlier”[9]whichever is later.

The amount which is to be recovered or adjusted should be computed based upon the formula which is specified in the PPA earlier or the case according to the rule 3(5) if there is the absence of any such formula then a formula is itself mentioned in the Schedule of CIF rules which should be adopted.[10] When the recovery of the impact of the “Change in law” proceedings from the either of the affected sides comes into effect according to the rule 3(7) the party affected is to submit all the relevant information and method of calculation or details of the computed amount which is to be recovered on monthly tariff or charge basis is to be submitted before the responsible Commission.[11]

Then further according to Rule 3(8), such a commission then should cross-verify the details within 60 days.[12] One point to note here is what kind of authority the commission would play here whether it would just for the sake of verification or as a regulatory authority to set the adjustment at its discretion or to follow the information furnished by the affected party i.e the amount which is to be recovered is still a grey area of this rule.

Nonetheless, after this, the adjustment of this amount which is to be recovered in a monthly tariff or charges shall be adjusted against the monthly tariff or charges annually based upon the amount which is to be recovered in a way that doing so would compensate the affected party and would bring the affected party to the same economic position which the party would have enjoyed in absence of such “change in law”. A thing to note is that when it comes to the recovery of the impacted amount according to rule 3(6) in the case of a fixed amount it shall be within 180 months(Maximum time) in the case of power generation plant and the case of recurring impact it shall be calculated and adjusted and given off until such impact persist.[13]

CONCLUSION

The CIF rule is certainly progress in the Indian power sector and more importantly, it provides a boost to India’s power infrastructure by trying to remove certain uncertainties and vulnerabilities from PPAs. Though it’s not the case that the absence of these rules previously was causing havoc in the power sector over the issue of “change in law” the process of seeking compensation was itself lengthy and cumbersome one where each matter was to be adjudicated by SERCs(State Electricity regulatory commission)/CERC(Central Electricity Regulation Commission )on a case by case basis since there was lack of mention of “change in law” in law and thus mostly the PPAs accorded were lacking in their input/Direction over in such scenario where a “change in law” impact occurs. Still the existing ‘Electricity (Timely Recovery of Costs due to Change in Law) Rules’ are not exhaustive and leave ambiguity behind it which should be eliminated for e.g the Role of the “Appropriated commission” is not specified in detail which may cause trouble for affected parties in future if there is no clear line drawn between the role and limit of such commission in these matters moreover often assessing of the impact sustained by the affected party couldn’t be calculated.

Author(s) Name: Prashant Dound (MNLU, Nagpur)

References:

[1] Sarita C Singh, ‘Model power buying pacts to be redrafted to junk long terms deal’ Economic Times(Delhi 28 SEP 2021)

[2]Ramanuj Kumar, ‘Recovery of change in law Impact-An overdue Intervention’ CAM Blogs(Visited 7 JUNE 2022) <https://corporate.cyrilamarchandblogs.com/2021/11/recovery-of-change-in-law-impact-an-overdue-intervention/#more-5028> Accesssed 7th June 2022

[3]Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021,Rule1(3)

[4] Ministry Of power, Clarification on Electricity (Timely Recovery of Costs due to Change in Law) Rules( 22 Feb 2022) para.3

[5]Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021,Rule 2

[6] Ibid

[7]Electricity (Timely Recovery of Costs due to Change in Law) Rules,2021,Rule2(C)

[8]Electricity (Timely Recovery of Costs due to Change in Law) Rules,2021,Rules3(2)

[9]Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021,Rule3(3)

[10]Electricity (Timely Recovery of Costs due to Change in Law) Rules,2021,Rule 3(5)

[11]Electricity (Timely Recovery of Costs due to Change in Law) Rules,2021,Rule 3(7)

[12]Electricity (Timely Recovery of Costs due to Change in Law) Rules,2021,Rule,3(8)

[13]Electricity (Timely Recovery of Costs due to Change in Law) Rules, 2021,Rule 3(6)