Generators v. DISCOMs: How the Supreme Court balanced the power scales

India has one of the most complex power sectors in the world; it can be divided into three distinct sectors - generation, transmission, and distribution. While the power infrastructure has been progressing at a steady pace, the distribution companies (DISCOMs) responsible for the distribution of energy to consumers have been facing continuous losses (estimated at ₹90,000 crore for FY 21).

These DISCOMs are statutorily obliged to develop and maintain efficient and economical distribution systems in their area, for the supply of electricity [Section 42, Electricity Act, 2003]. DISCOMs procure power from various government-owned as well as private power generating stations by way of entering into power purchase agreements (PPAs), usually on a long-term basis. Most DISCOMs in India are government-owned corporations that enjoy state monopoly in their area of operation.

The DISCOMs have been the Achilles heel of the sector and the losses have gone unchecked, making the entire sector debt-ridden. A large number of losses in this sector reflect weaknesses in operations, infrastructure, and regulations.

The Power Ministry had to come up with a scheme for ensuring the payment of dues by DISCOMs to generators on time. It launched the UDAY (Ujwal DISCOM Assurance Yojana) Scheme in 2015 to improve the financial situations of DISCOMs. The long-term vision of the scheme was to ensure an uninterrupted supply of electricity to India and equip DISCOMs with financial discipline. However, a large percentage of Aggregate Technical and Commercial (AT&C) losses is higher than the target number.

Further, the Power Ministry in 2018 launched a web portal called ‘PRAAPTI’ (Payment Ratification and Analysis in Power Procurement for bringing Transparency in Invoicing of Generators) for clearing of invoices and replying to the claims raised by generating companies. The Central government also waived the penal charges in light of the COVID-19 pandemic.

While the government has been pulling all stops to ensure that the power distribution sector becomes financially viable, it is still difficult to cover up the immense losses and dues already pending against DISCOMs. The situation further worsens when states are given responsibility of managing the distribution and generation of power. Contrary to the laudable objectives sought to be achieved by the Electricity Act, 2003, which sought to promote public-private partnership, state-managed DISCOMs have been reduced to tools to serve the sole purpose of meeting political ends. Politicians end up swaying their voter base with promises of subsidized electricity. This leads to a reduction of the financial viability of an already eroding sector, and especially affects private generators, who have pooled in substantial private equity and public funds from banks and financial institutions.

There has been a massive build-up of plants to power a surge in economic activity, which never materialized. The situation worsened with the onset of the pandemic, which left nearly half of India's thermal power idle. If we take the example of Tata Power Delhi, which is a unit of Tata Power Co. Ltd., it has contracts for 2.4 GW of energy, which is 20% more than needed even in the peak periods. The company has so far paid ₹17.7 billion in fixed charges to power plants burning coal and natural gas, of which half was idle capacity. The amount of idle capacity and public investment lying in waste is in itself a crime for a power-starved nation like India.

The judiciary’s response to this malady has been stern. The Supreme Court of India in its recent judgment in Southern Power Distribution Power Co. Ltd. of AP (APSPDCL) v. Hinduja National Power Corpn. Ltd. (HNPCL), acknowledging that DISCOMS are instrumentalities of the State and fall within the purview of Article 12 of the Constitution of India, held that instrumentalities of the State are to keep the interest of the public at the fore when exercising their powers. The Court also opined that investments by generation companies are a cumulation of public resources and as such should not be wasted.

Factual Background

The Andhra Pradesh State Electricity Board (APSEB) entered into a memorandum of understanding with HNPCL on July 17, 1992 for the generation and supply of electricity to APSEB. They entered into an initial PPA on December 9, 1994 after which the Central Electricity Regulatory Commission (CERC) on July 25, 1996 granted clearance for the project for an estimated initial cost of ₹4628.11 crore. The parties signed an amended PPA on April 15, 1998.

When HNPCL in 2007 approached the Government of Andhra Pradesh to revive the plant as a ‘merchant plant’ and offered 25% power to the State and 75% to third parties, the bid evaluation committee in its meeting dated September 28, 2012 noted that the entire capacity of HNPCL was encumbered to the State of Andhra Pradesh, and discarded HNPCL’s bid.

On March 12, 2014, as per Section 62 of the Electricity Act, 2003, HNPCL filed a petition for the determination of capital cost of the power station before the State Commission. The Commission, after determining the provisional tariff at the rate of ₹3.82 per unit, reserved judgment in both petitions filed by the parties on May 15, 2017.

Before the State Commission could give a final decision, DISCOMs filed withdrawal applications on January 4, 2018, which were permitted by the State Commission. HNPCL succeeded in its challenge against the withdrawal by DISCOMs before the Appellate Tribunal For Electricity (APTEL). The dispute finally made its way to the Supreme Court.

Supreme Court’s Decision

Justice BR Gavai, being the part of the Bench along with Justice L Nageswara Rao, authored the Judgment where it was noted that the State of Andhra Pradesh had expressed its interest in purchasing 100% power from HNPCL and had taken necessary steps for commissioning the project at the earliest including the execution of PPA. It had also assured HNPCL about making provision of transmission system for startup power and power evacuation, the Court noted.

Further, it was solely based on the assurances and actions of the State government (which were consistent up to January 2018) that HNPCL continued its investments into the power plant and had entered into a fuel supply agreement (FSA).

While castigating the conduct of the DISCOMs in the present case, the Court gave its insights on the multiple matters that came up for adjudication in the following manner:

1. Withdrawal of an application cannot be permitted when it is reserved for judgement.

The Supreme Court while referring to Arjun Singh v. Mohindra Kumar & Ors and Orders IX and XX of the Code of Civil Procedure, 1908, held that the conduct of the DISCOMS would disentitle them to withdraw the application. This view was further strengthened by the fact that the reasons for the sudden withdrawal of the applications were “exclusively within the knowledge of the appellants – DISCOMs.” The consequence of a unilateral withdrawal of the application for tariff determination is to render the PPA otiose. Therefore, the judgment prevented the DISCOMs from taking such a unilateral action, which, if allowed, would give unbridled powers to the DISCOM to proceed with or to withdraw a commercial arrangement involving substantial public and private investments as per its whims and fancies.

2. DISCOMs fall within the ambit of Article 12 of the Indian Constitution.

The Supreme Court held that DISCOMs are instrumentalities of the State within Article 12 of the Indian Constitution and as such, were “required to be guided by the touchstone of non-arbitrariness, reasonableness and rationality.”

Further, “every action of a State is equally required to be guided by public interest” and the highest duty of any holder of public office was to the people of the country. Not only would the huge investments made by HNPCL go to waste, but also valuable resources of the public including thousands of acres of land which had been granted for this project.

The Court after relying on the doctrines of ‘legitimate expectation’ and ‘public interest’ held that “DISCOMs could not be permitted to change the decision at their whims and fancies and, particularly, when it is adversarial to the public interest and public good.”

The Supreme Court had, in State of AP v. Goverdhanlal Pitti, defined the concept of ‘legal malice’ or ‘malice in law’ in the following manner:

“12.…… “Legal malice” or “malice in law” means “something done without lawful excuse”. In other words, “it is an act done wrongfully and wilfully without reasonable or probable cause, and not necessarily an act is done from ill feeling and spite. It is a deliberate act in disregard of the rights of others”.”

Relying on this settled definition of legal malice, the Supreme Court in the present case opined that since the acts of withdrawal of the petitions by the DISCOMs are acts which were done wrongfully and wilfully without reasonable and probable cause, they squarely fit within the realm of ‘legal malice’ or ‘malice in law’.

Light at the end of the tunnel

The judgment has considered the best interests of all the stakeholders while providing necessary relief to generators in their never-ending struggle with DISCOMs on various issues. The DISCOMs will now be required to ensure that their conduct and their actions are devoid of any arbitrariness as required for any other State instrumentality. This will also ensure a delicate balance between the rights of the consumer to get electricity at reasonable prices, entrusted with the DISCOMs, and the right of the generators to get their dues under a particular contractual arrangement as well as by the law of the land.

In the facts of this case, the same was achieved by acknowledging the investment being put up by the private generator as a valuable public resource. It was held that jeopardizing the same would be “adversarial to the public interest and public good”, thereby acknowledging that the rights of the consumer and generators are not antithetical to one other; rather the rights of the consumer are better served with a robust generation infrastructure. The powers and duties of the DISCOMs under the Electricity Act are therefore made subject to principles of non-arbitrariness and reasonableness expected of a State Instrumentality.

This reining in of the distribution licensees was necessitated by the fact that while the procurement cost of electricity has gone down in the past decade, the DISCOMs have still not been able to cut their losses and have been trying to make private generators scapegoats for their inefficiency. The high-handed nature of the DISCOMs when dealing with generating companies will only lead to problems in the future that could end up disrupting the electricity industry.

Electricity security being essential to national security, balancing the interests of generating companies and distribution companies becomes paramount to ensure that the power sector in the country becomes more robust and self-sustaining. The Supreme Court has attempted to do the same by aligning the protection of the huge investment into the generating plants with public interest.

The judgment is expected to have a positive impact on pending litigation countrywide, where generators have been litigating in cases where DISCOMs are attempting to renege on the commitments made in the PPAs or MOUs, including cases of specific performance of PPAs or where the PPAs are stuck for several years at the stage of State Commission approvals.

The Supreme Court held that DISCOMs, especially state-led DISCOMs, operate while keeping public interest in mind and political parties should avoid promising subsidized electricity as it may soon become fiscally untenable.

Shashank Garg and Aman Gupta are practitioners before the Delhi High Court and Supreme Court