Maharashtra State Electricity Distribution Company Limited vs Ratnagiri Gas and Power Private Limited and Others

Civil Appeal No. 1922 of 2023

Maharashtra State Electricity Distribution Company Limited …. Appellant

Versus

Ratnagiri Gas and Power Private Limited & Ors. .…. Respondents

Signature Not Verified

Digitally signed by Sanjay Kumar Date: 2023.11.09 15:13:30 IST Reason:

1 JUDGMENT

Dr Dhananjaya Y Chandrachud, CJI

Contents

Factual Background ................................................................................................... 4

CERC Order dated 30 July 2023 and APTEL Judgement and Final Order dated 22

April 2015. .................................................................................................................. 6

Submissions ............................................................................................................... 9

Analysis and Conclusion .......................................................................................... 13

Terms of the PPA .................................................................................................. 13

Factual Context and the Intention of parties to the contract .................................. 17

2 1. This appeal arises from the judgment of the Appellate Tribunal for

Electricity 1 at New Delhi. APTEL dismissed an appeal against an order of the

Central Electricity Regulatory Commission 2 dated 30 July 2013. 3

2. The first respondent, an electricity transmission company called Ratnagiri

Gas And Power Private Limited 4, filed a petition under Section 79 of the

Electricity Act, 2003 against the appellant, Maharashtra State Electricity

Distribution Co. Ltd. 5, seeking the resolution of issues arising out of the non-

availability of domestic gas; beneficiaries’ reservations to allow the first

respondent to enter into contracts for alternate fuel, the revision of the Normative

Annual Plant Availability Factor6 and directions to the beneficiaries to pay fixed

charges due to the first respondent.

3. CERC, by its order dated 30 July 2013 held the appellant liable to pay

fixed charges to the first respondent. CERC’s decision was upheld by APTEL by

the impugned order. The civil appeal against the APTEL order was disposed of by

this Court by an order dated 13 May 2015, whereby the appellant was granted

liberty to move the court when it became necessary. This Court directed as

follows:

“The question raised in the present appeal before this Court at this stage appears to be academic in the absence of any coercive steps against the appellant for recovery. We, therefore, decline to entertain this appeal at this stage. However, we give liberty to the appellant to move this Court once again in the event it becomes so necessary.”

1 “APTEL”. 2 “CERC”. 3 Appeal No. 261 of 2013 4 “RGPPL”/first respondent. 5 “MSEDCL”/appellant. 6 “NAPAF”.

3 4. Consequently, there was correspondence between the appellant and the

first respondent regarding the liability towards fixed charges. The appellant

disclaimed any liability under the Power Purchase Agreement 7 stating that it stood

absolved of the fixed charges since the capacity declaration was made by the first

respondent based on RLNG, without the appellant’s consent. The first respondent

filed an execution petition before APTEL seeking the payment of Rs 5287.76

crores together with an amount of Rs 1826 crores in accordance with the APTEL

order dated 22 May 2013. Notice was issued on the execution petition by an order

dated 25 November 2022.

5. Thus, in light of the subsequent events and the liberty granted by this

Court, the present appeal has been filed.

FACTUAL BACKGROUND

6. The first respondent, RGPPL is a joint venture of NTPC Ltd., Gas Authority

of India Ltd8, MSEB Holding Company, ICICI, IDBI, SBI, and Canara Bank. It was

established as a Special Purpose Vehicle to take over the assets of Dabhol

Power Company Limited whose operations had to be closed down. The first

respondent is a transmission company that owns a gas-based generating station

at Ratnagiri, Maharashtra. 95% of its capacity has been allocated by the Ministry

of Power to the State of Maharashtra and the rest to the State of Goa, and UTs of

Daman and Diu, and Dadra and Nagar Haveli. The share allocated to the State of

Maharashtra is supplied to the distribution licensee MSEDCL, the appellant. The

appellant and the first respondent entered into a Power Purchase Agreement on

7 “PPA”.

8 “GAIL”

4 10 April 2007 for 25 years whereby the appellant would purchase power from the

first respondent. The tariffs for the three blocks of the generating station were

determined by CERC in accordance with the Central Electricity Regulatory

Commission (Terms and Conditions of Tariff) Regulations, 2004 having regard to

the capital cost and plant capacity of the generating station.

7. The first respondent was supposed to receive the contracted quantity of

gas supply from RIL. It is stated on behalf of the first respondent that the supply

was received accordingly until September 2011, after which, there was a

progressive decline in the gas supply. The shortfall was attributed to the low-

yielding KG-D6 gas fields. The issue of short supply was taken up with the

Central Government and was placed before the Empowered Group of Ministers

in its meeting held on 24 December 2012.

8. On account of the steady decline in the supply of domestic gas since

September 2011, and in order to make up for the shortfall in the generation of

power during 2011-2012, the first respondent entered into a Gas Supply

Agreement/Gas Transportation Agreement9 with GAIL for the supply of Recycled

Liquid Natural Gas 10 under spot cargo on a take-and-pay-contract basis. The first

respondent conveyed this to the appellant by a letter dated 16 December 2011. In

this letter, the first respondent stated that due to the shortfall in the supply of

domestic gas, the first respondent was unable to achieve the target availability

stipulated in the tariff order. According to the first respondent, this, in turn, was

impacting their ability to make full fixed cost recovery and hampering the viability

9 “GSA”/”GTA”.

10 “RLNG”

5 of the project. The appellant was requested to schedule its energy requirements

accordingly based on capacity declarations made by the first respondent.

9. The appellant refused to schedule power at the rates stipulated in the

above letter. The appellant stated that in accordance with Clause 5.9 of the PPA,

the first respondent failed to obtain the appellant’s approval before entering into

the GSA/GTA with GAIL. As such, the declaration of capacity on RLNG was

stated to be unilateral and arbitrary and in violation of the terms of Clause 5.9 of

the PPA which mandated prior approval from the appellant. Therefore, the

appellant stated, that it stood absolved of the liability to pay capacity charges in

accordance with the PPA. Letters were exchanged between the appellant and the

first respondent from 17 December 2011 to 01 March 2012.

10. In order to resolve the above issue of non-payment of fixed charges, the

first respondent filed a petition under Section 79 of the Electricity Act 2003

seeking the resolution of the issue of shortfall of domestic gas, the reservations of

the beneficiaries to allow it to enter into alternate contractual arrangements for

fuel i.e. RLNG. The petition additionally sought the revision of the NAPAF and

directions to the beneficiaries to pay outstanding fixed charges.

CERC ORDER DATED 30 JULY 2023 AND APTEL JUDGEMENT AND FINAL ORDER

DATED 22 APRIL 2015.

11. CERC allowed the above petition and held the appellant liable to pay fixed

capacity charges under the PPA. It held that (i) Clause 4.3 of the PPA permits the

use of LNG/Natural gas or RLNG as a ‘primary fuel'; (ii) the first respondent is

6 permitted to use even liquid gas, albeit with the consent of the appellant; (iii) the

terms of the PPA do not injunct the first respondent from declaring capacity based

on RLNG; (iv) the beneficiaries have the option to dispatch or refuse to dispatch

the capacity on natural gas, RLNG, or liquid fuel; (v) in the event they choose to

refuse the dispatch, they cannot repudiate the liability to pay fixed charges citing

the transmission company’s failure to obtain approval; (vi) such consent or

approval is not necessary for declaring capacity based on the contractually

designated primary fuels, including RLNG; (vii) the requirement of seeking the

appellant’s approval under Clause 5.9 is not a mandatory pre-requisite for making

capacity declarations under Clause 4.3; (viii) the fixed tariffs are payable on

declared capacity; (ix) since the first respondent was unable to obtain domestic

gas due to a country-wide shortage, they made arrangements for RLNG; (x) the

appellant’s decision to not schedule the supply based on RLNG has a bearing on

variable charges and not on the fixed charges; and (xi) the appellant was thus

liable to pay the fixed charges based on capacity declarations made on RLNG by

the first respondent.

12. APTEL upheld the above order in the following terms:

a. The need to obtain the consent of the distribution licensee arises

only when the power generation company makes arrangements

based on liquid gas. In the present case, the only change in

question is being made from one primary fuel to another primary fuel

i.e. from natural gas to RLNG. Both of these are “primary fuel for

RGPPL” in accordance with Article 4.3 of the PPA. This change,

7 unlike the change from primary fuel sources to liquid gas, does not

require the consent of the distribution company;

b. The PPA did not require the power generation company to obtain the

consent of the distribution licensee for entering into the GSA/GTA

with GAIL. The plant was set up after significant efforts from the

central and state governments. The first respondent was left with no

choice but to enter into the GSA/GTA with GAIL in order to

overcome the domestic gas shortage. The appellant had refused to

schedule power for the declared availability based on RLNG to be

supplied under the GSA/GTA;

c. The first respondent has declared the necessary availability of

electricity when the appellant has chosen not to schedule the

quantum of electricity on the declared availability. As long as the first

respondent has the declared available capacity and irrespective of

whether the appellant has scheduled the capacity offered by the first

respondent, the appellant is liable to pay the fixed capacity charges;

and

d. The first respondent has invested in establishing, operating, and

maintaining the generating station. The annual fixed charges are

determined with reference to specific tariff requirements stemming

from the Tariff Regulations of 2009. The capital costs invested in the

station need to be serviced by way of the annual fixed charges.

8 Thus, APTEL directed that if the appellant wishes to not pay for the

electricity from RLNG, it must pay compensation to the first respondent,

since it is liable, under Article 5.2 of the PPA, to pay the capacity

charges. No prior consent, as envisaged in Article 5.9, is required, in

order for such liability to arise.

13. APTEL thus held that the appellant has been rightly ordered to pay the

capacity charges notwithstanding the fact that they have not consented to the

GSA/GTA with GAIL. The appeal was thus dismissed.

14. The Civil Appeal against APTEL’s decision was initially disposed of by this

Court. Since the appellant was not facing any punitive action for recovery, the

appeal was dismissed and the appellant was granted the liberty to approach the

Court when necessary.

15. In view of the above liberty, the present appeal is before us.

16. Following the issue of notice, the first respondent has entered appearance

and filed a counter affidavit.

17. We have heard Senior Counsel for the appellants and respondents.

SUBMISSIONS

18. The appellant urged the following submissions in its challenge to APTEL’s

judgment and final order:

a. CERC has put Clause 4.3 and Clause 5.9 of the PPA in two

separate buckets. According to the PPA (clauses 4.3, and 5.9 read

9 conjointly), the first respondent was obligated to obtain prior

approval from the appellant before entering into the GSA/GTA with

GAIL. Failing this requirement, the first respondent has absolved the

appellant of the obligation to pay for the declared capacity to the

extent that such declared capacity is attributable to the RLNG which

though, a primary source of fuel, could have been obtained by the

first respondent only after prior consent of the appellant;

b. The placement of the prior approval clause in clause 5.9 suggests

that it applies to clause 5.2 capacity charges as well as clause 5.3

energy charges. The impugned decisions make an artificial

distinction between the two sub-clauses and the two types of

charges and incorrectly subjects only clause 5.3 (energy charge)

and not clause 5.2 (capacity charge) to the approval requirement in

clause 5.9;

c. Clause 5.9 reads as follows:

“the conditions of GSA/GST having commercial implications (for example, bearing on plant availability, contracted quantity, price components, Take or pay provisions, penalties, and damages, etc.) shall be signed separately with the MSEDCL as supplementary agreement. The total required to be Gas/LNG is envisaged procured through short-term contracts long long-term contracts through GAIL and under the directions of GOI, the details of which shall be furnished in due course. RGPPL shall be required to obtain approval of MSEDCL on contracting terms and price before entering into the GSA/GTA contract.”

The phrase “commercial implication” makes the consent

requirement applicable to the present GSA/GTA. The commercial

10 implication of “plant availability” is the average of daily declared

capacity as a percentage of net capacity. Thus, plant capacity

stands affected by the decision to adopt RLNG which affects the

quantum of declared capacity. Thus, the use of RLNG by the first

respondent automatically has “commercial implications” and as

such, the prior approval requirement in clause 5.9 stood invoked;

d. There is an “organic interlinking” between clause 5.9, commercial

implications, plant availability, declared capacity, and declaration of

capacity in terms of choice of fuel as provided in clause 4.3.

Therefore, the compartmentalization of clauses 4.3 and 5.9, which is

the premise of the impugned decisions is flawed;

e. For the reasons stated above, the plant availability factor would be

less than 70%, and as such, the capacity charges would be reduced

in accordance with Clause 21(1)(a) of CERC (Terms and Conditions

of Tariff) Regulations 2009;

f. CERC and APTEL have virtually re-written the contract between the

parties which is impermissible under settled principles of contractual

interpretation. The correct reading must be in accordance with the

terms of the contract as well as the conduct of the parties to the

contract. The conduct of the parties in the present case suggests

that the approval of the appellant was a mandatory pre-requisite in

order to attach the liability of fixed charges to the appellant. In the

past, for a similar GSA, prior approval of the appellant was sought

11 by the first respondent. As such, the intention as evinced by this

past conduct, seems to be that the consent requirement was a

mandatory pre-requisite for such GTA/GSA. Failing that, the liability

of the appellant to pay does not arise; and

g. The impugned decisions will impact the customers of the appellant.

19. As against the above, the first Respondent urged the following

submissions:

a. The generating station was established to meet the electricity

demands of the appellant. After the failure of M/s Enron

International, and M/s Dabhol Power Company, the generating

station was revived and its assets were transferred to RGPPL, the

first Respondent, by virtue of an order of the Bombay High Court

dated 22.09.2005. NTPC Ltd and GAIL owned 23.5% shares each

while the Appellant held 13.51% shares in the first respondent at the

time of the take-over; and

b. The capacity declaration using RLNG as well as demanding

capacity charges based on such declared capacity are in

accordance with Clauses 4.3 and 5.2 of the PPA. The PPA

contained no clause for termination of the PPA, and was thus valid

for 25 years from the Commercial Operation Date. 11 As such, the

appellant is bound by the PPA as a whole and particularly by

Clauses 6.6. and 6.7 which stipulate that even if a dispute is

11 “COD”.

12

pending, the Appellant is bound to pay 95% of the charges during

such pendency, which the Appellant has failed to do.

ANALYSIS AND CONCLUSION

20. The issue that arises for consideration is whether the CERC and APTEL

were justified in affixing liability to pay fixed charges on the appellant. The dispute

primarily turns on the terms of the PPA. For the reasons stated hereafter, we

answer the issue in the affirmative.

TERMS OF THE PPA

21. “Declared Capacity” means the capability of the Station to deliver ex-bus

electricity in MW declared by the Station in relation to any period of the day, or

the whole day, duly taking into account the availability of Gas and liquid fuels. 12

22. The Station has to allocate 95% of its capacity to MSEDCL after the COD

of respective power blocks/stations. MSEDCL is liable to pay full capacity

charges as mentioned in Clause 5.2 and shall be entitled to corresponding

incremental power. 13

23. Clause 4.3 states as follows:

4.3 Declared Capacity

Primary Fuel for RGPPL is LNG/Natural gas and/or RLNG. Normally capacity of the station shall be declared on gas and/or RLNG for all three power blocks. However, if agreed by MSEDCL, RGPPL shall make arrangements of Liquid fuel(s) for the

12 Clause 1.1(b), PPA.

13 Clause 2.2.1, PPA.

13

quantum required by MSEDCL. In such a case the capacity on liquid fuel shall also be taken into account for the purpose of Availability, Declared Capacity and PLF calculations till the time Liquid fuel(s) stock agreed/requisitioned by MSEDCL is available at site.”

24. Clause 5 of the PPA deals with Tariff and states that the Tariff of the Station

shall be ascertained based on the restructuring model as approved by the GOI

and GOM and IFIs for the revival of the erstwhile Dabhol Power Project and that

the Station cannot be compared with other power stations as the financial and

technical parameters have been restructured to arrive at a viable and acceptable

tariff.

25. The PPA provides for the tariffs to be paid in two parts: capacity charges

i.e. fixed charges corresponding to the declared capacity and energy charges i.e.

variable charges corresponding to the actual electricity delivered. The relevant

clauses are extracted below:

5.2 "Capacity Charge

The Annual Capacity Charge (ACC) of Power Block for supply of power from the station worked out to Rs. 1446.451 Cr. per annum based on capacity charge of 96p/KWH finalized at the time of asset takeover by RGPPL. This Capacity Charge of 96p/KWH is increased to 98.5p/KWH pursuant to discussions under the aegis of Gd. This Capacity Charge of 98.5p/KWH is subject to further review and finalization by GoT and GOM pursuant to the ongoing restructuring exercise under consideration by GoI to ensure project viability based on above capacity charges on levelized basis of 98.5p/KWH, the total Annual Capacity Charges work out to Rs 1484.12 Cr. per annum.

Full capacity charges shall be payable at 80% of 2150MW (i.e.1720MW) declared capacity lower than this shall be recovered on pro-rata basis after COD of Block(s)/Station.

14 MSEDCL shall pay capacity charges in proportion to the allocation of power from RGPPL.

…

5.3 Energy Charges:

The Energy Charge for supply of power from the Station shall be worked out based on the gross heat rate and auxiliary Power Consumption as given below:

…

5.4 For the purpose of Tariff computation all values of price, quantity, etc. would be considered up to eight decimal point accuracy.

5.5 Energy Charges shall be worked out on the basis of ex-bus energy scheduled to be sent out from the Station as per the following formula:

Energy Charges (Rs) = REC9 * SG on Gas + REC * SG on liquid fuel

5.6 Provisional Billing: RGPPL shall be billing provisionally MSEDCL based on the above rate calculated for Capacity Charges and Energy Charges and MSEDCL agrees to pay based on the above billing till such time it is approved by CERC or other competent authority. Provisional Billing shall be adjusted after final approval of tariff by CERC or other competent authority.

5.9 Gas Supply Agreement (GSA)/ Gas Transportation Agreement (GTA) Gas supply agreement is presently for 1.5 MMTPA R-LNG upto September 2009 after being sourced through Petronet LNG Ltd and regasified at their Dahej terminal with supply though GAIL/off-takers. The conditions of GSA/GTA having commercial implications (for example bearing on Plant availability, contracted quantity, price components, Take or Pay provisions, penalties and damages etc.) shall be signed separately with MSEDCL as a supplementary agreement. The total required Gas/LNG is envisaged to be procured through short-term contracts/long-term contracts through GAIL and under the directions of GoI, the details of which shall be furnished in due course. RGPPL shall be required to obtain approval of MSEDCL on contracting terms and price before entering into the GSA/GTA contract.”

15

26. The position which emerges from the terms of the PPA is formulated thus:

a. There are two types of tariff charges payable by MSEDCL – capacity

charges under clause 5.2 and energy charges under clause 5.3;

b. For the former, the rates are fixed, having been finalized at the time

of takeover by RGPPL, and are subject to revision by the

Government of India or the Government of Maharashtra;

c. For the latter, the rates are to be calculated by way of the formula

stipulated in Clause 5.3;

d. MSEDCL is required to schedule the sending of energy from RGPPL

and the energy charges are payable according to the energy

scheduled to be sent out from RGPPL to MSEDCL;

e. Provisional billing of the two types of charges shall be made until the

billing is approved by CERC; and

f. The total gas requirements are to be procured through GAIL, by

way of a GSA/GTA under the directions of the GOI. Before entering

into the GSA/GTA, RGPPL is supposed to obtain approval from

MSEDCL on the terms of the contract and the price since such a

GSA/GTA has ‘commercial implications’.

27. The first respondent has consistently stated that the alternate arrangement

in the form of GSA/GTA with GAIL and capacity declarations based on RLNG

were necessitated on account of the unprecedented nationwide shortage of

domestic fuel. But for such an alternate arrangement, the first respondent would

16 have been unable to meet the target availability, which would have in turn

affected their ability to recover fixed costs, and jeopardized the viability of the

project. The appellant does not dispute the shortage of domestic fuel but merely

objects to the “unilateral” decision to declare capacity based on RLNG, which the

appellant states violated the mandatory approval requirement under clause 5.9 of

the PPA, thereby exonerating it of the liability to pay fixed capacity charges.

28. In accordance with settled principles governing the interpretation of

contracts, the PPA is required to be read as a whole. Clause 4.3 has two parts:

according to the first, primary fuels include LNG/Natural gas and/or RLNG;

according to the second, the appellant’s agreement is required in case liquid fuels

are to be employed. A bare reading of the clause indicates that the requirement to

seek such an agreement does not attach to the first part of the clause which

envisages RLNG as a primary fuel. An arrangement involving a transition from

one primary fuel to another primary fuel is permissible by the clause, even

without the appellant’s agreement.

29. The requirement of an agreement, mandated for an arrangement involving

liquid fuel cannot be read into the plain text of the former part of Clause 4.3.

Thus, the capacity declaration based on RLNG could be done unilaterally,

unencumbered by the requirement of the appellant’s consent in the latter half or

the prior approval requirement under Clause 5.9 of the PPA.

FACTUAL CONTEXT AND THE INTENTION OF PARTIES TO THE CONTRACT

30. We must remain mindful of the conspectus of facts that led to the

establishment of the first respondent. It was set up consequent to the failure of

17 M/s Enron International, and M/s Dabhol Power Company to meet the energy

needs of the State of Maharashtra. The tariff requirements have been determined

based on the need to preserve the viability of the unit.

31. The first respondent was compelled to make alternate arrangements in

view of the country-wide shortage of domestic gas, making RLNG a viable and

contractually permissible alternative. Notably, the appellant has not disputed the

circumstances in which this need arose.

32. In the present case, CERC and APTEL have correctly held that the

GSA/GTA with GAIL is permissible by the terms of the contract and the consent

or approval of the appellant is irrelevant. Clause 5.9 and Clause 4.3 operate in

different spheres and the requirements of the former cannot be foisted on an

arrangement permissible by the latter.

33. Capacity charges mandated under Clause 5.2 hinge on the declared

capacity that the Station is capable of delivering to its beneficiaries. Energy

Charges, on the other hand, are payable only against the actual energy

delivered. The appellant’s liability for the former is actual delivery agnostic. It

arises as long as the declared capacity is made in terms of the PPA i.e. Clause

4.3.

34. Clause 2.2.2 of the PPA prescribes that even in case MSEDCL is unable to

utilize the entire allocated capacity of RGPPL, or in case MSEDCL fails to comply

with the payment obligations in accordance with the PPA, RGPPL shall be

entitled to sell power to other parties, without prejudice to its claim for recovery of

capacity charges from MSEDCL subject to the provisions of Clause 2.2.2. Clause

18 2.2.2 indicates the intention of the parties to the PPA to put the capacity charges

beyond the realm of actual energy supplied. The appellant’s reading implies that

such a fixed charge can be avoided and made subject to the consent of the

appellant. Such a reading goes against the apparent intention of the parties to

treat capacity charges as fixed charges under the PPA.

35. A commercial document cannot be interpreted in a manner that is at odds

with the original purpose and intendment of the parties to the document. A

deviation from the plain terms of the contract is warranted only when it serves

business efficacy better. The appellant’s arguments would entail reading in

implied terms contrary to the contractual provisions which are otherwise clear.

Such a reading of implied conditions is permissible only in a narrow set of

circumstances. This Court in Transmission Corporation of Andhra Pradesh

Ltd v. GMR Vemagiri Power Generation Limited 14 held as follows:

“26. A commercial document cannot be interpreted in a manner to arrive at a complete variance with what may originally have been the intendment of the parties. Such a situation can only be contemplated when the implied term can be considered necessary to lend efficacy to the terms of the contract. If the contract is capable of interpretation of its plain meaning with regard to the true intention of the parties it will not be prudent to read implied terms on the understanding of a party, or by the court, with regard to business efficacy.”

36. In the present context, bearing in mind the background of the

establishment of the first respondent, and the shortfall of domestic gas for

reasons beyond the control of the first respondent, such a deviation from the

14 (2018) 3 SCC 716, 729 para 26.

19 plain terms is not merited and militates against business efficacy as it has a

detrimental impact on the viability of the first respondent.

37. The execution proceedings pursuant to the above-mentioned execution

petition before the APTEL be continued.

38. The appeal is dismissed. There shall be no order as to costs.

39. Pending applications, if any, stand disposed of.

……………………………………….CJI.

[Dr Dhananjaya Y Chandrachud]

….….…………………………..………J. [JB Pardiwala]

……..…………………………………J. [Manoj Misra]

New Delhi;

November 09, 2023.

20