(On August 31, a Supreme Court Bench headed by Justice Arun Mishra approved the decision by electricity regulators to grant Adani Power “compensatory tariffs” amounting to Rs 8,000 crore for electricity generated at its power plant in Rajasthan. The verdict, just before Justice Mishra’s retirement on September 2, is the seventh judgment since the beginning of 2019 in which benches headed by him have ruled in favour of Adani group of companies.)
Bengaluru/Gurugram: On August 31, a Supreme Court bench headed by Justice Arun Kumar Mishra, that included Justices Vineet Saran and M R Shah, ruled in favour of a company in the Adani group in a dispute with public sector power distribution companies in Rajasthan. The verdict, issued three days before Justice Mishra retired from the court on September 2, has granted Adani Power Rajasthan Limited (APRL) – which owns a 1,320 megawatt capacity thermal power station in Kawai, Baran district – “compensatory tariffs” worth over Rs 5,000 crore and penalties and interest payments of nearly Rs 3,000 crore.
This “price” of Rs 8,000 crore will be borne by electricity consumers in the cities of Jaipur, Jodhpur and Ajmer. This is the seventh verdict in favour of Adani group companies issued by benches headed by Justice Mishra since the beginning of 2019.
The verdict was on petitions by power distribution companies (discoms) of the three cities, and a separate petition by the All India Power Engineers Federation (AIPEF), a representative body of employees of public sector power companies, against a September 2019 verdict of the Appellate Tribunal for Electricity (APTEL). Agreeing with the APTEL’s contention that APRL had suffered on account of a “change in law” for which it was owed compensation, the Supreme Court bench rejected the arguments made in appeal by the discoms and AIPEF.
The court held that a memorandum of understanding (MoU) signed by the government of Rajasthan providing an “assurance” that it would “facilitate” allocation of coal mined domestically as fuel supply for Adani’s power plant in Kawai, constituted the basis for power purchase agreements (PPAs) signed by the Adani group company with the Rajasthan discoms in 2010. This was despite those PPAs having been signed on the basis of APRL bidding successfully in a competitive auction, which it qualified to participate in on the basis of a coal supply agreement (CSA) it signed with its sister company, Adani Enterprises Limited (AEL), for coal imported from Indonesia.
Subsequently, the failure of the power plant to secure a coal allocation from the government constituted a “change in law,” the court held. This, coupled with the fact that in 2011 the price of coal imported from Indonesia had risen significantly above the levels agreed upon in the CSA that qualified APRL to participate in the auction, entitled the company to “compensatory tariffs,” the Supreme Court ruled.
Domestic or Imported Coal?
The case before the apex court depended on answers to two important questions.
In 2009, the Rajasthan discoms conducted an auction in which private power producers were invited to participate and present bids to win the right to sell electricity to the state. In order to qualify to participate in the auction, the private power generation companies needed to have in place CSAs – either a domestic coal linkage that would supply enough coal for the entire lifetime of the PPAs or a CSA for imported coal that would supply at least half of the fuel requirement for the first five years of the PPAs.
At the time the auction was announced, with requests for proposals being circulated, in February 2009, the Adani group company was in the process of setting up its power plant at Kawai, but did not have any CSA. While in a MoU signed by the government of Rajasthan with AEL in March 2008, the government had assured its support to the project in facilitating it to obtain a domestic coal linkage, this did not constitute a concrete agreement that would qualify it to participate in the auction.
While preparing its bid, in June 2009, APRL wrote to the Rajasthan government seeking its support under the terms of the MoU for securing a coal linkage, requesting either the allocation of excess coal from existing coal mines owned by the state government, including the Parsa East Kente Basan mine in Chhattisgarh, which another Adani group company was contracted to mine, or to support its application for allotment of a captive coal block to the Union government.
However, without a CSA guaranteeing its coal supply, APRL would not qualify to bid in the auction. Hence, in June 2009, it executed a CSA with group company, AEL, for supply of coal imported from Indonesia for the Kawai project. In addition, APRL also applied for a long-term coal linkage contract to the Union Ministry of Coal in July 2009. With this CSA for imported coal in place, APRL submitted its bid in the auction, attaching the agreement to its bid.
It was because of this agreement that APRL’s bid was considered in the first place during the auction. Having qualified, the Rajasthan government sought a clarification from APRL regarding the evaluation of its bid. APRL clarified that it intended to “use domestic coal as well as imported coal.” Pointing to the CSA, it said: “A duly executed Fuel Supply Agreement for more than 50% of the coal requirement for a period of 5 years has been submitted along with this bid.”
The company added: “…we have also submitted with the bid a MoU executed between the GoR (government of Rajasthan) and AEL wherein...the state has assured in making its efforts to facilitate in getting coal linkage/block or coal from any other source for the power project.”
Hence, APRL stated that “we (will) meet the fuel requirement on the basis of imported coal tie-up,” adding: “… we are sure to get domestic fuel tie-up with the support of the GoR. In view of this we submit that our bid should be evaluated on the basis of Domestic Coal tie-up. We undertake that payment considering domestic coal escalations will be acceptable to us during the term of the PPA (power purchase agreement).”
However, once its bid qualified and was evaluated by the discoms, APRL cancelled its CSA with AEL on June 10, 2009. The agreement had been used only to qualify for the auction.
APRL’s bid was the lowest and it won a contract to supply electricity to the state discoms from its 1,320 megawatt (MW) capacity Kawai power project. A letter of intent (LoI) was issued to APRL by the discoms on December 17, 2009, which stated the following: “Your offer to provide 1,200 MW power at the rates mentioned at Annexure-1 and escalations thereof on domestic coal is based on your commitment that the above rates would be applicable even in case of coal requirement being met by you by way of back up arrangement with imported coal.”
This meant that even if APRL were to use imported coal under its CSA with AEL, the tariff would be calculated based on the prices of domestic coal. This LoI was “unconditionally accepted” by APRL.
Terms of Power Purchase Agreement
However, the PPA that was signed the following month, on January 28, 2010, did not reflect the same terms. While it noted that the fuel supply arrangement for the PPA was based on the supply of domestic coal with a fallback support arrangement of imported coal for five years, it dropped the language clarifying that the tariff would be calculated against domestic coal prices, irrespective of the source of the coal – imported or domestic.
Given this sequence of facts, the first question before the Supreme Court was whether the bid was based on domestic coal or imported coal. The APTEL and the Rajasthan Electricity Regulatory Commission (RERC) that had ruled on the dispute before it, had both held that the bid was indeed based on domestic coal.
While the discoms, represented by senior advocate C Aryama Sundaram argued that though the bid was evaluated based on a domestic coal linkage, no such linkage was actually in place, and it was the CSA for imported coal that was a fallback option for supplying 50% of the coal required by the power plant for the first five years that qualified APRL’s bid. In fact, the CSA had been for 61% of the coal requirement. Accordingly, the discoms argued that if any compensation has to be claimed, it could only arise on the remaining 39% of the domestic coal that APRL had said it would use for the project during the first five years, if this was the subject of a change in law.
Senior advocate and Congress party leader Abhishek Manu Singhvi, appearing for the Adani group company, meanwhile, argued that the CSA was only a qualifying document, and had no bearing on the tariff which was determined entirely against domestic coal. The entire bid was premised and accepted on domestic coal, and hence was affected by a “change in law” when the government failed to provide the promised coal linkage, and therefore APRL was entitled to compensation, he argued.
The Arun Mishra-led bench came down on the side of the Adani group company, ruling that the bid was based entirely on domestic coal.
Padamjit Singh, the convenor of the AIPEF, in an interview to Newsclick said this was the result of a “self-goal” by the Rajasthan discoms: “The Rajasthan discoms took the precaution to put a condition in the LoI that regardless of whether Adani Power were to use foreign or domestic coal it will be paid power tariffs determined according to domestic coal prices. This is recorded in the Supreme Court order as well. But the problem arose because this condition was not put in the PPA.”
Singh asked that “if Adani Power was awarded the contract under a certain understanding, why was that condition not put in the PPA, when it was such a critically important condition?” He said this condition was the basis on which the PPA was awarded.
“Adani had accepted the LoI unconditionally, so there would have been no way to challenge it if the discoms had put it in the PPA and the matter would have rested right there,” the AIPEF convenor pointed out, adding: “This was where the Rajasthan discoms lost the game. It was a self-goal. It was a huge blunder, or perhaps the discom officials were arm-twisted. There is no reasonable explanation.”
Libbying by Rajasthan Governement
The second significant issue before the Supreme Court was whether, having assured APRL in its MoU with the Rajasthan government that it would facilitate it to acquire a coal linkage, did APRL face a “change in law” when it failed to do so until 2018? Under the terms of the PPA, “change in law” is one of the conditions that enables either party to seek a tariff revision.
This question too, ultimately was decided by a “self-goal” by the Rajasthan discoms.
In August 2007, a LoI was issued by the Rajasthan Rajya Vidyut Udpadan Nigam Limited (RRVUNL) in favour of AEL to develop the Parsa East and Kente Basan (PEKB) coal block located in northern Chhattisgarh. The LoI stipulated that the coal could be utilised at the discretion of the Rajasthan government for new upcoming thermal power projects.
In March 2008, a MoU was signed between the Rajasthan government and AEL for the latter to set up a coal-based thermal power generation project in Kawai that also stipulated that the state government assured its support to the project in ensuring allotment of a coal linkage. Between May and June 2008, AEL wrote to the Rajasthan government six times, requesting that it consider allotment of coal from the PEKB coal mine, which was already being developed. With no such allotment forthcoming, at the end of August 2008, AEL requested the state government to apply to the Ministry of Coal for a coal block to be allocated to the Kawai project for the development of a captive coal mine.
In July 2009, when it was preparing to file its bid in the auction for the right to sell power to the discoms, AEL applied for a coal linkage to the government. It did so under the terms of the National Coal Distribution Policy of 2007, under which projects approved by a Standing Linkage Committee of the government would receive 100% of its coal from the public sector Coal India Limited (CIL).
By the beginning of 2010, APRL had PPAs in place with the Rajasthan discoms, but no coal linkage yet. At this stage, APRL once again wrote to the Rajasthan government seeking allocation of a captive coal block for its Kawai project. It further requested the state government to execute a fuel supply agreement between RRVUNL (which had discretionary authority over the use of coal from the PEKB coal mine) and itself. Starting in January 2011, the Rajasthan government lobbied the Union government to seek the allocation of a coal block for the Kawai power project.
In a previous article for NewsClick, the authors of this article have described this process in detail:
The Rajasthan government wrote to the Ministry of Coal in January 2011 requesting it to allocate coal blocks identified by the government in Chhattisgarh to meet the coal requirements for various power projects in the state, including the one at Kawai. Receiving no response for over a year, in February 2012, the state government wrote to the Central government again, this time to both the Ministry of Coal and Ministry of Power, requesting that the Kawai project be considered at par with other power projects in the Central government’s 11th Five Year Plan (2007-12), despite the project being part of the 12th Five-Year Plan (2012-17).
In response, the Ministry of Power responded that the project was part of the Twelfth Plan and would be considered for implementation in due course. Meanwhile, the ministry suggested that the government of Rajasthan examine the possibility of increasing the mining capacity in coal blocks already allocated to it in Chhattisgarh and allocate coal for the Kawai project from these blocks.
At the same time, in February 2012, the Standing Linkage Committee decided that no new fuel supply agreements (FSAs) would be signed by CIL owing to a shortage of coal.
The Rajasthan government wrote back in November 2012 that there was not enough surplus coal in its allocated coal blocks allegedly without attempting to revise the quantity of coal it was recovering from those mines. In effect, the Rajasthan government, after having committed itself to securing domestic coal for the Kawai project, and after being asked by both APRL and the Central government to supply coal from its own coal mines in Chhattisgarh, was refusing to do so.
Thereafter, the Rajasthan government escalated its lobbying in New Delhi. On November 26, 2012, a letter was sent by Chief Minister Ashok Gehlot to the Ministries of Coal and Power requesting ad hoc allocations of coal, as the Kawai power plant was due to commence operations. The Rajasthan government wrote another letter to the Planning Commission in January 2013. In December 2012, the Kawai power plant started operating on imported Indonesian coal on a “test” basis, and was synchronised with the state’s power grid in August 2013.
In February 2013, APRL wrote to the discoms stating that the Rajasthan government’s persistent attempts to secure a domestic coal linkage had failed and that since the plant was running on Indonesian coal, the prices of which had surged following the implementation of a new law by the Indonesian government, it would require a revision of tariff to compensate the private company for its higher costs due to use of imported coal.
With no domestic coal linkage in place, in April 2013, with the scheduled supply of power due to begin, APRL approached RERC with a petition seeking a hike in electricity tariff over what had been fixed, based on its bid in the competitive auction in 2010.
After this, in May 2013 the government decided to change the National Coal Distribution Policy (NCDP), that was notified in July 2013. In this amended policy, CIL would supply a portion of the fuel requirements of power plants which were yet to secure coal linkages, and supply the remainder by importing coal, which the power generators could also import for themselves.
Change in Lasw?
The question before the court was, whether this inability of APRL to secure a domestic coal linkage constituted a change in law. But reviewing the arguments and counter arguments would be futile because, in an affidavit submitted to the RERC by the discoms, months before the Ashok Gehlot led Congress government in Rajasthan demitted office in December 2013, the discoms admitted that it did agree that a change in law had indeed taken place!
“This was a suicidal admission,” said Singh. “This was quoted everywhere – from the RERC to the APTEL to the Supreme Court as well – and it has been exploited to the hilt.”
He added: “There was a swing of opinion or attitude somewhere mid-way in the case. It was like a friendly match and the government in Rajasthan appeared to be inclined to favour Adani Power and did not take a hard line against giving them any kind of concession. But somehow later on, they seem to have woken up and decided to contest it tooth and nail. But that changeover came too late. And by then they had already scored a number of self-goals.”
(Mis-)Using Energy Watchdog Judgment
With the admission by the discoms, the judgment draws on the so-called “Energy Watchdog” judgment of the Supreme Court of April 2017. In that case, also a demand for compensatory tariffs by an Adani-owned power plant – its Mundra power plant which supplies power to Gujarat, and several other states – the Supreme Court had ruled that it was entitled to limited compensation on account of change in law, because it already had a CSA in place with CIL, which was modified by the amended NCDP of 2013.
However, in the same judgment issued by a bench comprising Justices Rohinton Nariman and Pinaki Chandra Ghosh, the Supreme Court had also elucidated a fundamental principle: “The price payable for the supply of coal is entirely for the person who sets up the power plant to bear...it is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took...the risk of supplying electricity at the tariff indicated was upon the generating company.”
The present judgment draws from the Energy Watchdog judgment in its understanding of change in law, while appearing to ignore the above principle. Despite not having been a CSA in place, the verdict by the Justice Arun Mishra-led bench held that the MoU between the Government of Rajasthan and APRL was sufficient to fulfil the basis for holding that APRL had suffered a change in law.
Over Invoicing of Coal?
A Third Issue, that had been raised by the AIPEF, was that of allegations of over-invoicing of coal imported from Indonesia, that have been raised against 40 Indian companies including companies in the Adani group by the Directorate of Revenue Intelligence (DRI), the investigation arm of India’s customs authorities under the Ministry of Finance.
The DRI has alleged that companies in the Adani group, among other private and public sector companies, had artificially inflated the prices of imported coal by manipulating invoices and valuations. Additionally, it had alleged, the illicit gains thus made were being parked in offshore tax haven jurisdictions.
Specifically with regard to its investigations into the Adani group, the DRI is in a legal battle at the Supreme Court over Adani’s attempts to block its investigation. In 2018, the DRI had sent Letters Rogatory to Singapore, Hong Kong, Switzerland and the United Arab Emirates seeking the support of the courts in those countries to obtain banking and other documents it required for its investigation into the Adani group’s import of coal from Indonesia. The Adani group sought to quash these letters rogatory, first in the courts in Singapore, and having failed there, at the Bombay High Court. The Bombay High Court had in 2019 ruled in Adani’s favour and quashed the letters rogatory, which the DRI is currently appealing before the Supreme Court. In January of this year, the Supreme Court stayed the High Court’s order as it heard the case.
The Justice Arun Mishra-led bench refused to entertain the issue. Noting that the AIPEF’s counsel, Prashant Bhushan, had sought to bring the matter to the court’s attention, the verdict reads “we are of the opinion that until and unless there is a finding recorded by the competent court as to invoicing, the submission cannot be accepted.”
Impact of Judgement
The one count on which the Supreme Court’s verdict has given a minor relief to the discoms is on the interest rate payable on the compensatory tariffs due, calculated back to the beginning of the supply of electricity from the plant in 2013. While the Adani group company had sought an interest rate of 2% more than the SABR interest rate (Stochastic Alpha Beta Rho, a measure used in banking and finance), the Supreme Court’s verdict has capped it at 9%.
AIPEF’s Singh explained what this meant in quantitative terms: “As a result of this judgment, the discoms will face an immediate financial burden. The original claim which was allowed by the APTEL – 50% of which was paid after an interim order – was around Rs 5,130 crore. On that, Adani Power Rajasthan has claimed interest of around Rs 3,000 crore. The Supreme Court's judgment has not modified the original claim at all, but has said that the interest rate can be slightly reduced. So the interest would be marginally reduced. In the judgment, it has been said it should not exceed 9% while Adani had sought an interest rate 2% higher than the SABR rate. In total, the amount would still approach Rs 8,000 crore.”