Power Generation Co. Entitled To Carrying Cost On Restitutionary Principles From Date Of Change In Law Event – SC

The Bench of CJI NV Ramana, Justice Krishna Murari, and Justice Hima Kohli observed –

"…the respondent No. 1 – Adani Power is justified in stating that if the banks have charged it interest on monthly rest basis for giving loans to purchase the FGD, any restitution will be incomplete, if it is not fully compensated for the interest paid by it to the banks on compounding basis. We are of the opinion that interest on carrying cost is nothing but time value for money and the only manner in which a party can be afforded the benefit of restitution in every which way."

In this case, the Appellate Tribunal had granted carrying cost interest on compounding basis in favor of Respondent No. 1 from the date on which the Change in law event took place till the actual date of payment of the amount determined by the Central Commission.

While the Appellants did not dispute the grant of interest to Respondent No. 1 by way of carrying cost, their grievance was that the Appellant Tribunal did not only permit carrying cost on simple interest basis, but has imposed interest on carrying cost or what is commonly known as interest on interest (compound interest) on carrying cost.

The Appellants are the distribution licensees that are supplying electricity to the consumers in the State of Haryana while Respondent No. 1 r is a power generating company that has set up a 4620 MW (comprising of four units of 330 MW and five units of 660 MW), coal fired power plant in Mundra, Gujarat. The Appellants had entered into two Power Purchase Agreements (PPAs) with Respondent No. 1 for procurement of contracted capacity of 1424 MW from the generating units 7, 8 and 9 established at Mundra, Gujarat. An environmental clearance was also obtained for the same, after which a Change in law event took place as Respondent No. 1 had to incur additional costs on installing Flue Gas Desulfurization (FGD) unit.

Thereafter, Respondent No. 1 filed a petition before the Central Commission for adjudication of compensation on account of certain Change in Law events including installation of the FGD. The Commission allowed compensation only for certain Change in Law events but disallowed the claim for carrying cost raised by the Respondent No. 1.

Aggrieved, both the parties approached the Appellate Tribunal. A separate petition was also filed by Respondent No. 1 before the Central Commission. The Central Commission passed an order on the separate petition preferred by the Respondent No. 1 – Adani Power, allowing compensation on account of the Change in Law event pertaining to installation of the FGD and at the same time, disallowing its claim for carrying cost.

In another petition filed, the Central Commission granted carrying costs in favor of Respondent No. 1. This decision was challenged before the Supreme Court by the Appellants in 2018, however, the appeals were dismissed by the Apex Court.

The Court had held that he power generating company would be entitled to carrying cost on restitutionary principles from the date of Change in Law event, so as to bring the affected party to the same economic position as if such Change in Law had not occurred.

For arriving at the said conclusion, reliance was placed on Article 13.2 of the PPAs governing the parties that contains an in-built restitutionary principle which compensates the party affected by such Change in Law.

Thereafter, on approaching the Appellate Tribunal, it was held that Respondent No. 1 was not only entitled or carrying cost in respect of compensation for Change in Law events towards FGD installation, as approved by the Central Commission, reckoned from the date of Change in Law occurrence, but also entitled for interest on carrying cost.

Aggrieved, the Appellants approached the Apex Court.

Senior Advocate M.G. Ramachandran appeared for the Appellants, while, Senior Advocate Mukul Rohatgi appeared for the Respondents before the Supreme Court.

The Apex Court referred to the various provisions of the PPAs signed by the parties and noted, "It is clear that the restitutionary principles encapsulated in Article 13.2 would take effect for computing the impact of Change in Law. We see no reason to interfere with the impugned judgment, wherein it has been held by the Appellate Tribunal that the respondent No. 1 – Adani Power had started claiming Change in Law event compensation in respect of installation of FGD along with carrying cost, right from the year 2012 and that it has approached several fora to get this claim settled."

Further, the Bench also held that once carrying cost has been granted in favour of the Respondent No. 1 it cannot be urged by the Appellants that interest on carrying cost should be calculated on simple interest basis instead of compound interest basis. Grant of compound interest on carrying cost and that too from the date of the occurrence of the Change in Law event is based on sound logic.

In this context, the Court held –

"The idea behind granting interest on carrying cost is not far to see, it is aimed at restituting a party that is adversely affected by a Change in Law event and restore it to its original economic position as if such a Change in Law event had not taken place."

"We are not persuaded by the submission made on behalf of the appellants that since no fault is attributable to them for the delay caused in determination of the amount, they cannot be saddled with the liability to pay interest on carrying cost; nor is there any substance in the argument sought to be advanced that there is no provision in the PPAs for payment of compound interest from the date when the Change in Law event had occurred," the Bench observed.

The Court held that the entire concept of restitutionary principles engrained in Article 13 of the PPAs has to be read in the correct perspective. The said principle that governs compensating a party for the time value for money, is the very same principle that would be invoked and applied for grant of interest on carrying cost on account of a Change in Law event.

Thus, the Court upheld the impugned order of the Tribunal and dismissed the appeal.

Cause Title - Uttar Haryana Bijli Vitran Nigam Ltd. and Another v. Adani Power (Mundra) Limited and Another