Will SC Ruling Help Adani Group Gain Rs 5,000 Crore?

Mumbai/Gurugram: A three-judge bench of the Supreme Court of India, led by Justice Arun Kumar Mishra, is expected to deliver its ruling in a dispute over electricity tariffs between Adani Power Rajasthan Limited and power distribution companies (discoms) in the state before September 2, two individuals with close knowledge of the matter have confirmed to NewsClick on the condition that they not be named.

Justice Mishra, the senior-most judge of the Supreme Court (in terms of age), is heading the three- judge bench that also includes Justices Vineet Saran and Mukesh Shah. The bench reserved its judgement after concluding hearings on the matter on July 29. Justice Mishra retires as a judge of the Supreme Court on September 2.

The Adani group company stands to gain over Rs 5,000 crore by way of so-called “compensatory tariffs” if the legal dispute is decided in its favour. As NewsClick has already written, this will be the seventh case involving the Adani group that a bench headed by Justice Mishra will adjudicate on since January 2019. The previous six judgements have all gone in favour of the corporate conglomerate owned by India’s second richest man, Gautam Adani.

Contracts and “Assurances”

To understand the dispute which began in 2013, it is necessary to go further back to the period between 2006 and 2009, when Adani group companies won contracts given by the Rajasthan government to develop a coal mine and a thermal power plant that would supply electricity to consumers in the state.

In October 2006, the Rajasthan Rajya Vidyut Utpadan Nigam Limited (RRVUNL), the state government-owned power generation company, conveyed to Adani Enterprises Limited (AEL) that it had been selected as its joint venture (JV) partner. RRVUNL stated that the business activities of the proposed JV would be limited to mining and supply of coal from allotted coal blocks for the requirements of the existing and new thermal power stations owned by RRVUNL as well as for new thermal power projects in the state.

In August 2007, a letter of intent (LoI) was issued by 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 memorandum of understanding (MoU) was signed between the Rajasthan government and AEL for the latter to set up a coal-based thermal power generation project in Kawai in Baran district of Rajasthan. The MoU 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 by the JV company. With no such allotment forthcoming, at the end of August 2008, AEL requested the state government to apply to the Union Ministry of Coal for a coal block to be allocated to the Kawai project for the development of a captive coal mine.

While these efforts by AEL were going on, the Rajasthan government prepared to conduct an auction to procure electricity from private generators. Between October and December 2008, the state government approved the procurement of power by the state discoms. This was the last major decision of the state government then led by Chief Minister Vasundhara Raje of the Bharatiya Janata Party (BJP). The Raje government subsequently lost the Assembly elections and was succeeded by a Congress-led government under Ashok Gehlot.

It should be noted that it was under Raje’s government that the contract to mine coal at the PEKB block and to build a thermal power plant at Kawai was granted to companies in the Adani group. The coal linkage, however, was still not in place.

Meanwhile, the power procurement process had already been set in motion. In 2009, the Rajasthan discoms conducted an auction to determine the price at which it could buy electricity. An auction was announced in February 2009 via a Request for Proposal (RfP) issued for procurement of power. APRL, which was then developing the Kawai power project, sought to secure a commitment from the Rajasthan government of a coal linkage.

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, including the PEKB mine, or to support its application for allotment of a captive coal block to the Union government. APRL also sought that the MoU on the Kawai project, which was due to expire in March 2009, be extended for a year.

In order to qualify to bid in the auction, APRL needed to have a signed an agreement that guaranteed it coal supply. In June 2009, it executed a coal supply agreement (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 in place, APRL submitted its bid in the auction, attaching the agreement to its bid.

When the Rajasthan government (GoR) 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.” “Further” it continued, “we have also submitted with the bid a MoU executed between the GoR 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 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).”

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 PPA (power purchase agreement) was signed between APRL and a Rajasthan government-owned discom in January 2010.

Following this, 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 Ashok Gehlot 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 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.

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 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 price of which had surged following the implementation of the Indonesian government’s new law, 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 August 2013, with the scheduled supply of power due to begin, APRL approached the Rajasthan Electricity Regulatory Authority (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.

At RERC, Rajasthan Government Undermined Own Cause

APRL argued before RERC that the circumstances fell under the “force majeure” and “change in law” clauses of the PPA it had signed with the discoms. It argued that the hike in Indonesian coal prices constituted a force majeure event, equivalent to an “act of God” that could not have been foreseen, and it argued that the failure of the Rajasthan government to ensure that it received a domestic coal linkage after having signed an MoU assuring its support, constituted a change in law. Accordingly, it prayed that the RERC award it a compensatory tariff.

Opposing APRL, the discoms pointed out that APRL’s winning bid had been qualified on the basis of its CSA with group company AEL, that is, its bid was based on coal imported from Indonesia. However, a crucial affidavit was filed in the case on August 31, 2013 by the discoms, conceding one of APRL’s central points. That affidavit admitted that the “change in law” provisions of the PPA do apply to the circumstances of the case.

“The non-availability of coal and inaction on the part of Central Government also put the case of the petitioner within the scope of Change in Law. It is stated that the Change in Law is also a result of failure on the part of the Government of India instrumentality to provide linkage coal supply to Kawai project in accordance with the assurance given to the petitioner as well as in line with the New Coal Distribution Policy dated 18.10.2007,” read the crucial line of the affidavit of the Rajasthan government company.

Arguments before the RERC continued for five years, with its ruling announced on May 18, 2018. The RERC’s judgement, authored by its chairman Vishvanath Hiremath and two members, R P Barwar and S C Dinkar, based on the admission by the Rajasthan government, granted APRL the compensatory tariffs it was seeking.

It noted that domestic coal had been cited as a primary fuel in APRL’s bid, and imported coal as a “fall back support arrangement,” and stating that “while interpreting a contract the subsequent conduct is also a relevant factor”, it further noted that the Rajasthan government’s subsequent efforts to secure a coal linkage substantiated the point of the bid being based on domestic coal. Having done so, it noted the admission by the Rajasthan government that the circumstances constituted a change in law, and accordingly granted the compensatory tariffs.

Notably, the judgement appeared to deviate from a landmark ruling of the Supreme Court in a comparable case in April 2017. In that case too, an Adani group-owned power generation company had sought compensatory tariffs for imported Indonesian coal, in this instance for its 4,620 MW capacity power plant in Mundra, Gujarat. In this case, the Supreme Court had ruled that power plants that had CSAs in place for domestic coal linkages but did not receive coal supplies due to a change in the Indian government’s coal distribution policy in 2012, did in fact suffer a change in law and were due to be compensated. In this case, no CSA had been in place. The RERC, however, disregarded this point.

At APTEL, Intervention by Power Engineers

The case then moved to the Appellate Tribunal for Electricity (APTEL). The discoms that faced a back-payment of over Rs 5,000 crore, appealed the order of the RERC before the APTEL.

In September 2018, came the first indication of the direction in which APTEL was leaning. In an interim order, it directed the discoms to first pay 70% of its dues, or Rs 3,591 crore, to APRL. The appellate tribunal’s ruling was based on its finding that “prima facie” the facts of the case were in APRL’s “favour” and that the “balance of convenience” lay with APRL, since it was highly indebted due to paying the cost of Indonesian coal. The discoms appealed this order before the Supreme Court and in October 2018, the apex court reduced the amount payable to 50% of the dues, or around Rs 2,500 crore.

It was at this juncture that the All India Power Engineers Federation (AIPEF), a representative association of employees of electricity utilities owned by the Union and state governments, attempted to intervene in the proceedings, pointing out various issues it felt were crucial to the case but had been ignored. It filed an intervention application before the Supreme Court in December 2018.

The apex court, however, dismissed its petition in February 2019 on the ground that it was on a subject on which the court had already ruled. Subsequently, the AIPEF filed the same intervention application before APTEL. Its intervention was, however, rejected in May 2019, on the ground that the Supreme Court had rejected the same application. The tribunal questioned the bona fides of the federation claiming that it had attempted to suppress the dismissal of its application by the Supreme Court.

The AIPEF’s intervention application had argued that among several issues that the tribunal was ignoring, the most significant was that coal imports from Indonesia by companies in the Adani group were the subject of an investigation by the Directorate of Revenue Intelligence (DRI), the investigative arm of India’s customs authorities, relating to allegations of “over-invoicing.”

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. In an interview given to these authors in 2019, Padamjit Singh, chief patron of AIPEF, had asserted that these allegations of over-invoicing of imported coal are of considerable significance as far as his organisation is concerned. As for the alleged irregularities in the bidding process, he argued that these issues can be litigated after the investigation into the allegations of over-invoicing is completed.

If the allegations are proved, the quantum of compensation that APRL would be entitled to—if granted by APTEL and the apex court—would be significantly reduced. Singh argued that until the issue was decided, the discoms should not have to bear a high financial burden.

With the AIPEF’s petition having been dismissed, APTEL ruled on the case in September 2019, upholding RERC’s order. It agreed with RERC that APRL’s bid was based on domestic coal and that the failure of the Rajasthan government to secure a coal allocation for it constituted a change in law. The order, issued by Justice Manjula Chellur, chairperson of APTEL and S D Dubey, member (technical) of APTEL, ordered the discoms to pay the remaining 50% of the compensatory tariff.

How Will Justice Mishra-led Bench rule?

The discoms have appealed APTEL’s order before the Supreme Court, while AIPEF has appealed the dismissal of its intervention application by APTEL and placed it before the apex court once again. The three petitions, that have marked together, have been heard by the three-judge bench.

There have been 12 hearings in the case between January and July 2020, with the last four having been conducted through video conferencing in July, due to the ongoing Covid-19 pandemic. Delhi-based advocate Prashant Bhushan has argued on behalf of the AIPEF, and senior advocate C A Sundaram has appeared for the discoms, while senior advocates Abhishek Manu Singhvi and Arvind Datar have appeared for the Adani group company."

The Supreme Court’s April 2017 judgement on compensatory tariffs for the Adani group’s Mundra power plant had stated “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.”

This was the conclusion of the apex court’s bench of Justices Rohinton Nariman and Pinaki Chandra Ghosh upon reading the PPA signed between Adani Power Mundra and the discoms in Gujarat, along with the Electricity Act, 2003, under which the process of tariff determination by auction has been specified.

This fundamental principle articulated by the country’s top court in that judgement, however, does not make an appearance in the orders by RERC or APTEL, with both concluding that the risks involved on account of the cost of coal used in APRL’s Kawai plant increasing over the level that it had based its bid on, should be borne by power consumers in the form of higher tariffs, “passed through” to them by the discoms. What remains to be seen is whether this judgement will be considered in the decision of the bench led by Justice Arun Mishra.

The authors are independent journalists.

Corrigendum: This article was updated on 8th August, 2020 at 11:55 PM to reflect that Mr Prashant Bhushan has appeared for AIPEF and Senior Advocate C A Sundaram has appeared for the discoms. An earlier version stated that Mr. Bhushan appeared for both AIPEF and the discoms. The error is regretted.