CERC pushes Developers to settle Change in law issues with SECI directly, not in court

By Soumya Duggal/ Updated On Tue, Feb 15th, 2022

Highlights :

A’Change in Law’ (CIL) event is one which results in the imposition of additional recurring/non-recurring expenditure on the project developer.
The underlying principle of having a CIL provision in PPAs is to restore the affected party to the same economic position as if the CIL had not occurred.

CERC pushes Developers to settle Change in law issues with SECI directly, not in court

CERC Allows Adani Subsidiary Compensation For 'Change of Law' Events

In two recent judgements, the Central Electricity Regulatory Commission (CERC) rejected projects developers’ plea to intervene in the cases of claims arising out of Change in Law (CIL) events before the petitioners had attempted to mutually settle the matter with the parties involved in their respecting Power Purchase Agreements (PPAs), i.e. the Solar Energy Corporation of India (SECI) and state distribution licensees.

By definition, a ‘Change in Law’ event is one which results in the imposition of additional recurring/non-recurring expenditure on project developers and/or on the revenue owed to them.

The purpose of a CIL provision is to insulate the parties from the financial impact arising out of events which were not within the control of the project developer, that take place after the effective date of the PPAs. The underlying principle of having the CIL provision in the PPAs is to restore the affected party to the same economic position as if the CIL had not occurred.

CERC’s recent judgements on the petitions concerning CIL rules involved three project developers: Tata Power Renewable Energy Limited (TPREL); SB Energy Three Private Limited; and SBE Four Limited. Each of their cases is summarised below.

Tata Power Renewable Energy Limited (TPREL) entered into Power Purchase Agreements (PPAs) with SECI in 2016 and 2017, following which the Goods and Services Tax (GST) was introduced. In 2020, the Ministry of New and Renewable Energy (MNRE) clarified that since CERC had already laid down the procedure to be followed in CIL cases on account of GST imposition, there was no need to ask every developer to approach the commission for seeking individual orders in similar cases.

CERC Declines To Step in For Change In Law Petition From Mahindra Renewables

Also Read

TPREL then petitioned CERC, seeking a declaration from the commission that the implementation of GST amounted to CIL as it imposed additional expenditure on the company. TPREL also sought compensation on account of such CIL event, along with carrying cost.

In its response, CERC agreed with SECI that the discoms were in fact concerned parties in the present case as the provisions of the PPAs specifically dealt with SECI’s back-to-back Power Sale Agreements (PSAs) with the discoms. “SECI is not functioning as merchant trader but as an intermediary trader and hence, there is as a clear link between the ultimate distribution company and the generator with trader acting as only an intermediary linking company,” clarified CERC. Thus, the settlement of CIL claims would not be possible without the discoms’ approval.

The commission further observed that in CIL events, the affected party [TPREL] and the other parties [SECI and the discoms] are required to settle the CIL claims among themselves and approach CERC only in terms of Rule 3(8) of the CIL Rules, which specifically concerns the verification and adjustment of the amount of the claims.

Consequently, CERC ruled that TPREL may approach the discoms for the settlement of CIL claims amongst themselves and thereafter approach the commission in terms of Rule 3(8) only. “The filing fees deposited by the Petitioner in respect of the present Petitions shall be adjusted against the Petitions to be filed by the Petitioner in terms of Rule 3(8) of the Change in Law Rules,” the commission added.

The commission passed a similar ruling in response to other petitions filed due to a CIL event.

SB Energy Three Private Limited, which had entered into a PPA with SECI in 2017 for 100 MW solar projects, petitioned CERC to request an in-principle approval for a CIL event: Land Tax notifications by the Finance Department (Tax Division), Government of Rajasthan, in 2019 and 2020. SBE Four Limited, which had entered into a PPA with SECI in 2018 for 200 MW solar projects, sought a similar in-principle approval from CERC for the same CIL event i.e., the Rajasthan government’s Land Tax notifications.

The petitioners submitted that at the time of the signing of the PPAs, no land tax was applicable on their projects located in Rajasthan. However, as per specific land categorisations, the state government reinstated payment of tax at Rs.1 per sq. m. in 2019 and at Rs. 2 per sq. m. in 2020. The petitioners then approached CERC, seeking to recover the land tax to be imposed on their projects’ land, along with carrying cost. They submitted that CERC had plenary (i.e. complete/absolute) powers under Section 79 of the Electricity Act, 2003, with regards to their respective cases.

In response to their requests, CERC clarified that since there was no provision for the grant of ‘in-principle approval’ either in the PPAs or in the CIL Rules, the commission found no reason to accord the desired approval.

Further, SECI submitted that the Rajasthan government’s tax notifications would constitute law under the PPAs, and the petitioners admitted that since the said land tax was yet to be levied on their projects’ lands, they had not made any payments towards the same thus far.

As a result, CERC ruled, “…the cause of action arises only when the land tax is levied and the Petitioners have to pay for the tax. It is the settled law that no Order can be made in anticipation for any future claims to be raised. Hence, the Commission finds no necessity to invoke Regulatory powers provided under Section 79 of the Act.”

Thus the commission held that the petitioners could approach SECI for the settlement of CIL claims amongst themselves as and when the tax rules are enforced and thereafter approach CERC for further need.