In the midst of a pandemic-driven curfew, the government stealthily pushes through stifling and controversial policies and amendments to critical laws and rules that will have an adverse impact on India’s polity and the economy. The Electricity (Amendment) Bill, 2020 (EB-2020) notified by the Ministry of Power (MoP) on April 17, 2020, is one of them. At a time when all forms of meetings, interactions, discussions and protests are choked, MoP gave 21 days for the public to respond.

First, a brief recap. India is the world’s third-largest producer and consumer of electricity. As of March 31, 2020, it had an installed generation capacity of 3,70,106 MW. Of this private, state and central shares are 47%, 28% and 25%, respectively. Transmission lines are owned mostly by state companies (57%), followed by central (37%) and private (6%) companies. Distribution and supply are totally carried out by state-owned distribution companies (DISCOMs) or Electricity Boards except in a few cities such as Delhi, Noida, Mumbai and Kolkata. Electricity is a concurrent subject under the Constitution.

The distinct characteristics of India’s economy and its power sector make it very difficult for market forces to operate effectively to generate and deliver power in an efficient, economic and equitable manner. Yet, India adopted a World Bank-sponsored structural and market-oriented management model in the reforms launched in 1995-96.

It envisaged creating independent organisations with unbundled functions—generation, transmission and distribution—replacing State Electricity Boards (SEBs).

These are to be turned into privately owned firms with “the quest for profit and greater commercial orientation” than government-owned SEBs. Efficiency was to be achieved by a “trickle down” process, passing through the layers of restructuring, unbundling and privatisation and tariff rationalisation on a cost-plus basis. Priority was given to setting up generation stations adopting the Public-Private Partnership (PPP) model.

Hoping to pluck low-hanging fruits, Independent Power Producers (IPPs) from abroad, mostly the US, came in droves to set up generating stations and sell electricity to SEBs at much higher tariffs than the prevailing rates. But due to the near-bankruptcy of SEBs, this did not work. Instead, scandals like Enron happened. The World Bank and ADB panicked and withdrew from the power sector in 2002 after spending millions of dollars on consulting services and project formulations. IPPs also trooped back in droves. Ironically, “reforms”, supposed to resolve problems, brought about a crisis. This was because, instead of the utility-oriented, efficiency (distribution)-driven reform option, the government pursued market-oriented, big-ticket (generation)-driven reforms. It was under these circumstances that the Electricity Act, 2003 (EA-2003) was enacted. The objective was to introduce competition, protect consumers’ interests and provide power for all. The Act provides for a national electricity/tariff policy, rural electrification and open access in transmission/ distribution, phased elimination cross-subsidies, mandatory Electricity Regulatory Commissions (ERCs), licence-free generation and distribution, power trading, mandatory metering and stringent penalties for theft of electricity. It is comprehensive legislation replacing Electricity Act, 1910, Electricity Supply Act, 1948 and Electricity Regulatory Commission Act, 1998. EA-2003 mandated dismantling of SEBs, forming them into DISCOMs. There was some minor amendment to this Act in 2007.

Taking advantage of the liberal provisions of the Act, mega and ultra-mega power plants were set up, substantially increasing the installed capacity in the private sector, the share of which is 47% now as against almost nil before the reforms. All of them have entered into Power Purchase Agreements with various DISCOMs/utilities in the country. As the demand did not catch up and the cost was high, DISCOMs could not buy the power produced. Even where power was bought, they could not pay for it. This led to a sharp downslide of the average plant load factor to a dismal 57%, the lowest in over a decade. Private power plants became non-performing with massive stressed assets.

As this crisis was peaking, in 2013/2014, the government went back to the World Bank, which did a fresh diagnosis and suggested a slew of reforms on the distribution side. EB-2020 incorporates almost all the prescriptions of the World Bank. The Bill was originally introduced in the Lok Sabha in December 2014. It was examined by the Standing Committee on Energy which suggested certain changes and was reintroduced in 2018. It has cropped up again in 2020.

Like the 2018 version, EB-2020 envisages separate licences for distribution and supply of electricity. There can be multiple supply licensees in an area which would enable consumers to migrate from one supplier to another. The Bill proposes the same PPP model of the World Bank which has been a consistent failure. It also proposes privatisation of DISCOMs in the name of franchises and sub-franchises in the distribution sector. This could lead to cherry-picking in the sense that while profitable franchises will go to private entities, DISCOMs will be saddled with loss-making business. What is bad is that the tariff will be determined by the Central Commission on a cost basis rather than a competitive basis. This will increase the tariff rate to be recovered from consumers.

The Bill defines renewable energy (RE) in detail and provides for its supply by coal/lignite-based generators through “Renewable Generation Obligation” as well as purchase by DISCOMS/supply licensees through “Renewable Purchase Obligation”. It also defines “decentralised distributed generation”, including the hybrid power system. The Bill also defines “renewable energy sources” as hydro, wind, solar, bio-mass, bio-fuel, bio-gas, waste including municipal and solid waste, geothermal, tidal, forms of oceanic energy and co-generation from these sources. All these will facilitate RE-driven “energy transition” which is the need of the hour.

But the devil in EB-2020 are the devious provisions to extinguish the role that state governments play in this key sector and seamlessly shift electricity from the Concurrent to the Union List. First is to remove Section 85 which empowers state governments to set up a selection committee for selecting the members of the State Electricity Regulatory Commission (SERC). Now, under Section 78, SERC members would be selected by a committee to be appointed by the centre. This eliminates the state government from the regulatory and tariff-setting process of electricity which is a critical area.

Second is Section 109A that provides for establishing a new Electricity Contract Enforcement Authority (ECEA) by the central government. This Authority will have the sole jurisdiction to adjudicate upon matters regarding performance and powers to direct parties to perform their obligation under the contract related to sale, purchase or transmission of electricity. Regulation or determination of tariff or any dispute involving tariff will continue to remain with SERCs. This could prove detrimental to the health of DISCOMs and access to affordable power for consumers because most of the contracts signed with private entities are costly and much higher.

Besides, it militates against the cardinal principle of “merit order purchase”, which is a way of ranking electrical generation based on ascending order of price together with the amount of energy that will be generated. In load despatch centres, the ranking is such that those with the lowest marginal costs are the first ones to be brought online to meet demand and plants with the highest marginal costs are the last to be brought on line. Dispatching generation in this way minimises the cost for DISCOMs\utilities and tariff for consumers.

As against this, RE enjoys a “must run” status, which means that the concerned power plant has to supply electricity to the grid under all conditions. Renewable players have raised concerns in recent months about rising instances of DISCOMs/utilities unplugging their generating capacity from the grid and delaying payments. Enforcing original contracts in these cases can sound the death knell of power utilities, leading to a sharp hike in tariffs.

Take, for instance, Adani Group’s 648 MW solar plant in Ramanathapuram district of Tamil Nadu. The Group signed a PPA with the utility, TANGEDCO. The 313-MW solar project commissioned before the March 2016 deadline got a tariff of Rs 7.01 per unit, while the 335 MW project was being paid the lower tariff of Rs 5.10 per unit. Both these tariffs are much higher than the present solar power rate of less than Rs 3 per unit which is likely to fall further. Claiming “must-run” status, the Adani Group wants TANGEDCO to buy all the power it generates at this high cost. If the new ECEA orders enforcement of the contract, TANGEDCO either has to sharply increase the tariff for consumers or go into bankruptcy. Similar would be the case with many other DISCOMs/utilities.

EB-2020 could make electricity hard to access by vulnerable communities and prevent states from giving any relief. In the event, its objective seems to be to centralise power and reward big corporates while subjugating states and fleecing consumers.

The finance minister’s stringent power sector reform proposals, including elimination of cross-subsidies in retail tariff which was announced as part of the Covid-19 economic revival package and a Rs 90,000-crore bail-out for big-ticket generation companies, vibes with this objective.

Switching off states with a sinister agenda?

—The writer is a former Army and IAS officer

Lead Picture: UNI

While the world is crippled by the coronavirus outbreak, an important concern among different industrial sectors is the force majeure clause and whether it will excuse parties who are otherwise bound by a contract from performing their obligations. Is the Indian law well-equipped to deal with a situation like this, especially as economic activities and commercial transactions globally have come to a standstill?

Force majeure is a standard clause in most contracts. If invoked, it exempts a party from performing his obligations due to an event that has not been foreseen and which he has no control over. It’s generally added to the contract to cover incidents. The Indian Contract Act does not expressly refer to the term force majeure, but the essence of the concept can be found in Section 32 and Section 52 of the Act.

Section 32 talks about “contingent contracts” where the performance of the contractual obligations is contingent on the happening or non-happening of an event. Section 52 deals with the frustration of a contract and states that any act which was to be performed after the contract became unlawful or impossible to perform and which the promisor cannot prevent will become void. Therefore, applicability of both force majeure and frustration of contract require a supervening event which is not foreseeable and is not attributable to either party.

The Supreme Court in its landmark judgment Satyabrata Ghose vs Mugneeram Bangur & Co held that to determine whether a force majeure event has occurred, it’s not necessary that the performance of an act should literally become impossible; a mere impracticality of performance will also be covered. “If the contract has an express or implied ‘force majeure’ clause, then the situation will be analysed on the basis of that, and not through the application of principles under Section 56,” it said.

Further, in Industrial Finance Corporation of India Ltd vs The Cannanore Spinning & Weaving Mills Ltd. and Ors., the Court stated: “It may be noticed here that the Statute itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be avoided or overcome.”

In M/s Alopi Parshad & Sons Ltd. vs Union of India, 1960, the Court held: “A contract is not frustrated merely because the circumstances in which it was made are altered.”

More recently, in Energy Watchdog vs CERC in 2017, the Court held that if a contract has an express or implied force majeure clause, it will apply over the principles under Section 56 and the force majeure clause will not apply if alternative modes of performance are available.

So how does this clause affect various sectors? In the power sector, distribution companies (discoms) normally maintain a payment assurance for all the power that they intend to procure from a power generator (genco) to prevent a build-up of dues. However, after the lockdown, problems for the power sector have increased manifold as the demand of power has come down by 20-30 percent. Electricity bill collections by discoms witnessed a fall by 80 percent, leading to their inability to make daily payments not only to generators but also for debt servicing to banks and financial institutions.

Meanwhile, gencos are required to make payment for monthly supplies of coal, but they have been defaulting in their payment to Coal India Limited (CIL) due to the lockdown. Despite this, CIL is ensuring smooth supply to gencos. The power ministry had received requests from power distribution companies and state governments for waiver of late payment surcharge considering force majeure coming into effect due to the lockdown restrictions.

Acknowledging the gravity of the situation, the ministry relaxed the payment security mechanism to give support to discoms that were finding it difficult to collect payments for bills. The ministry stated: “Considering the unprecedented and force majeure situation, it has been decided that power may be scheduled even if payment security mechanism is established for 50 percent of the amount for which payment security mechanism is to be otherwise established contractually.

This order shall be in effect till June 30, 2020.”

Meanwhile, the Central Electricity Regulatory Commission (CERC) passed an order reducing the late payment surcharge imposed on discoms for delay in payment to power generators and transmission companies. It lowered LPA to 1 percent per month from 1.5 till June 30. The order was passed following directions from the power ministry under Section 107 of the Electricity Act, 2003. CERC has, however, provided relief only on late payment surcharge.

Six discoms—UP, Punjab, Haryana, Telangana, MP and Dadra and Nagar Haveli—have invoked the force majeure clause for an indefinite period and asked private sector gencos, with whom they have entered into power purchase agreements (PPA), not to expect any payment till further notice.

However, according to the gencos, these units cannot use force majeure to deny payment, and notices sent by discoms invoking the force majeure clause are violative of the PPA. According to the Association of Power Producers, these discoms may have misinterpreted a press release issued by the ministry asking CERC to specify a reduced rate of late payment surcharge and grant discoms a longer window for repayment, which was not intended to absolve them of their obligations.

In response to a notice by the UP Power Corporation Limited invoking the force majeure clause, the Solar Energy Corporation of India stated that the claim of force majeure for its inability to pay on the grounds that it could not collect consumer dues was not valid. Therefore, the discoms can only ask for relief measures on account of the pandemic, it said.

Force majeure was also invoked by some hotels. OYO suspended payment of minimum assured amount to its hotels by invoking this clause in their agreement. Hotel owners have expressed disapproval and alleged that such a clause was not included in the original agreement, while according to OYO, it reserves the right to terminate the contract completely if the situation worsens.

FICCI has also recommended that the government mandate force majeure in all civil aviation contracts to save the industry from this crisis. “Epidemic” is mentioned as the cause in the agreements between the Airports Authority of India and airline companies, putting the burden on the government to bail out these companies.

Similarly, the ministry of road transport and highways has advised the National Highways Authority of India (NHAI) not to levy toll charges during the lockdown. In order to balance the revenue loss for companies and NHAI, it had clarified that the event will be classified as a force majeure of concession contracts.

In the real estate sector, if the current scenario of Covid-19 is treated as force majeure, the lessees will be allowed to not make payments or defer payments under existing lease agreements for income-generating properties. As this is part of the Real Estate Investment Trusts structure, such disruption in income generation will eventually impact them and its unit holders.

However, the Department of Expenditure has issued a memorandum stating that Covid-19 should be considered as a “natural calamity” and force majeure may be invoked wherever considered appropriate. This may not apply to all contracts as force majeure clauses are to be interpreted strictly in terms of the contract. These clauses may be specific (flood, war, etc) or general (events outside the reasonable control of a party to the contract) or a combination of both. However, where Covid-19 is not specifically stated as a force majeure event or the contract itself does not have such an express clause, the party may claim relief on the grounds provided under the Indian Contract Act.

If this issue is not amicably resolved between parties in various sectors, it could lead to a new set of legal cases.

Lead picture: UNI

The last two months have seen governments across the world imposing some of the most stringent measures to contain the rise and spread of COVID, arguably for its sheer spread, the worst calamity to hit mankind ever. Many countries, among them India, have imposed lockdowns, varying from a fortnight to a month. Experts say the impact of the lockdown on India to be approximately $120 billion or 4 percent of GDP and will spare no sector. The pandemic has affected the different spheres of life – economic, financial, political, educational, travel and tourism, aviation, most of all the health of citizens and the healthcare resources of the country.

One important concern that binds all sectors amidst this emergency is the question of force majeure clause and if it will excuse the parties, who are otherwise bound by a contract, from performing their obligations. This article will focus on the Indian law on force majeure, it’s applicability in agreements in the power sector, and the current situation of Gencos and Discoms amidst the pandemic and the lockdown

The question that arises here is if the Indian law is well-equipped to deal with a situation like this, specially as the economic activities and commercial transactions world over have come to a standstill in the wake of COVID-19 pandemic.

Force Majeure and Indian Law:  “Force Majeure” is a standard clause present in most of the contracts, that if invoked, exempts a party to a contract from performing his obligations under that contract, because such performance has become impossible due to an event that the parties could not have foreseen and had not control over. Its generally added to   the contract to cover incidents

The Indian Contract Act does not expressly refer to the term ‘Force Majeure’, but the essence of the concept can be found in Section 32 and Section 52 of the Act.

Section 32 talks about “contingent contracts”, in which the performance of the contractual obligations is contingent on the happening or non-happening of an event. If the event becomes “impossible”, the contract becomes “void” under this Section.

Section 52 that deals with frustration of contract, states that   any act which was to be performed after the contract is made becomes unlawful or impossible to perform, and which the promisor could not prevent, then such an act which becomes impossible or unlawful will become void.

Therefore, applicability of both force majeure and frustration of contract require a supervening event which is not foreseeable and is not attributable to either party too. These sections also clarify that even if the force majeure clause is not expressly added in a contract, and if there happens an event which makes the contract’s performance impossible, then the doctrine of frustration will be applied.

Supreme Court in its landmark judgement Satyabrata Ghose v. Mugneeram Bangur & Co had covered the question of scope of section 56 and ‘force majeure’ clauses in a contract, and had held that held that the word “impossible” has not been used in the Section in the sense of physical or literal impossibility. To determine whether a force majeure event has occurred, it is not necessary that the performance of an act should literally become impossible, a mere impracticality of performance, from the point of view of the parties, and considering the object of the agreement, will also be covered.

The Court had also stated that:

“If the contract has an express or implied “force majeure” clause, then the situation will be analysed on the basis of that, and not through the application of principles under Section 56.”

The Apex Court in Industrial Finance Corporation of India Ltd. Vs. The Cannanore Spinning & Weaving Mills Ltd. and Ors. that

“It may be noticed here that the Statute itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be avoided or overcome.”

In M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960, SC had held that

“A contract is not frustrated merely because the circumstances in which it was made are altered. The courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.”

A Division Bench of Supreme Court comprising of Justices P C Ghosh and R F Nariman in Energy Watchdog v CERC in, 2017, had held that, “If contract has an express or implied ‘force majeure’ clause, it will apply over the principles under Sec 56, and Force majeure clause will not apply if alternative modes of performances are available. The scope of ‘impossibility’ does not only refer to physical or literal impassivity but also to what is ‘impracticable’ and ‘useless’ from the point of view of the object and purpose of the parties.”

Effect of Lockdown in the Power Sector: The Discoms, normally maintain a payment assurance for all the power that they intend to procure from a power generator (Genco), to prevent build up of dues. When the nationwide lockdown was imposed on 24^th March, trouble for the Power sector increased manifold. The demand of power in all the states came down by 20-30 %, along with blocking of their major source of income, the high end earning sources like railways, industrial and commercial consumers, etc. The electricity bill collections by Discoms witnessed a fall by 80% only in a few days, due to which the Discoms now are unable to make daily payments not only to generators but also debt servicing to banks and financial institutions. The inability of Discoms to not pay the power generators has also affected the coal payments and coal transport by railways.

Decision by Coal India (CIL) amidst Corona Outbreak: State Power Generation Companies (Gencos) are required to make payment for the monthly supplies of coal, but they have been defaulting in their payment to CIL due to the situation of lockdown in the country. Such default in payment has affected the cash flow of the coal companies and large accumulation of dues. Despite this situation, Coal India (CIL) is ensuring smooth supplies to these Gencos without any restrictions. Coal India (CIL) has also extended the time limit for payments for release of coal by road.

Order by the Union Ministry of Power : The Ministry of Power had received requests from power distribution companies and state governments for waiver of late payment surcharge (LPS) considering the  force majeure due to the lockdown restrictions, since the consumers of power distribution companies were unable to pay their dues, and this was going to affect the liquidity position of the DISCOMs, thereby reducing their ability to pay timely payments to power generation and transmission companies.

The Ministry of Power acknowledged the gravity of the situation and noted that extremely low receipts due to non-payment or delayed payments by consumers, might hinder the cash flow in the system.

The MoP then relaxed the payment security mechanism to give support to Discoms that are finding it difficult to collect payments for bills raised on consumers in light of the coronavirus lockdown.

“Considering the unprecedented and force majeure situation, it has been decided that power may be scheduled even if payment security mechanism is established for 50 per cent of the amount for which payment security mechanism is to be otherwise established contractually. This order shall be in effect till June 30, 2020” – Power Ministry

It also issued directions to the Central Electricity Regulatory Commission to provide a moratorium of three months to Discoms to make payments and requested State Governments to issue similar directions to State Electricity Regulatory Commissions.

Reduction of late payment fee by the Central Electricity Regulatory Commission: The Central Electricity Regulatory Commission (CERC), passed an order reducing the late payment surcharge that is imposed on power distribution companies (discoms) for delay in payment to power generators and transmission companies. The LPA has been lowered to 1 per cent per month from 1.5 per cent per month for 45 days till June 30. The order was passed in suo moto proceedings following directions from the Ministry of Power under section 107 of the Electricity Act, 2003. CERC has however provided relief only on late payment surcharge.

Discoms invoke force majeure to refuse payment to Gencos: Six state-run power distribution utilities (discoms), including Uttar Pradesh, Punjab, Haryana, Telangana, Madhya Pradesh, and Dadra and Nagar Haveli have invoked the force majeure clause for an indefinite period, and asked private sector gencos, with whom they have entered into power purchase agreements (PPA), to shut down and not expect any payment till further notice. All PPAs have two parts, one is fixed and the other is variable. A buyer may be absolved from payment of variable cost but payment of fixed charges is mandatory, unless and until the contract is scrapped altogether.

Stance of the power sector Gencos: According to the Gencos, state electricity distribution units cannot use force majeure to deny payment and default on their contractual obligations, and notices sent by Discoms invoking the force majeure clause is violative of the PPA.

According to the Association of Power Producers, these Discoms may have misinterpreted a press release issued by the ministry of power asking CERC to specify a reduced rate of late payment surcharge and grant Discoms a longer window for repayment, and was intended to absolve them of their obligations.

In response to such a notice by the Uttar Pradesh Power Corporation Limited (UPPCL) invoking force majeure clause stating that the pandemic affected its ability to perform its obligations under its power purchase agreements, the Solar Energy Corporation of India (SECI) has stated that the claim of ‘force majeure’ for its inability to pay is not valid. Explaining further, SECI said that the force majeure event that the Discom sought was not for the non-availability of power generation capacity but was for its inability to collect dues from its consumers, and that ground is not covered under their Power Sale Agreement. Therefore, the Discom in this situation can only ask for relief measures on account of the pandemic

Conclusion: The Department of Expenditure, Ministry of Finance on 19 February 2020 has issued an office memorandum stating that COVID-19 should be considered as a ‘natural calamity’ and force majeure may be invoked wherever considered appropriate, following due procedure. Force Majeure clauses however are to be interpreted strictly be terms of the contract. The Memorandum may therefore not apply to all the contracts. If force majeure can be invoked or not depends on the terms of the agreement, or if there is a force majeure clause present in the agreement in the first place.

The Force majeure clauses may be specific (specific events flood, war, etc) or general (referring simply to events outside the reasonable control of a party to the contract), or a combination of both. For example, some contracts like the concession agreements entered with National Highways Authority of India specifically include an ‘epidemic’ as a force majeure event. Other contracts namely, power purchase agreements for renewable projects, do not specifically include an ‘epidemic’ as a force majeure event

However, in situations where COVID-19 is not specifically stated as a force majeure event or the contract itself does have not have an express force majeure clause, the party may claim relief on the grounds as provided under the Indian Contract law.

If this issue is not amicable resolved between the parties there is a huge possibility that the power sector in India, which is already in a troubled situation owing to the Covid-19 outbreak and a nationwide lockdown, will be embroiled in a new set of legal cases.

Pic Credit: Power Grid India