Article Category: Regulatory & Policy

Authored by Shreshth Sharma, Partner along with Molshree Bhatnagar, Principal Associate, HSA Advocates

Governed by its constitution and derivative laws, a country speaks through its policies. Sound economic and regulatory policy creation coupled with effective implementation encourages investor confidence and forms the fundamental basis of attracting large volume and consistent investment. This is even more essential in the power sector, which is characterized by capital intensive requirements, the need for long-term cash flow and substantial gestation periods.

Policy uncertainty has without a doubt adversely impacted the country’s stressed power capacity which was reported in 2018 as being 40,130 MW, with 24,405 MW having been commissioned and 15,725 MW under construction. Of late, sanctity of contracts has emerged as a significant contributor to the sectoral headwinds, as witnessed most noticeably in the spate of unilateral tariff reductions by the government of Andhra Pradesh (AP), which tried to reduce the solar and wind tariffs of already executed and operative power-purchase agreements. This attempt was ultimately quashed by the Andhra Pradesh High Court, which held that the government cannot intervene in tariff matters. The case is presently being appealed on the limited issue of a single judge directing AP distribution companies (discoms) to approach the state regulator to seek revision in concluded tariffs, while in the meantime directing that interim payments be made. Similarly, the new Maharashtra government has declared its intention to review the 508.17 km Mumbai–Ahmedabad high speed rail corridor, which is technically owned and financed by the government of Japan.

Such rollbacks are in direct conflict with the declaration made by the central government in 2018–19 that top-level policymakers must ensure that policy actions are predictable, consistent and reduce ambiguity and arbitrariness in their implementation. The Supreme Court in the case of Mahabir Auto Stores and Ors v Indian Oil Corporation and Ors held that “every state action must be informed by reason and it follows that an act uninformed by reason, is arbitrary”. Also, in the case of State of Tamil Nadu & Ors v K. Shyam Sundar and Ors, the Supreme Court held that the state cannot change its stand merely because another political party has come into power, unless the earlier action is contrary to statute, unreasonable or against public interest. It is indeed unfortunate that these and other decisions of the Supreme Court escaped the attention of the decision makers and their advisers.

Projects entailing long gestation periods must have certainty, which gives comfort to financial institutions including public sector banks. Inevitably, failure of debt service leads to haircuts in resolution within or outside the Insolvency and Bankruptcy Code, 2016 (code). Such resolution processes can also deal with regulatory hurdles such as in the case of the acquisition of the Prayagraj Power Generation Company Limited, a 1,980 MW thermal power project in Uttar Pradesh, declared a non-performing asset by its lenders. This led to the first resolution process undertaken by the State Bank of India and other lenders under the umbrella of Reserve Bank of India guidelines outside the code, setting a precedent for the larger industry. In this instance, the Appellate Tribunal for Electricity (APTEL) granted relief to the bidders, ruling that tariffs forming the basis for the auction could not be altered pursuant to the bidding process. Lending certainty to similarly placed resolution processes, the Supreme Court refused the leave to appeal against the decision of APTEL.

With the target of a USD 5 trillion economy and a planned infrastructure investment worth INR 102 trillion (USD 1.42 trillion) over the next five years, the government must ensure that its policy framework is predictable and offers the promise of no changes over its horizon period. Using as an analogy the principle of attornment in which a change of land ownership does not give the new owner as landlord any additional rights over an existing tenant, including termination of the lease, policies and contracts should be drafted to acknowledge and accept continuity and certainty in the future. Further, the administration involved in policy assessment and decision-making must be sensitive to the need to abide by its own decisions and their legal repercussions. A dictatorial fiat reneging on a policy or binding contract will unsettle the banking and financial sector, in turn risking public money.

A state characterized by frequent policy U-turns must be prepared for disengagement and a lack of faith on the part of its investors. It may be that the aggrieved have rights of legal action, as happened in the case of the AP government, but time-consuming litigation and little or no return on investments aggravated by chronic uncertainty will not outweigh a promise well kept.

Source: India Business Law Journal

Brief Note on Rajasthan Electricity Regulatory Commission Suo-motu Order on Policy Directives issued by the State of Rajasthan with regard to Solar/Wind/Solar-Wind Hybrid Power Generation in the State

• The State Government on 22.01.2020 had issued Policy Directives to the Rajasthan Electricity Regulatory Commission (“Commission” / “RERC”) u/s 108(1) of the Electricity Act,2003 (the Act) with regard to its prospective solar/wind/wind-solar hybrid policies 2019.
• The Commission, treating the Policy Directives u/s 108 of the Act as a guidance (not mandatory) notices that certain directives of the State Government will be limited to certain generators / developers and will not cover the general consumers at large and has inter alia issued a suo-motu order in respect to the following:

• Banking:

The Policy Directive states that the Banking to be allowed at consumption end for captive Consumption and third-party sale on yearly basis @ 10 % charges in kind of banked energy. The banking year will be from April to March. However, no drawl of banked energy will be allowed at peak hours as determined by DISCOMs and the unutilized banked energy will lapse at the end of the year.

RERC observes in this regard:

• That the banking facility for renewable energy projects was introduced in its earlier regulations.
• Under the existing regulations, banking was allowed only for the captive consumer. However, according to the Policy Directive, the banking facility has been extended to the third-party sale also.
• That the burden arising from implementation of the Policy Directive cannot be passed on to the general consumers. Therefore, the Commission has directed the DISCOMs to approach the state government for claiming financial support to make good the impact in their revenue consequential to the directions. (over and above the provisions of the existing Regulations.)
• Exemption In Transmission And Wheeling Charges:

The Policy Directive provided that the transmission and wheeling charges to be levied for projects set up for captive or third-party sale within the state, after the Commencement of policies or up to March 2023, or for projects with a capacity of 500 MW (solar, wind and wind-solar hybrid, with or without storage) whichever is earlier, as follows:

• For solar power projects set up for captive use and third-party sale– 50% of Normal transmission and wheeling charges for a period of 7 years from the commissioning of the project.
• For solar power projects with a storage system and repowered wind projects set up for captive use and third-party sale –

25% of normal transmission and wheeling charges for a period of 7 years from the commissioning of the project.

• For solar power projects set up for electric vehicle charging stations for captive use and third-party sale –

100% exemption in standard transmission and wheeling charges for a period of 10 years from the date of establishment of the Electric Vehicle (EV) charging station.

(the Policy Directive also provides the above provision to be applicable for individual plant capacity of maximum 25MW)

RERC has accordingly:

• Directed the DISCOMs to claim subsidy as per Section 65 of the Act in line with the Commission’s Tariff Regulations of 2019 and initiate the provisions of exemption in transmission and wheeling charges in respect to the said State Policy Directive.
• Power Projects With Storage System:

The Policy Directive had stated that power up to 5% of RPO targets in MW (solar & non-solar combined) would be procured from solar projects with storage systems by Rajasthan DISCOMs at a tariff discovered through competitive bidding besides their RPO target.

RERC has accordingly:

• Directed the DISCOMs to implement the state government’s policy for projects with storage systems.

• Roof Top Solar System:

The Policy Directive provided that under net metering, the DISCOMs will allow solar rooftop of up to 50% of the capacity of the distribution transformer. Further, benefits such as banking facility and payment of surplus energy by DISCOMs under net-metering applicable to domestic consumers will also apply to government buildings.

The Policy directive has also provided an enabling provision for Solar Rooftop Systems, that the same can be set up under the gross Metering Scheme as per the guidelines issued by the Government and the generated power to be supplied to DISCOMs at the tariff determined by RERC.  The Capacity of 1 MW of Solar rooftop System will be allowed under this scheme.

RERC has accordingly:

• Noted that the existing RERC net metering regulations provide for a limit of 30% on the capacity of the distribution transformer for setting up a rooftop solar PV project. However, the Commission under the powers conferred under the Regulations 18 & 19 of the RERC Net- Metering Regulations, has increased the limit to 50% as stated in the Policy Directives. And the Commission emphasized that the limit of 50% should be adopted ensuring the technical feasibility and safety issues.
• Taken note of the benefit of payment of surplus energy to the state government buildings like a domestic consumer and the provision for limiting the payment for surplus energy to the domestic consumer category having been recently incorporated through an amendment in the current RERC net metering regulations, directed the DISCOMs to file a petition indicating the requirement of change in regulations for the consideration of the Commission.
• On the issue of gross metering, directed the DISCOMs to assess their needs for gross metering and then enter into a power purchase agreement (PPA).
• The Commission has also stated that the State Government also consider prescribing appropriate guidelines as contemplated in the Policy directive. If required, the Discoms may also file a petition for determination of Tariff for sale of the power generated from the solar Rooftop Systems and supplying power to the Discoms under Gross Metering scheme envisaged under the directive.

• The DISCOMs are further directed by RERC to give effect to the directives of the Government in view of directions given above. And also, the DISCOMs to conduct the impact assessment study of these government directives and furnish the report of impact assessment study to the Commission after the completion of one year. The Commission also asked the DISCOMs to submit the status of recovery of additional financial implications due to the government policy directives.

Authored by Hemant Sahai, Founding Partner

The Andhra Pradesh government’s announcement regarding the closure of the Amaravati Capital City Startup Area project on Nov. 11, comes on the heels of the same government’s vicious assault on existing renewable energy power purchase agreements in the state, as well as the unilateral cancellation of the Polavaram dam project. The High Court of Andhra Pradesh intervened and ensured that the illegal termination of the PPAs and the cancellation of the Pollavaram project were not given effect to. However, the question of whether legally determined tariffs enshrined in lawfully concluded PPA contracts can be unilaterally reduced by the AP government is awaiting determination by the High Court in appeal.

Pertinently, the Amaravati project and the renewable energy PPAs represent a significant private sector investment aggregating billions of dollars that have already been made in the state. Therefore, the timing and overtly arbitrary and opaque nature of executive action by the government of Andhra Pradesh has sent shivers down the collective spines of private investors, not just in Andhra.

The fear that this contagion may spread to other states is real. As regards the Amaravati Project, for the record, the cancellation of the contract with the Singapore consortium with investment from Ascendas-Singbridge and Sembcorp has been done by “mutual consent” and both have made efforts to avoid communicating a perception of acrimony.

However, a rudimentary analysis of the facts suggests otherwise, or at the very least creates an impression that the private sector consortium succumbed to political pressure. In the world of infrastructure contracts requiring private sector investment, perceptions are usually stronger than facts, especially because the counterparty is always the government.

This series of events in Andhra Pradesh raises significant questions on the durability of contracts, especially in the context of insulating infrastructure projects from political risk.

Viability of projects put at risk

Even if one were to undertake a nuanced analysis and accept that there might indeed be certain justifiable reasons for the termination of the projects, however, the timing and manner of effecting such termination is anathema and destructive to the fundamentals of creating an enabling environment for private investors in the infrastructure sector. India’s future growth in the short, as well as medium and long term, is predicated upon significant private investment in the infrastructure sector. Therefore, the obvious question is whether our legal system is designed to protect investors by ensuring compliance by the dominant counterparty.

While fundamentally the Indian law on contracts is robust in philosophy and principles, however, the burden for enforcement remains on the aggrieved party. Therefore, in delicately balanced infrastructure projects that depend on timely cash flows for viability, any arbitrary withholding of payments by the government as the counterparty can be fatal to the project.

Remedial action needs to be swift and designed to give the benefit of doubt to the project investor. Regrettably, that is not what the Indian law and judiciary deliver. The relatively weak enforcement of contracts in India has long been voiced as an investment risk. Several decisions that have been taken by governments in India over the last few years, both at the central and state level, have created a perception of uncertainty which does little to assure investors generally, more so in capital-intensive sectors characterised by large capital outlays and delayed returns on investment. The World Bank’s Ease of Doing Business rankings currently ranks India at 163 on the enforceability of contracts. While this has been a historical lag on India’s overall rankings, the ramifications are amplified when applied to the infrastructure sector wherein contractual arrangements play a singular role.

Remedial action

The Government of India has taken certain steps to ameliorate investor concerns. The Specific Relief (Amendment) Act, 2018 which was finally notified in the Gazette and brought into force on Aug. 1, 2018, deserves a special call-out in the present context. This amendment mandates that specific performance of a contract is the remedy of first resort. Therefore, the amendment now mandates that every court must grant specific performance of the contract as a general rule. The Act now also contemplates the appointment of experts to assist the court on technical issues. There are special provisions for the infrastructure sector, such as provisions for ensuring timely and unhindered completion of public utility projects by restricting the grant of injunctions in infrastructure project contracts, special courts to adjudicate such matters, setting of a time limit of 12 months for disposal of all suits filed under the Act, etc. restricting the grant of injunctions in infrastructure project contracts, special courts.

Notably, however, these amendments do not address the primary contagion affecting privately funded infrastructure projects, which is timely payment of tariffs and dues to the private investor by the government. It appears that the central government is taking the Andhra Pradesh government actions quite seriously and is making its own efforts at preserving investor sentiment. One such step that has been generally alluded to is a proposed new law to shield private investors from arbitrary actions by state governments and ensure the sanctity of contracts is respected and enforced meaningfully. The exact contours of this proposed new law have not been elaborated.

My first reaction to this news was that the law already provides that parties including governments must respect and honour contracts. However, what is urgently needed are explicit provisions that preclude governments from acting arbitrarily and capriciously. The usual stratagem for governments has been to make allegations against the private sector counterparty to a contract, and on such unproven allegations, take precipitative action such as withholding payments, or terminating the agreement.

In simple words, the monopolist buyer remains unaccountable and wields disproportionate and arbitrary power.

Preventing ad hoc moves by governments

In my view, therefore, the proposed new law should re-calibrate the enforcement regime to expressly provide a framework to fix accountability to deter opaque and arbitrary decisions. One such mechanism could be to prevent governments, or indeed any party to a contract, from taking any precipitative action merely based on an allegation. The person making the allegation must be obliged to escalate the issue to specialized courts or tribunals (such as the electricity tribunals already provided for the power sector, or specialized dispute resolution tribunals to be created for the infrastructure sector) and such tribunal would be required to address these disputes in a time-bound manner. Thus, the burden of proving the allegation must remain with the person making the allegation.

“The practical challenge in the current regime is that the aggrieved party is burdened to prove the negative, i.e. that he has not been in breach as alleged. This is a logical fallacy as one cannot prove the negative.” The government can get away with shifting the onus as well as the financial burden onto the aggrieved party and take advantage of the delays.

Certain disputes can be made mandatorily referable to arbitration. However, in any scenario, the government should be obliged to continue making some minimum payments, such as 80 percent of the amounts in dispute, to ensure that the project does not head into insolvency. This continued payment is especially critical since on the other hand, the insolvency laws now require that a borrower must mandatorily and automatically be declared a non-performing asset within a legally specified time frame, and thereafter be referred to insolvency proceedings in a time-bound manner.

This chatter of a new law stems primarily from the negative actions taken by the Andhra Pradesh government in the context of the power purchase agreements for renewable energy projects, which threaten to jeopardise the central government’s larger plans to ramp up investments in the renewable energy space. The target of 450 gigawatts by 2030 is currently one of the world’s largest renewable energy programs, and one that would be feasible only with foreign investments. However, this re-balancing is required for all other infrastructure sector contracts too.

Other ripple effects

The central government’s urgency to bring in new legislation is justified on several counts. Not only is the current weak enforcement regime threatening further investments in the infrastructure space, but there is a real threat of foreign investors bringing legal action under the bilateral investment treaties and similar bilateral arrangements, to recover damages for losses attributable to arbitrary actions by governments. The preponderance of BIT-related legal jurisprudence would justify such action in the context of the actions taken by the Government of Andhra Pradesh in the Amaravati project and the renewable energy PPAs.

Another law that has not been invoked as yet but would appear to have a direct bearing on these events, is the Competition Act, especially in the context of the electricity utilities that are monopolistic and largely government owned. There are several international precedents where large monopoly utilities have been broken by the anti-trust authorities, of which the ‘Baby Bells’ created from the monolithic AT&T jumps to mind. In the end, these may not be bad ideas if the if the efficiency in these critical sectors needs to be forced, to make the Indian economy efficient and competitive at a global stage.

Source: BloomberQuint