Punjab PPA Bill: Indian Power Sector’s Vodafone Moment?

Earlier this month, Ajay Shah and I advocated the complete privatisation of state-owned power distribution corporations in India. We said that government control was the fundamental reason why most discoms are in bad financial condition and why they are untrustworthy contractual counterparties. As control of the discoms rests ultimately with politicians, they are used to fulfill political and redistributive objectives. As an example, we referred in passing to a new bill in the state of Punjab that sought to amend the law to enable the Punjab discom to renege on power purchase agreements that it no longer liked.

This bill has now been passed unanimously in the Punjab Legislative Assembly. At the date of writing, it is awaiting the state governor’s assent to become law.

This is a bad bill.

It is bad in law, bad for the state of Punjab, and bad for India’s energy transition.

But the Punjab Renewable Energy Security, Reform, Termination and Re-Determination of Power Tariff Bill has one thing to commend. It does what it says on the tin.

What The Bill Is Trying To Do

The bill was apparently the outcome of a review of Punjab’s power sector. Its preamble contains a purported analysis of the Electricity Act, 2003. Reading section 63 (adoption of tariff) and various sub-sections of section 86 (functions of State Commission) together, it came to the spectacular conclusion that the State Regulatory Commission has the “authority to re-determine the tariff for renewable energy in the State”.

The objectives of the bill include:

Making electricity available to consumers on the state at an affordable and sustained basis;
Enabling statutory measures to require review, modification, variation, and substitution of the terms and conditions of the PPAs to avoid their terms being onerous on the Punjab discom; and
Deal with the fuel crisis.

Based on these objectives, section 4 of the bill states that “all the relevant clauses impacting tariff directly or indirectly in the Agreements shall stand terminated”. This action affects 983.5 MW of renewable energy generation capacity, across 73 projects.

The bill then proclaims that notwithstanding anything contained in any other law or any court judgment, all PPAs signed by the state discoms are “referred to the Punjab State Electricity Regulatory Commission for re-determination of tariff”. It directs the PSERC to determine a temporary tariff till the tariff is finally redetermined.

Quite spectacular.

Why This Is A Bad Law

The bill ostensibly seeks to override the provisions of “any other law” in force, as well as any relevant decisions of all courts and tribunals. State law cannot override central laws – this is prevented by Article 162 of the Constitution and a line of case law under it. So clearly, if there is a central law, or a decision of the Supreme Court of India, a state government cannot legislate to the contrary.

Section 63 of the Electricity Act provides clearly that the Appropriate Commission (the PSERC in this case) “shall adopt the tariff” determined through competitive bidding in accordance with relevant Central Government guidelines. For the projects whose PPAs are currently under review, there is no suggestion that these guidelines were not followed. In that case, the PSERC is bound to adopt the tariff. Further, as far as the PSERC’s powers under section 86 are concerned, a PPA signed by a discom following the above process becomes a contract between the discoms and the power producer, and the appropriate commission ordinarily has no power to amend it. This was confirmed by the Andhra Pradesh High Court when Andhra Pradesh tried to renegotiate renewable energy tariffs.

The Punjab law goes a step beyond what the Government of Andhra Pradesh tried to do in 2019. There, the discoms or the state government did not purport to terminate the PPAs, they merely approached the regulatory commission to revise the tariff. The Punjab bill actually declares that the tariff provisions in the PPA have been terminated.

It is well-settled law that contracts are binding on its parties and cannot be amended other than by mutual consent unless the contract itself permits this. This is irrespective of commercial difficulties, inconvenience, difficulties in performance, or the fact that interest rates and taxes have gone down, as the bill claims.

It is also settled law that when the state signs a contract, it does so not as a sovereign but as a commercial counterparty and cannot generally use the public interest to get out of its obligations.

More specifically, the Supreme Court has held that PPAs executed by the mutual consent of two parties are equally binding on both of them. And the doctrine of privity of contract, taught in week one of year one at law school, establishes that a third party (the Punjab Government in this case) cannot amend a contract validly entered into between two contracting parties.

In fact, if the discom acts in reliance of law that the bill attempts to put in place, this will constitute a breach of contract, giving rise to a right of termination on behalf of the solar power producers! It is unlikely that this bill will survive a legal challenge.

Gymnastics To Come To This Position

To be able to justify passing such a law, the Punjab government has had to make some quite extraordinary claims. First, it laments that its examination of central and state government policies and the PPAs executed under them shows that these are leading to “unsustainable and ever-increasing and cascading burden” on the Punjab discom and its customers. Second, it claims that the law is in the public interest. Third, it makes the incredulous claim that the PPAs that its own discom executed (typically these are standard form PPAs with no ability on behalf of the power producers to negotiate them) are lopsided and allow the independent power producers to make “exorbitant tariff claims beyond the optimum and affordable level”.

For a government to contend that its own past policies and contracts were so bad that a new law was required to liberate it from its own mistakes is possibly unprecedented in Indian legislative history.

Damage Done

This bill is a populist and cynically self-serving action of the Punjab government, most likely made keeping in mind state elections next year. Through it, for short-term political advantage, promises are being held out to the people of the state that the state government should know are not capable of being fulfilled.

It is understood that the FICCI Renewable Energy CEOs’ Council has written a letter to the Union Minister for Power and Renewable Energy RK Singh, pointing out the legal problems with the bill, its negative impact on investor sentiment, the possibility that it would lead to operating projects becoming non-performing assets, and all this with little benefit to electricity customers in the state.

It will probably take a while before investors trust the state again. State action of this kind could bring into question the credibility of the Indian renewable energy sector as a whole. This in turn could impact the country’s ability to build a coherent and efficient path towards building a robust energy transition and fulfilling its commitments under the Paris Agreement.

Akshay Jaitly is President, 262 Advisors; and co-founder of Trilegal.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.