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Published : March 09, 2011 | Author : pallavi ghorpade
Category : Company Law | Total Views : 8261 | Unrated

  
pallavi ghorpade
Pallavi Prithviraj Ghorpade II NLC email: pallavighorpade@legalserviceindia.com
 

Challenges Faced By Power Purchase Agreement

India is world's 6th largest energy consumer, accounting for 3.4% of global energy consumption. Due to India's economic rise, the demand for energy has grown at an average of 3.6% per annum over the past 30 years. In March 2009, the installed power generation capacity of India stood at 149,390 MW while the per capita power consumption stood at 612 kWH1.The country's annual power production increased from about 190 billion kWH in 1986 to more than 680 billion kWH in 20062. The Indian government has set an ambitious target to add approximately 78,000 MW of installed generation capacity by 2012. The total demand for electricity in India is expected to cross 950,000 MW by 20303.

About 75% of the electricity consumed in India is generated by thermal power plants, 21% by hydroelectric power plants and 4% by nuclear power plants4. More than 50% of India's commercial energy demand is met through the country's vast coal reserves. The country has also invested heavily in recent years on renewable sources of energy such as wind energy. As of 2008, India's installed wind power generation capacity stood at 9,655 MW5. Additionally, India has committed massive amount of funds for the construction of various nuclear reactors which would generate at least 30,000 MW6. In July 2009, India unveiled a $19 billion plan to produce 20,000 MW of solar power by 2020.

Power Purchase Agreement
A Power Purchase Agreement (PPA) is a legal contract between an electricity generator (provider) and a power purchaser (host). The power purchaser purchases energy, and sometimes also capacity and/or ancillary services, from the electricity generator.

The seller under the PPA is typically an independent power producer, or "IPP." Energy sales by regulated utilities are typically highly regulated, so that no PPA is required or appropriate. A Power Purchase Agreement (PPA) is at the heart of any power generation project that is to be undertaken by an Independent Power Producer (IPP). During the past decade privately owned IPPs selling electricity to the power industry has become common place.

The PPA is often regarded as the central document in the development of independent electricity generating assets (power plants), and is a key to obtaining project financing for the project.

Emergence of power purchase agreement
In 1992, the government amended India's Electricity Act of 1910 and opened the electricity sector to privatization and foreign investment. An incentive package was enacted in 1993 to provide a five year tax holiday for new projects in the power sector and a guaranteed 16% return on foreign investment. Additionally, the protracted project approval system was substantially revised. The IPP's were allowed attractive terms to set up power station but they had to work with vertically integrated SEB's and IPP's entered into power purchasing agreement with SEB's.

Although, a policy on private sector participation was announced in 1991, the pace of private investment has been slow as most Independent Power Producers (IPPs) were unable to achieve closure for their projects, despite progressing well on the other clearances.

De licensing of Generation
Delays in finalization of Power Purchase Agreements (PPA) and high cost of electricity estimated for the projects were also some of the reasons failure of the power purchase agreement. The Electricity Bill 2000, which was introduced in Parliament, envisaged sweeping changes to the power sector, including delicensing generation and permitting power trading. The Bill's aim was to carry forward reforms in the power sector without imposing any particular model on the States. The States can choose any model which suits them. The Bill hoped to ensure competition in power trading. The Power Trading Corporation had been set up by the Centre to purchase power from mega projects and sell it to different States. What was visualised at this stage was that the PTC would not be a monopoly and power would be commodity that could be traded. The Government was trying to include a provision to permit others to acquire licences and trade in power.

On generation too, the Bill envisaged complete delicensing of this sector, except for some inter-State hydel projects. Power Ministry pointed out that the Government had an ambitious target of adding 100,000 MW of capacity in the next 12 years7. This would be equal to the capacity that had been built up in the last 53 years. This called for massive investments not only in gene ration but also in transmission and distribution systems.

There was no way the public sector could achieve this target and hence the private sector had to be induced to participate in capacity addition in a greater way.

Electricity Act 2003, enacted on 10th June 2003, brought about a paradigm shift by opening up the Indian power sector to competition. The act brings about de-licensing of thermal generation, open access in transmission, open access of distribution network in phases, multiple licensing in distribution zones and de-licensing of rural electricity supply. This sets tone for a competitive era in Indian power sector. This delicencing of generation opened the market of electricity generation by private players.

Legislative setup and Power Purchase Agreement
Under the Constitution of India, electricity is a 'concurrent' subject contained under Entry 38 List III. Hence, the Central as well as the State governments have authority to enact legislation in regard to the power sector. The Central Government generally provides the policy framework and the State governments focus on specific issues. Currently, the constitution, responsibilities and accountability of the Power sector entities in India are governed by the following Central statutes :
- The Electricity Act, 2003
- The Electricity (supply) Act, 1948 (Repealed)
- The Electricity Regulatory Commission Act, 1998 (Repealed)

As per Electricity Act, 2003 following are the Sections dealing with Power Purchase Agreement.

86. Functions of State Commission
(1) The State Commission shall discharge the following functions, namely:--
(b) Regulate electricity purchase and procurement process of distribution licensees including the price at which electricity shall be procured from the generating companies or licensees or from other sources through agreements for purchase of power for distribution and supply within the State;

Section 49 of The Electricity Act, 2003 deals with agreement for the purchase and supply of electricity.

49. Agreements with respect to supply or purchase of electricity
Where the Appropriate Commission has allowed open access to certain consumers under section 42, such consumers, notwithstanding the provisions contained in clause (d) of sub-section (1) of section 62, may enter into an agreement with any person for supply or purchase of electricity on such terms and conditions (including tariff) as may be agreed upon by them.

PPA's are entered between the state electricity boards and the independent power producers. The Electricity Act 2003 makes it mandatory for all SEBs to unbundled into separate generation, transmission and distribution entities so as to make them more efficient than vertically integrated utilities. However, in most countries, vertically integrated utilities continue to remain better financial performers and are better able to meet customer needs.

The Electricity Act, 2003 completely eliminates Section 5 of Electricity (Supply) Act, 1948, thereby abolishing the existence of SEB's as statutory autonomous bodies, in other words the Electricity Act 2003 by totally eliminating the Section of Electricity Supply Act, 1948, clearly converts the SEB's into Companies under the Company Act 1956.

Section 172. (Transitional provisions) :
Notwithstanding anything to the contrary contained in this Act,-

(a) a State Electricity Board constituted under the repealed laws shall be deemed to be the State Transmission Utility and a licensee under the provisions of this Act for a period of one year from the appointed date or such earlier date as the State Government may notify, and shall perform the duties and functions of the State Transmission Utility and a licensee in accordance with the provisions of this Act and rules and regulations made there under :

Provided that the State Government may, by notification, authorize the State Electricity Board to continue to function as the State Transmission Utility or a licensee for such further period beyond the said period of one year as may be mutually decided by the Central Government and the State Government;

The act made it mandatory for all state electricity boards (SEBs) to unbundle into separate generation, transmission and distribution entities. As per Electricity Act electricity act-2003 state electricity board has to be unbundled and make it into three companies -

1. Generation
2. Distribution
3. Transmission

Power Purchase Agreement and its contents
When the State Electricity board agrees to purchase energy form an Independent Power Producer they enter into a Power purchase agreement. It lays down names of the parties their rights and liabilities, the tariff to be paid and many other things.

It contains the Name of the parties, their registered office and the Date on which the PPA is entered. A standard Power Purchase Agreement contains the following clauses which are referred to as Articles :

1. INTERPRETATION AND DEFINED TERMS
2. SALE AND PURCHASE OF ENERGY
3. TERM
4. CURRENCY, PAYMENTS AND BILLING
5. PRE-OPERATION OBLIGATIONS
6. INTERCONNECTION
7. METERING
8. OPERATIONS AND MAINTENANCE
9. MUTUAL WARRANTIES AND COVENANTS OF THE PARTIES
10. DEFAULTS AND TERMINATION
11. FORCE MAJEURE
12. INDEMNIFICATION AND LIABILITY
13. INSURANCE
14. RESOLUTION OF DISPUTES
15. NOTICES
16. MISCELLANEOUS PROVISIONS

Challenges faced by the Power Purchase Agreement
Power Purchase Agreement, has gained of importance in few years but still there are many direct and indirect challenges which affect its practicability and its present day relevance.

There are many landmark cases where there are issues relating to PPA, one of the most landmark cases in this regard is the Enron- MSEB case8. In June of 1992, Enron, the US energy giant engaged in negotiations with the government of India. Enron had identified the state of Maharashtra, to negotiate a major energy project. Negotiations were made with the state government and with the Maharashtra State Electricity Board (MSEB). Enron's mega project proposal was for the construction of a US$3 billion, 2015-megawatt power plant. Being the largest project ever undertaken in India, Enron proposed that the project be broken down into 2 phases. Initially, in phase 1 they proposed to produce 695 megawatts and would use locally produced natural gas. Phase 2 would produce 1,320 megawatts and for this they would use the natural gas imported from Qatar. Enron chose the town Dabhol, situated on the Indian Ocean as the project site.

The power project agreement entered into between the Maharashtra State Electricity Board and the Dabhol Power Company on 8th Nov. 1993. It was set up in two phases. Phase-I (740 mw) was initially based on naphtha but was eventually to switch to LNG. Phase-II (1,444 mw) was based on LNG from the outset. MSEB was required to purchase 90% of the power generated as per the terms of the "take-or-pay" power purchase agreement (PPA) signed with the DPC. The price was determined by a PPA detailed formula. The obligations of MSEB under the PPA for both phases were guaranteed by the Maharashtra government. The Centre counter-guaranteed the Maharashtra government's obligations for Phase-I.

Dabhol Phase-I became operational in 1999. Construction of Phase-II was nearing completion when a series of disputes arose between the MSEB and DPC. The plant was shut down in June 2001, after MSEB suspended purchase of power from DPC.

MSEB canceled the power purchase agreement with the Dabhol Power Company at the time when US$300 million had already been invested and Enron and its partners were facing a daily loss of US$250,000 each day the project was delayed.

As per the terms of the original agreement, Dabhol and its partners initiated arbitration proceeding against MSEB and the Maharashtra government. The government in turn launched legal action to invalidate the arbitration action alleging that illegal means had been employed to secure the contract. Maharashtra's government officials responsible for the investigation also stated firmly they had no wish to consider renegotiation. In the fall of 1995, Enron managed to persuade the government of Maharashtra to reopen negotiations which would take place in the fall. Subsequently, Chief Minister Joshi announced that a review panel would carry out a review of the project. The review panel not only began to discuss the restructuring with Enron executives, they also heard the major opponents to the deal. The major issues entailed the electricity tariff, the capital costs of the project, the payment plan and also the environment.

The original electricity the plant would produce was actually increased from the initial proposed outage of 2,015 megawatts to 2,410 after the completion of phase 2. Capital cost was reduced from US$2.85 billion to US$2.5 billion and the tariff was lowered from 7.03US cents to 6.03US cents subject to the cost of fuel and inflation.

MSEB rescinded the PPA on the grounds of material misrepresentation and default on the availability of power. MSEB had claimed rebates of over Rs 1,200 crore, as per the PPA provisions, for DPC's failure to provide power in the stipulated time period. These events, coupled with Enron's bankruptcy in November 2001, led to stoppage of work at the site. As a result, an investment of nearly Rs 11,000 crore has been idle for more than four years.

A writ petition was filed by the Center of Indian Trade Unions, a federation of registered trade unions, and, Shri Abhay Mehta, a resident of Mumbai and a citizen of India. This writ petition has been filed by way of public interest litigation.

Issues :
Original agreement challenged after modification and revision.

The delay was on the part of the petitioners in moving this Court to challenge the original PPA, etc. There is no dispute about the fact that they did not challenge it earlier. The petitioner did not bother to intervene when it was a subject-matter of challenge before this Court in the year 1994. They were least concerned with the PPA, guarantee and counter guarantee till the original PPA was scrapped and a modified PPA was entered into by the Shiv Sena - BJP Government. No explanation has been rendered for the same. The petitioners, therefore, contend that the State of Maharashtra and the Maharashtra State Electricity Board have acted most illegally and against public interest in entering into a modified PPA with the very same party without even clearing them of the grave charges of corruption, bribery, fraud and misrepresentation.

Scrap original Enron Power Project Agreement on the ground of corruption and discriminatory terms.

The statement of the State Government is the foundation of the challenge of the petitioners to the PPA and the modified PPA. The State Government had later back tracked. The Government has gone that far to say that the filing of the suit and the allegations made therein were not bona fide but intended to stall the arbitration proceedings and to open a counter for renegotiation. The petitioners also contended the guarantee and the counter-guarantee furnished by the State of Maharashtra and the Union of India respectively. According to the petitioners, the modified PPA has in no way improved the original PPA but in this process, much more has been conceded by the State of Maharashtra.

Grounds of challenge of PPA
The challenge to the power project agreement ("PPA") is on various grounds. One of the main grounds of challenge is that it was concluded without proper clearance under the Indian Electricity (Supply) Act, 1948, in particular, Section 29 read with Section 31 thereof. The petitioners contend that the requisite clearance was not granted by the Central Electricity Authority ("CEA") and if granted was not validly granted after full compliance with the requirements of the Act. It is also contended that even if concurrence or clearance was granted to the original PPA, there was no fresh clearance or concurrence obtained from the CEA under Section 31 of the Act to the amended or supple-mentary scheme. The petitioners also contend that the above PPA should be declared as void as the same was induced by corruption, bribery, fraud and misrepresentation.. The PPA has also been challenged on the ground of absence of competitive bidding and lack of transparency. The contention of the petitioners is that the such deals could not have been finalised without competitive bidding and (iii) the PPA having been scrapped on that ground, it was not open to them to enter into the modified PPA for a project of much bigger magnitude having far reaching ramifications without tenders, competitive bidding and transparency and that too on the face of charges of corruption, bribery, fraud and misrepresentation levelled by none else but the very same Government in the suit filed by them in this court and in their submissions before the arbitrators. The petitioners, therefore, contend that the State of Maharashtra and the Maharashtra State Electricity Board have acted most illegally and against public interest in entering into a modified PPA with the very same party without even clearing them of the grave charges of corruption, bribery, fraud and misrepresentation.

Held
It was held that there is a long delay on the part of the petitioners in moving this Court to challenge the original PPA, etc. There is no explanation whatsoever, not to speak of plausible explanation, for the same. The petitioners cannot claim that they were not aware of the PPA. There is no dispute about the fact that they did not challenge it earlier. They even did not bother to intervene when it was a subject-matter of challenge before this Court in the year 199. No explanation has been rendered for the same. Entertaining such challenge at such belated stage will cause great injustice to the contracting parties for no fault of their own. it was clearly noted that those who purport to work in the public interest and challenge Government action, not for personal gain but for the benefit of the people at large, must be vigilant and watchful and have due regard for the rights of innocent parties affected by their action. In that view of the matter the petitioners cannot be allowed at this stage to challenge the original PPA on the basis of the material that were available before its scrapping and revival. The writ petition, to that extent, was held as not maintainable on the ground of unexplained delay.

It was also held that the Government cannot deny the statements or the allegations made by it because they were made on verification in the suit filed in this Court and before the Arbitrators in London, it wants to retract the same on the ground that all those allegations were baseless and unfounded. The Government has gone that far to say that the filing of the suit and the allegations made therein were not bona fide but intended to stall the arbitration proceedings and to open a counter for renegotiation. The petitioners contended that much more has been conceded in favour of Enron or Dabhol than what was given to them by the original PPA.

There is no dispute about the fact that categorical allegations of corruption, bribery, fraud and misrepresentation were made by the State Government in the plaint in the suit filed in this Court. Equally uncontroverted is the position that the very same allegations were reiterated by the State Government before the Arbitrators in London and it was contended that the PPA was void on that count. The allegations are very serious, more so when levelled by the Government of the State, and if found correct, will have a serious effect on the PPA. The PPA in that event may have to be held to be in conflict with the public policy of India. Similarly, if a contract is obtained by a party by bribing the officials of the Government or its instrumentality, very many important issues in regard to the validity of such contract would arise. Otherwise also, even under Section 19 of the Indian Contract Act, an agreement caused by fraud and misrepresentation is voidable. But all those legal issues would arise only when there is material to justify the charge. In the instant case, the petitioners do not have with them any material as such to justify the charge of corruption, bribery, fraud and misrepresentation. The foundation of their challenge to the PPA and the modified PPA is the charge levelled by the State Government itself in the plaint in the suit filed in this Court which, according to the petitioners, amounts to admissions of the State Government under Section 17 of the Evidence Act.

In view of the foregoing discussions and for the reasons set out above, both these Writ Petitions were dismissed. However, though the petitioners have lost the litigation, they have succeeded in extracting from the State Government a clear statement to the effect that what they said against Enron and did in pursuance thereof was activated by political considerations. This case has highlighted to the people as to how, even after 50 years of independence, political considerations outweigh the public interest and the interest of the State and to what extent the Government can go to justify its actions not only before the public but even before the Courts of law.

Conclusion
During the past decade privately owned IPPs selling electricity to the power industry has become common place. Such arrangements require some version of a PPA. Although, a policy on private sector participation was announced in 1991, the pace of private investment has been slow as most Independent Power Producers (IPPs) were unable to achieve closure for their projects, despite progressing well on the other clearances.

Delays in finalization of Power Purchase Agreements (PPA) and high cost of electricity estimated for the projects were also some of the reasons failure of the power purchase agreement. THE Electricity Bill 2000, which was introduced in Parliament, came in the form of Electricity Act, 2003 which delicensed the power sector and was a major factor for the popularity of PPA.

Although PPA has gained of importance in few years but still there are many direct and indirect challenges which affect its practicability and its present day relevance.

The power purchase agreements vary a lot in different states and for different kinds of energy, some of the agreements are meticulously drafted to avoid any kind of ambiguity and scope for litigation, while some are not drafted well and there is lot of scope for litigation and ambiguity.

1. http://www.livemint.com/2009/03/04222335/5-years-on-plans-fail-to-add.html
2. http://www.eia.doe.gov/emeu/cabs/India/Electricity.html
3. http://www.kwrintl.com/library/2007/indianelectricity.htm
4. http://www.kpmg.com/SiteCollectionDocuments/India-electricity-outlook-2008.pdf
5. http://www.wwindea.org/home/images/stories/worldwindenergyreport2008_s.pdf
6. http://business.rediff.com/report/2009/jul/22/india-commits-rupees-180k-cr-to-nuclear-trade.htm
7. http://www.hinduonnet.com/businessline/2000/12/01/stories/14015629.htm
8. Center of Indian Trade Unions and another Vs. Union of India and others AIR1997Bom79.

Authors contact info - articles The  author can be reached at: pallavighorpade@legalserviceindia.com




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