Last week’s ruling from the Appellate Tribunal for Electricity (APTEL) –– that a change in Indonesian laws in 2011 that made Tata Power’s and Adani Power’s Mundra Power plants unviable qualifies for invocation of the force majeure clause –– has come as a shot in the arm for the companies.

With its ruling, APTEL has essentially laid down that the losses incurred by the companies due to the change in Indonesian laws on coal export prices were outside their control, and that the companies must therefore be compensated.

The force majeure clause in contracts is intended to protect the interests of a party in the event of failure to fulfil the terms of a contract due to unavoidable circumstances (natural or man-made).

Secondly, the relief, to be worked out by the Central Electricity Regulatory Commission (CERC), is expected to be more durable since it derives legitimacy from being an event of force majeure , relief for which has been provided under the Power Purchase Agreements (PPAs) between the power companies and the distribution utilities (discoms).

Section 12.7 of the PPA signed between Coastal Gujarat Power (Tata Power’s subsidiary, which operates the 4,000 MW Mundra plant) and the discoms states, “Every party shall be entitled to claim relief in relation to a Force Majeure Event in regard to its obligations…”. APTEL has also set a three-month time limit for the matter to be decided.

The background The cost calculations of Tata Power and Adani Power were upset due to the change in Indonesian regulations in 2011, which increased the cost of coal exports from that country. While the decline in international coal prices in recent times has brought some relief, the Mundra plants are still incurring losses. The plants account for a chunk of the companies’ generation capacities and the losses have hurt the their consolidated financials.

Following the change in Indonesian regulations, the power companies approached the CERC in 2012 for relief. In an order in 2013 and 2014, the CERC awarded compensation (a lumpsum amount for past losses and higher tariffs from April 2013) to help the companies cope with their losses. While the CERC had disapproved of renegotiation of tariffs as the projects had been competitively bid for, it nonetheless allowed the companies to levy higher tariffs. It had held the increase in Indonesian coal prices due to a benchmarking to international prices to be a normal market forces-driven event and not a force majeure event.

By asking the CERC to now decide on compensation under the force majeure provisions of the PPAs, APTEL has accepted that the loss incurred was on account of an event that was not under the companies’ control, and that they therefore merited compensation. “While the APTEL order strengthens the generators’ claim for relief for the unforeseen and undeserved adverse impact of Indonesian regulation and domestic coal shortages on the PPAs, it is too early to speculate on the quantum of compensation,” says Amit Kapur, counsel for Tata Power, Adani and GMR in the case. But although the quantum of the compensation that will be provided by the CERC this time is unknown, given that the change in Indonesian laws has been held to be a force majeure event, the compensation is expected to be long-term and more comprehensive. The earlier CERC compensation formula had required the companies to take a cut on their return on equity to bear a part of the burden.

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