Case: India Thermal Power Ltd Vs. State of M.P

In the year 1991-92, the Government of India declared a policy of liberalisation in the electricity sector and thereby widened the scope for private participation in generation, distribution and supply of electricity. Pursuant to that policy the State of Madhya Pradesh decided to invite private companies for setting up power plants at different places within the State so as to increase its power generating capacity by about 7000 MW. On 27.2.1992 Madhya Pradesh Electricity Board (MPEB) invited offers from potential private investors for pre qualification in establishment of four power projects. One of them was Thermal Power Project at Korba (West) in the district of Bilaspur. Indian Thermal Power Ltd. (hereinafter referred to as `ITPL) made an application for establishment of that power plant. After considering its application the Government of Madhya Pradesh made an offer by issuing a letter of intent to ITPL to establish, operate and maintain a power plant at Korba (West) as a generating company. Similar advertisements were issued for other projects also and letters of intent were issued to those who were found qualified. In all 21 MOUs were entered into between them and the State Government and MPEB. 13 Independent Power Producers (IPPs) entered into Power Purchase Agreements (PPAs) withthe MOU and PPA he generating company has to undertake the project and offer for sale all net electrical output from the project to MPEB and the MPEB is under an obligation to purchase thedischarge of its obligations under the MOUs and PPAs the Madhya Pradesh Government December, 1997 decided to recommend (1) Daewoo, (2) Pench, (3) Bina, (4) GBL, (5) STI and (6) Maheshwar to the Financial Institutions (Fis) for providing Escrow Protection to them and accordingly letters of comforts were sent to those six IPPS. Meanwhile, negotiations were going on between Madhya Pradesh Government, MPEB and the IPPs regarding the terms and conditions of the Escrow Agreement. The Government had proposed to give Escrow Protection equal to one months invoice. A meeting between Government Officer, MPEB and the Financial Institutions was also held on 5.9.1997 for discussing the issue of escrowable capacity available with MPEB and whether it was possible to reduce Escrow Cover to one months Invoice amount. In that meeting the Government suggested that in order to accommodate more number of IPPS the Escrow Cover may be reduced from 1.5 times to at least 1.2 times. The banks and Financial Institutions accepted the escrowable capacity of MPEB at about 2200 M.W. only and stated that Escrow Cover equal to 1.25 times could be accepted as reasonable. Even for this relaxation it insisted that MPEB shall have to take certain steps to improve its finances. The Financial Institutions also directed that MPEB should indicate to IPPS its ability/inability to provide Escrow Account facility to them so that there may not remain any misunderstanding in that behalf. After considering various aspects the Financial Institutions decided o consider financial assistance to those four projects which had already received techno-economic clearance by then. IPPs thus approved were Shree Maheshwar Hydel Power Corporation Ltd., Deewoo Power India Ltd., Bini Power Supply Co. Ltd and GBL Power Ltd. MPEB was requested to issue letters to all those IPPs to take steps to negotiate and achieve financial closure within next two or three months. Therefore, MPEB on 21.12.1997, wrote letters to the four approved IPPs about its decision to recommend them for grant of Escrow Protection and called upon them to finalise the negotiations within one month from the date of the letter and obtain financial closure and start commencement of the project work within three months of the execution of Escrow Agreement. They were told that in case of failure to perform any of the stipulations the Escrow Agreement will standreceived techno-economic clearance from the Central Electricity Authority on 12/15.9.1997. Pursuant to the decision taken in the meeting with the Financial Institutions. MPEB wrote to ITPL on 21.4.1998 that it was considering granting Escrow Protection to them equal to one months invoice amount and inquired whether ITPL was agreeable to that condition and also to the condition of executing the Escrow Agreement within one month and achieve financial closure within next three months. ITPL expressed its willingness. But IDBI, which was the main financial institution, did not agree to any reduction below 1.25 times the monthly billing and insisted that the Escrow Agreement should be executed before financial closure and COD. It also informed MPEB that as a part of the security package, FIs/banks would require IPPs to have first charge of its receivables. It further told MPEB that in absence of compliance with the above conditions it will be difficult for them to grant any financial closure to any of the IPPs. Thus the terms of the Escrow Agreement and the decision to whom Escrow Protection should be extended and to what extent could not be finalised because of lower assessment of the escrowable capacity of MPEB and unwillingness of the FIs to relax theirthe negotiations and decision in that behalf were going on the Central Government, in exercise of its power under Section 43A(2) of the Electricity Supply Act, 1984, issued a notification on 8.6.1998 amending its earlier tariff notification dated 30.3.1992. That was followed by a letter dated 12/15/6/1998 of the Minister of Power, Government of India to the Chief Minister of Madhya Pradesh Government pointing out the necessity to finalise the projects quickly and drawing attention to the amendment made in the tariff notification dated 8.6.1998. He requested the government to take an early decision by giving priority to those projects which offer the least tariff so as to ensure that in the 9th Five Year Plan they get the benefit of the capacity addition from those projects. The Minister of Power again wrote to the Government on 5.7.1998 and 11.7.1998 to quickly finalise the projects. The Madhya Pradesh Government therefore, decided to call all the IPPs on 14.7.1998 for discussion for altering terms of PPAs in view of the amendment in the tariff notification and the suggestion made by the Minister of Power. After the meeting MPEB took the decision to priorities the projects for providing Escrow Protection mainly on the basis of least tariff criteria and after considering an optimum mix of liquid fuel, hydel and coal based projects. By its letter dated 24.7.1998 it brought that decision to the notice of all the IPPs and called upon them to submit their offers containing better terms on the basis of the changed parameters mentioned in PartB of the proforma sent along with that letter. The IPPs were also called upon to furnish security deposit of an amount equal to of 2% of the approved projectprotested and maintained that the terms of its PPA remained unchanged that the tariff offer by it was the cheapest, that it cannot be asked to give security of 2% and that it should be given six months time from the date of approval of the Escrow by the financial Institutions for obtaining financial closure and completing other formalities. It then filed a writ petition in the Madhya Pradesh High Court challenging the communication dated 24.7.1998 and prayed for a Writ of Mandamus directing the respondents to grant Escrow facility to it. Similar petitions were then filed by six other IPPs. All the seven writ petitions were heard by a learned Single Judge. He was of the view that the goverment and MPEB had not properly applied their mind before taking the impugned decision. He directed them to take a fresh decision objectively andsome of the IPPs the State and MPEB were not satisfied with the said order they filed Letters Patent Appeals before the Division Bench of that Court. The contentions raised before the Division Bench were that the PPAs are statutory contracts and the condition regarding Escrow Cover is a statutory condition and, therefore, it is not open to the State Government to go back upon it. It was also contended that the principles of promissory estoppel and legitimate expectation would apply to the facts of these cases and, therefore, it was not open to MPEB to invite fresh bids and determine giving of priority for Escrow Protection on the basis of the new least tariff criteria. contentions regarding priority of adopting least tariff criteria and who can be said to be lowest according to that criteria were alsoDivision Bench held that the PPAs are statutory contracts as they have been entered into under Section 43 and 43A. It, however, upheld the contention raised by the State and MPEB that the decision to invite fresh bids on the basis of least tariff was taken in larger public interest and the least tarrif criteria is a good criteria. It also held that once the IPPs participated in the negotiations and gave their fresh bids they can be said to have abandoned their right to seek enforcement of the PPAs and to challenge the letter dated 24.7.1998. It also held that as the ITPL had not challenged the earlier decision of issuing Letters of Comfort to six IPPs. It was not now entitled to any relief. Taking this view the Division Bench allowed the appeals and dismissed the writ petitions filed by the IPPs.

Reasoning: If entering into a contract containing prescribed terms and conditions is a must under the statute then that contract becomes a statutoryt incorporates certains statutory only tomay not beand PPAs are concluded contractsis one thingred a legal right andincurred an enforceable obligationis a different thing.MOUs and PPAsts and obligations. These provisions in theMOUs and PPAsclearly disclose that the obligation to open and maintain an Escrow Account is to be discharged by MPEB after the First Unit Commercial Operations Date. They do not impose an obligation on MPEB to execute an Escrow Agreement at an earlier date. The Escrow Agreement is to be in such form and substance as is acceptable to the parties. The Escrow Account is also to be established and maintained in the manner and to the extent agreed by the parties. The only obligation of MPEB which had come into existence on execution of theMOUs and PPAse with and assist the appellants in the matter of execution of an Escrow Agreement and opening of an Escrow Account. Execution of the Escrow Agreement and opening of a Escrow Account are thus contingent upon an agreement between the parties regarding the terms and conditions of those agreements and accounts. The terms and conditions of the Escrow Agreement could not be finalised in view of the disagreement of the FIs with the terms and conditions suggested by the MPEB and some of the appellants and their insistence upon certain other conditions. Even though MPEB and most of the appellants were willing for an Escrow Coverage to the extent of one billing months amount, the FIs insisted that it should be for one and a half months billing amount. Even though MPEB was willing to provide Escrow Coverage to as many IPPs as possible on the basis of its assessment that its Escrowable capacity is more the FIs did not agree with that assessment and showed their willingness to assist the IPPs on the basis of MPEBs Escrowable capacity at 2200 MW only. Thus it was because of the FIs reluctance to agree with MPEB and the IPPs that the terms and conditions of the Escrow Account, could not be finalised and Escrow Agreements could not be executed. It was not because of any lack of effort on the part of MPEB. In any case it cannot be said that any regal right in favour of IPPs to have an Escrow Agreement at that stage had come into existence. Therefore, the question of MPEB going back upon he terms and conditions of the concluded contract does not arise at all. Mr. Nariman, learned senior counsel appearing for SPPL also submitted that till 24.7.1998 no legally enforceable right to have an Escrow Agreement had come into existence. Mr. Shanti Bhushan, learned Senior Counsel appearing for Jindal has also not disputed this position.14. The IPPs were insisting upon Escrow Coverage/Protection and issuance of Letters of Comfort in their favour so as to enable them to persuade the FIs to lend them enough money and obtain financial closure. for executing the projects it is their duty to being enough finance. No doubt when such large projects are undertaken it is expected that the party undertaking the project will require monetary help from FIs. They are financed partly by equity and partly by debt. Consistently with this position MPEB had agreed to cooperate with and assist IPPS in obtaining financial assistance from the FIs by making a provision for different types of securities for payment of its dues to the IPPs. Though the Escrow Account will have to be opened at a later stage the appellants were insisting for Letters of Comfort and Escrow Agreements even before even obtaining financial closure. There was no reluctance or refusal on the part of MPEB to provide Escrow Coverage to all or as many as possible. But it was not possible for it to issue Letters of Comfort and provide Escrow coverage and enter into Escrow Agreements with all of them as the appellants desired and the FIs required better Escrow Coverage than the one which the MPEB was willing to provide. The situation which has arisen was beyond the control of MPEB. The IPPs including the appellants also could not obtain financial closure because of their inability to persuade the FIs to lend them enough money. This was the position in the month of July, 1998.15. The Minister of Power, Government of India had drawn the attention of the State Government to the delay in finalising the projects and the need to take a final decision in the matter as early as possible and to the recent amendments to the notifications issued under Section 43A of the Electricity Supply Act. Though the said amendment is prospective it cannot be said that it was totally irrelevant and could not have been taken into consideration by MPEB to seek revision of PPAs by inviting better terms from those IPPs who had agreed to undertake the projects. But the situation in which all were placed was such that it was not possible for the MPEB, the IPPs and the FIs to enter into further agreements regarding Escrowable coverage and financial closures. We are, therefore, of the opinion that the decision of the MPEB to invite offers for better terms in its favour on different parameters so as to enable it to prioritie the projects for providing Escrow Protection based on least tariff criteria and to decide about the optimum mix of liquid fuel, hydel and coal based projects cannot be said to be unreasonable orwas under these circumstances that a fresh policy decision was taken and, therefore, no purpose would have been served by retaining the selection earlier made for recommending Escrow Protection and going for negotiations for reduction of tariffs, No other IPP except those who had been given letters of Comfort would have possibly participated in such negotiations. Therefore, it is not possible to agree with contention that the priority fixed earlier should have been maintained by MPEB.18. some of the learned counsel challenged the least tariff criteria as `hoax because it is not rational, as an `excuse because it was adopted to favour some and rule out others and as `unrealistic as it is based upon certain assumptions which are not valid. It is difficult to appreciate how the least tariff criteria can be said to be hoax when it is based upon and consistent with the notification issued under Section 43A(2). To give priority to that project which will supply electricity to MPEB at a cheaper rate far from being regarded as an hoax or as an excuse must be regarded as a rational criteria because it will be more beneficial to MPEB and the general public who are the ultimate consumers of the electricity. The situation in which MPEB was placed at the relevant time justified adopting that criteria and the Court cannot in such matters substitute its opinion and say that it would have been better if a different criteria had been adopted. After the event it may be possible to visualise that it would have been better if a different course was adopted or decision was taken. But that cannot render the decision already taken arbitrary or invalid so long as it is taken bonafide and is based upon consideration of relevant aspects. Prioritisation could have been done on the basis of the dates on which TEC was sanctioned or it could have been on the basis of the date of sanction given by the Financial Institutions. If, however, considering all the relevant aspects MPEB though it proper to prioritise the projects on the basis of least tariff criteria it cannot be said that thereby it acted in an arbitrary or unreasonable manner. It is also not possible to accept the contention that the said criteria was adopted with a view to favour some and rule out others as no material is available on record to justify such an inference. It was submitted that least tariff criteria adopted by MPEB for deciding prioritisation is unrealistic. Our attention was drawn to certain assumptions on the basis of which the project cost was to be estimated and least tariff was to be determined. Our attention was also invited to the report of the Espert Committee which was constituted for tariff evaluation for the improved offers submitted byCabinet Sub Committee in spite of the objections raised by Bhilai and Bina had evaluated the offers on the basis of said wrong assumptions. It was submitted that the decision taken by the Cabinet Sub committee based on unrealistic assumptions should be regarded as bad. We do not think that it would be proper for this Court to examine in details the various assumptions as they are technical matters and moreover, theclearance was given by the CEA on the basis of such assumptions. Certain assumptions had to be made while determining the project cost and inviting offers on the basis thereof. Once we find that there was some valid basis for making these assumptions and that they are not fanciful or arbitrary it would not be proper to invalidate the decision taken on the basis of such assumptions. They were made applicable equally to all. It was, however, submitted by Mr. Singvi that the Foreign Exchange Variation percentage fixed at 2.553 was very low and that has benefited some of the IPPs with large foreign exchange equity participation. As indicated in the minutes of the Cabinet Sub Committee meeting the rate of foreign exchange variation was adopted on the basis of the advise of the Ministry of Finance. Having considered all the relevant facts and circumstances it is not possible for us to agree with the contention that the least tariff criteria was not a good criteria was it was unrealistic and arbitrary.19. As regards the application of the least tariff criteria for evaluating the various revised bids for deciding prioritization also there were some objections raised on behalf the appellants. Having gone through the minutes of the meeting of the Cabinet Sub Committee and the relevant facts and circumstances and on taking an overall view we find that the decision to recommend Maheshwar, Daewoo and Bine in respect of Maheshwar Hydel Project (82 MW), Korba (East) Thermal Power Project (1070 MW) and Bina Thermal Power Project (578 MW) cannot be faulted. The decision in favour of these projects appears to have been taken bona fide and in overall public interest. The decision, therefore, did not call for any interference by the Court and the High Court was right in upholding that decision.20. However, as regards Pench Thermal Power Project we find that it is not aproject and it did not have any appropriate coal linkage. The coal linkage which was suggested by the State Government was neither approved by the coal companies nor by the Railways. Its project cost was also not properly evaluated and the cost of supplying water from the dam was not taken into consideration on the ground that the whole cost of the dam is to be borne by MPEB. We need not go into the further details regarding the merits and demerits of the Pench Project, as in view of the remaining available Escrowable capacity we are directing MPEB to reconsider its decision as to which remaining coal based project should be given priority in recommending it for Escrowdisclosed by the decision of the Cabinet Sub Committee and also by the order of the High Court produced before this Court no decision to recommend any liquid fuel project on priority basis for Escrow Coverage could be taken because of a stay order issued by the Madhya Pradesh High Court. No doubt it was an interim order and after the same was vacated the State Government could have soon thereafter taken a decision. However, not taking a decision then cannot be regarded as sufficient to vitiate the decision taken with respect to the hydel and thermal power projects. To us it appears that the compulsions of the situation have prevented the MPEB for not extending priority for Escrow coverage to any liquid fuel project. The decision to give priority to the two coal based and one hydel power projects was nor taken with a view to favour them. Nor does it imply giving up an optimum mix policy.