Past Practice on Payment Appropriation Binds Power Utilities Under Section 79(1)(f) Electricity Act: CERC - 2026-06-06

Bridging the Gap: CERC Affirms Stability Over Unilateral Changes in Power Contracts

In a significant ruling concerning the appropriation of power purchase payments, the Central Electricity Regulatory Commission (CERC) has clarified that once a payment methodology is established through "past practice" between utilities and distribution companies, it cannot be unilaterally altered. The case involving Damodar Valley Corporation (DVC) and BSES Yamuna Power Limited (BYPL) reinforces the importance of contractual conduct over later-stage shifts in interpretation.

The Core Conflict: Principal vs. Surcharge

For over a decade, DVC supplied power to the Delhi-based discom, BYPL, under an assigned Power Purchase Agreement (PPA). The central dispute arose when DVC, citing Supreme Court jurisprudence, attempted to alter the appropriation of payments. DVC argued that payments made by the discom should be adjusted first against the Late Payment Surcharge (LPSC) and only subsequently against the principal dues . BYPL, however, maintained that the established "Original Methodology"—where payments are first applied to current energy bills and then to the principal amount—remained the governing framework.

The Legal Question: Can a Utility Flip the Switch?

The core of the dispute rested on whether DVC could rely on the Kerala State Electricity Board (KSEB) v. Kurien E. Kalathil judgment to unilaterally shift the priority of payment. BYPL contended that because the PPA was silent on appropriation and because both parties had signed a Joint Reconciliation Statement in 2017 affirming the "principal-first" methodology, the transition to an "LPSC-first" model constituted an unlawful novation of the contract under Section 62 of the Indian Contract Act.

Commission’s Verdict: Past Practice is Binding

The CERC sided with the respondent, emphasizing that the long-standing, mutually-accepted conduct between the parties created a binding arrangement. The Commission noted that even though the later Electricity (Late Payment Surcharge) Rules, 2021, mandated an "LPSC-first" approach, this did not justify retroactive unilateral changes.

As the Commission forcefully held: > "Any change in the Original Methodology, as evident from the said Joint Reconciliation Statement, would amount to novation of the contract as per Section 62 of the Contract Act, wherein mutual agreement of parties is sine qua non."

Key Observations

The Commission’s ruling provides a blueprint for utility disputes, highlighting three pivotal takeaways:

1. The Weight of Agreement: Once parties harmonize on a payment method—validated here by the 2017 Joint Reconciliation—that method becomes part of the contractual relationship.
2. Distinguishing Precedent: The Commission clarified that the Supreme Court's directives in the KSEB judgment pertained specifically to decretal amounts, which are irrelevant in the context of ongoing contractual commercial supply.
3. Statutory Transition: While the Commission acknowledged that statutory rules (LPS Rules) eventually standardized appropriation, these rules cannot be used to invalidate years of mutually agreed past practice prior to their enactment.

The Path Forward

The CERC has ordered both parties to reconcile their outstanding accounts based on the established methodology within one month. This decision serves as a stern reminder to energy players that in the absence of explicit contractual clauses, the consistent performance of a contract serves as the ultimate arbiter of intent. For generators and discoms, the ruling provides a measure of predictability, ensuring that foundational payment protocols cannot be disrupted without bilateral consent.