CERC Upholds 'Change in Law' in Power Purchase Agreements, Orders Tariff Revision for Tata Power's Mundra UMPP Following APTEL Ruling

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CERC Orders Tariff Hike for Mundra UMPP, Implementing APTEL’s ‘Change in Law’ Judgment

New Delhi, March 12, 2025 – The Central Electricity Regulatory Commission (CERC) has issued a landmark order directing a tariff revision for Coastal Gujarat Power Limited’s (CGPL) Mundra Ultra Mega Power Project (UMPP), a subsidiary of Tata Power. This decision follows the Appellate Tribunal for Electricity’s (APTEL) judgment dated October 25, 2024, which partially overturned CERC’s previous stance on ‘Change in Law’ claims raised by CGPL. The CERC bench, comprising Chairperson Shri Jishnu Barua and Member Shri Harish Dudani , presided over the matter.

Background of the Case

The case originates from a petition filed by CGPL in 2016, seeking tariff increases to account for escalated capital costs due to ‘Change in Law’ events during the construction phase of the 4000 MW Mundra UMPP. These events, as defined under the Power Purchase Agreement (PPA) signed in 2007 with distribution companies (Discoms) from Gujarat, Maharashtra, Rajasthan, Punjab, and Haryana, pertain to alterations in law that occurred after the bid submission date, impacting project costs.

Initially, CERC, in its order dated August 31, 2017, had only partially allowed CGPL’s claims, rejecting key components like increased land acquisition costs for water intake and outfall channels, changes in excise duty on civil materials (steel and cement), and service tax increases, among others. Aggrieved, CGPL appealed to APTEL, as did some Discoms challenging the partially favorable aspects of the CERC order.

APTEL’s Intervention and Key Rulings

APTEL’s judgment of October 2024 provided significant relief to CGPL. Crucially, APTEL broadened the interpretation of “Land” under the ‘Change in Law’ clause (Article 13.1.1 of the PPA), ruling that it encompassed not just the originally identified 2750 acres but also additional land acquired for essential water infrastructure. APTEL directed CERC to reconsider:

• Land Acquisition Costs: APTEL modified CERC’s order, affirming CGPL’s entitlement to compensation for the actual expenditure on acquiring land for water outfall and intake channels, beyond the initially declared price. > "…the difference between indicative price of water pipeline corridor and the actual expenditure incurred by TPCL on it qualifies as Change in Law event and TPCL would be entitled to be compensated for the same." - APTEL Judgment

• Service Tax and MOEF&CC Conditions: APTEL overturned CERC’s rejection and sided with CGPL on claims related to increased service tax on works contracts and costs arising from additional conditions imposed by the Ministry of Environment, Forest and Climate Change (MOEF&CC). APTEL relied on its precedent judgment in a similar case (Coastal Gujarat Power Limited vs. CERC & Ors., Appeal No. 172 of 2017) .

However, APTEL upheld CERC’s denial of ‘Change in Law’ status for changes in excise duty on civil materials (steel and cement) and additional stamp duty.

CERC’s Implementation and Prudence Check

Following APTEL’s directives, CERC conducted a “prudence check” on CGPL’s claims, scrutinizing submitted documents and auditor certifications. CERC affirmed the following key costs as eligible for ‘Change in Law’ compensation:

• Water Outfall Channel Land: CERC allowed the full claimed cost of ₹80.52 crore for acquiring 268 Ha of land, validating expenses related to both land acquisition from the Collector and payments for voluntary renunciation of leasehold rights to salt pan lessees.
• Water Intake Channel Land: CERC approved compensation for annual fees paid to Mundra Port SEZ Limited /Adani Port and SEZ Limited (APSEZL) for using the water intake channel. Recognizing that compensation through capacity charges is applicable primarily during the construction period, CERC devised a methodology:
  • Annual fees paid during the construction period (2011-2013) will be factored into incremental capacity charges.
  • Fees already paid for the operational period (2013-2024), amounting to ₹76.50 crore, will be directly reimbursed with carrying costs.
  • Future annual payments will be reimbursed as supplementary invoices are raised, subject to PPA terms.
• Service Tax on Works Contract: CERC allowed ₹21.22 crore, representing the difference between actual service tax paid and the tax applicable at the time of bid.
• MOEF&CC Conditions: CERC approved ₹24.60 crore for one-time capital costs related to Corporate Environment Responsibilities (CER/CSR) activities mandated by MOEF&CC.

Financial Implications and Payment Directives

CERC quantified the total principal amount allowed towards capacity charges at ₹149.64 crore, subsequently restricted to ₹100 crore for tariff calculation as per the PPA's block of ₹50 crore mechanism for capital cost increases. This translates to a 0.534% increase in non-escalable capacity charges, effective from March 7, 2012.

The order mandates the Discoms to:

• Deposit ₹152.73 crore with CERC within two weeks, to be withdrawn by CGPL against a bank guarantee, subject to the outcome of pending Supreme Court appeals challenging APTEL’s related judgment.
• Directly pay CGPL ₹92.63 crore towards additional capacity charges within two months.
• Directly pay CGPL ₹76.50 crore for water intake channel costs (2013-2024) within two months.
• Reimburse future water intake channel payments through supplementary invoices.

Conclusion

This CERC order marks the implementation of APTEL’s significant interpretation of ‘Change in Law’ provisions in PPAs, particularly concerning land acquisition costs for essential project infrastructure and other unforeseen regulatory changes. It underscores the principle of restitution, ensuring power generators are economically protected against legal changes occurring post-bid, thereby fostering investment security in the energy sector. However, the final financial implications remain subject to the outcome of appeals pending before the Supreme Court.

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