Contractual Obligation to Supply Free Power Prevails Over CERC Tariff Regulations: Supreme Court - 2025-07-17

Contractual Pacts on Free Power Supply Not Nullified by Tariff Regulations, Rules Supreme Court

NEW DELHI — In a significant ruling clarifying the interplay between contractual obligations and statutory regulations in the power sector, the Supreme Court has held that a generating company's contractual commitment to supply free power to a state is not limited by the caps set in the Central Electricity Regulatory Commission's (CERC) tariff regulations.

The bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar set aside a Himachal Pradesh High Court order, ruling that the CERC regulations are intended for tariff determination and do not prohibit a company from fulfilling a higher, contractually agreed-upon quantum of free power. The Court also held that the High Court erred in entertaining a writ petition to modify a commercial contract.

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Background of the Dispute

The case, The State of Himachal Pradesh vs JSW Hydro Energy Limited , centered on an Implementation Agreement between the state and JSW's predecessor. Under this agreement, the company was obligated to supply 18% of the net power generated from its Karcham Wangtoo Hydroelectric Project to Himachal Pradesh free of cost for a specified period. This "free power" was part of the consideration for the state granting rights to use its natural resources (river water) for the project.

However, the CERC (Terms and Conditions of Tariff) Regulations, 2019, specifically Note 3 under Regulation 55, stipulate that for tariff calculation purposes, the Free Energy for Home State (FEHS) "shall be taken as 13% or actual whichever is less."

Relying on this, JSW Hydro Energy Limited approached the Himachal Pradesh High Court, arguing that the regulation overrides their contractual obligation. The High Court agreed, directing that the Implementation Agreement be aligned with the 13% cap. The State of Himachal Pradesh subsequently appealed this decision to the Supreme Court.

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Key Arguments

State of Himachal Pradesh (Appellant): The state, represented by senior advocates Kapil Sibal and Parag Tripathi , argued that the 13% cap in the CERC regulations is solely for tariff calculation. Its effect is to limit the "pass-through" of the cost of free power to consumers in other states, not to prohibit the generating company from supplying a higher contractually agreed amount. They contended that the Implementation Agreement was a contract for natural resources, not a tariff agreement, and thus fell outside the CERC's direct regulatory ambit.

JSW Hydro Energy Limited (Respondent): The company, represented by senior advocates P. Chidambaram and Dr. A.M. Singhvi , asserted that the CERC regulations, being subordinate legislation, have the force of law and override any inconsistent contractual terms, as established in the landmark PTC India case. They argued that forcing them to supply 18% free power while their tariff is calculated based on a 13% cap would negatively impact their statutory Return on Equity (RoE) and commercial viability.

Central Electricity Regulatory Commission (CERC): Supporting the state's position, the CERC clarified that its regulations are confined to tariff fixation. The 13% cap determines how much cost can be passed on to distribution companies and consumers. Any supply beyond this is a commercial matter between the generating company and the state, to be met from the company's own resources.

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Supreme Court's Analysis and Ruling

The Supreme Court conducted a detailed analysis of the Electricity Act, 2003, the role of the CERC as an expert regulator, and the specific regulations in question.

1. Interpretation of CERC Regulations: The Court held that the purpose of the 13% cap in the CERC regulations is purely for tariff determination. It does not act as a legal prohibition on supplying a higher quantum of free power.

In a pivotal observation, the Court stated:

"Neither the language of Note 3 nor the context in which it appears in the CERC Regulations, 2019 supports respondent no. 1’s contention that the legal effect of this cap is to override its contractual obligations with the appellant-State. On the other hand, use of the term 'shall be taken as 13% or actual, whichever is less' shows that the Regulations cover a situation where the obligation to supply free power is higher than 13%..."

The bench concluded that the regulation simply limits the extent to which the cost of free power can be socialized through the tariff mechanism.

2. Sanctity of Contract: The judgment emphasized that generating companies cannot use regulations to "wriggle out of its contractual obligations," especially when the regulation itself does not intend such an outcome. The free power supply was deemed a form of "royalty" or consideration for the use of public resources, a commitment JSW's predecessors had knowingly entered into.

3. Maintainability of the Writ Petition: The Court strongly disapproved of the High Court entertaining a writ petition on this matter. It held that the interpretation of tariff regulations falls within the "exclusive domain of the CERC," an expert and specialized body.

"Constitutional courts must enable the regulator to comprehensively regulate all aspects of the sector such that remedies are not fragmented and certain issues are not left outside the regulator’s domain... In view of the existence of a statutory regulatory forum, the High Court should not have entertained the writ petition by interpreting the CERC Regulations, 2019."

The Court noted JSW's contradictory stance of claiming the state was a regulated entity (and thus subject to CERC's jurisdiction) while simultaneously bypassing the CERC and approaching the High Court for relief.

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Conclusion and Implications

Allowing the appeal by the State of Himachal Pradesh , the Supreme Court set aside the High Court's judgment. It concluded that the CERC regulations do not prohibit JSW from supplying 18% free power as per its contractual undertaking, and the writ petition to align the contract with the regulations was not maintainable.

This judgment reinforces the principle that while statutory regulations can override contracts between regulated entities, this happens only where the regulation's scope and intent directly conflict with the contract. It distinguishes between the CERC's role in setting tariffs and the freedom of parties to enter into commercial agreements, thereby upholding the sanctity of contracts voluntarily executed by commercial entities.