SC: Discoms Cannot Override Regulatory Tariff Mechanism with PPAs

In a significant judgment, the Supreme Court of India has ruled that power tariffs under the Electricity Act, 2003, must be determined by the appropriate State Electricity Regulatory Commission - not settled through private agreements between power distribution companies and developers.

This decision puts an end to a long-standing dispute between Gujarat Urja Vikas Nigam Limited (GUVNL) and several wind energy producers over tariff applicability in their Power Purchase Agreements (PPAs).

What was the dispute?

The dispute arose when four wind energy companies, who had earlier signed PPAs with GUVNL at a fixed tariff of INR 3.56 per unit, later approached the Gujarat Electricity Regulatory Commission (GERC) requesting project-specific tariff determination. Their plea was based on the fact that they had not availed the benefit of Accelerated Depreciation (AD) under the Income Tax Act, which is a key determinant in the applicable tariff structure.

GUVNL had insisted that all wind developers, including those who did not claim tax benefits under AD, should be paid a uniform tariff of INR 3.56 per unit, meant only for AD beneficiaries. Several developers objected, arguing that they were entitled to a higher tariff as per regulations.

GERC had earlier ruled in favour of the developers. This was upheld by the Appellate Tribunal for Electricity (APTEL). GUVNL, however, escalated the matter to the Supreme Court, claiming that once a PPA was signed, the tariff terms were binding.

Supreme Court’s Verdict

The SC bench firmly rejected GUVNL’s argument. They stated, “Electricity tariff is not a matter of free bargain in a commercial sense. It is governed by statute and determined by an expert regulatory body.”

The Court emphasised that state discoms cannot act like private traders, prioritising profits over public interest. It noted that GUVNL failed to obtain any written assurance from the developers that they would avail AD benefits. Therefore, it had no legal grounds to impose the lower tariff.

The ruling described GUVNL’s conduct as “patently unfair” and criticised its attempt to bind developers to a tariff not applicable to them. In strong words, the judges observed, “Such conduct, akin to a Shylock, does not reflect positively upon GUVNL.”

The Court also observed that merely because the companies signed the PPAs with a fixed tariff which was applicable only to those projects that availed accelerated depreciation, GUVNL cannot take advantage of its dominant position and its PPAs so as to bind them to the price mentioned therein for the entire life of their projects.

Conclusion

This ruling reinforces the authority of State Electricity Regulatory Commissions in determining power tariffs. It also protects renewable energy developers from being forced into unfair commercial terms and upholds the principle that statutory processes must prevail over individual contract clauses.

For the power sector, especially clean energy developers, this verdict sends a strong message - tariff setting is a regulated process, and distribution companies cannot bypass that regulation for commercial convenience.