A power deal was approved by the Karnataka government. Then a new law changed everything.

The government said: 'Buy power at Rs.2.60 per unit.' The company built a plant. Then a new law created a regulator — who cut the price by half.

In 1999, a thermal power plant in Karnataka was humming with possibility. A private company had built it, originally to feed a steel plant. But when the steel plant's demand dropped, the company had surplus electricity — and a problem. It needed a buyer. The Karnataka Electricity Board (KEB), the state's power utility, needed supply. Negotiations began. The Government of Karnataka stepped in, approving a purchase price of Rs.2.60 per unit with a 5% annual escalation for five years. The company built its plant. Then, on June 1, 1999, a new law came into force — the Karnataka Electricity Reforms Act — creating an independent regulatory commission with the power to set tariffs. The commission looked at the deal and slashed the price. The company cried foul. The question that reached the Supreme Court: was there a concluded contract before the new law took effect, or was the deal still open?

When the government said yes

The power company — JSW Energy Ltd (then known as JTPCL) — had set up a thermal plant in Karnataka. The original plan was to supply power to a steel plant owned by the same group. But when the steel plant's requirement fell, the company offered to sell the surplus electricity to KEB. Between 1998 and early 1999, the two sides negotiated over the tariff rate, the quantum of power to be sold, and the tenure of the agreement. A handwritten note on the Government Order, scrawled in the margins, recorded the state's approval.

On May 12, 1999, the Government of Karnataka issued a Government Order (GO) approving the purchase of power at Rs.2.60 per unit, with a 5% annual escalation for five years. The company saw this as a green light. It proceeded to invest further in the plant, confident that the deal was locked in. But the GO was not a signed power purchase agreement (PPA). It was an approval from the state government — a signal, not a signature.

The regulator arrives

On June 1, 1999, the Karnataka Electricity Reforms Act came into effect. The Act created the Karnataka Electricity Regulatory Commission — an independent body with the power to determine tariffs for the purchase and sale of electricity. The Act also contained a crucial proviso (a condition that limits the application of a rule) to Section 27(2): if a "concluded contract" existed before the Act came into force, the commission could not reopen the tariff. If no concluded contract existed, the commission had full jurisdiction to fix a new tariff.

The commission examined the matter. On May 22, 2002, it issued its first order, finding that no concluded contract existed between the company and KEB. The negotiations had not resulted in a binding agreement on all essential terms. The commission then fixed a lower tariff — significantly lower than Rs.2.60 per unit. On July 8, 2002, it issued a second order approving a modified power purchase agreement with the reduced tariff. The commission's order sheet, crisp and formal, recorded its findings in precise, unyielding language.

The company appealed to the Karnataka High Court.

The High Court's reversal

The High Court, hearing the appeal under Section 41 of the Karnataka Electricity Reforms Act (which allows appeals on questions of law), took a different view. On April 8, 2004, it held that the Government Order dated May 12, 1999 constituted a concluded contract on the essential terms of tariff, quantum, and tenure. The High Court set aside the commission's orders and restored the original tariff of Rs.2.60 per unit. The state transmission company (KPTCL, which had succeeded KEB) and the commission appealed to the Supreme Court.

What makes a contract 'concluded'?

The Supreme Court bench — Justices K.M. Joseph, Aniruddha Bose, and Hrishikesh Roy — had to answer one question: was there a concluded contract before June 1, 1999? The answer would determine whether the commission had the power to fix the tariff or whether the earlier deal was protected. The bench's silence as arguments closed was heavy with anticipation.

The company argued that the Government Order, combined with the ongoing negotiations and the company's investment decisions, showed that a contract had been concluded. The state and the commission argued that a power purchase agreement is a complex contract involving many essential terms beyond just the rate, quantum, and tenure — including payment security, force majeure (events beyond anyone's control that excuse performance), termination rights, and dispute resolution. None of these had been agreed upon.

The court examined the law of contract under the Indian Contract Act, 1872. For a contract to be concluded, the court held, the parties must be ad idem (in complete agreement) on all essential terms. A proposal must be made, accepted, and the acceptance must be communicated to the proposer. The proviso to Section 27(2) used the phrase "contracts concluded" — not "contracts concluded as regards tariffs." The court reasoned that a power purchase agreement cannot be reduced to just the rate, term, and quantum. Parties must be in agreement on all interconnected essential terms. As the court put it, "the proviso speaks of 'contracts concluded' — not 'contracts concluded as regards tariffs.'"

Why the commission's view prevailed

The Supreme Court held that the Regulatory Commission is an expert body. Its findings on technical and factual matters must receive due deference from appellate courts. A court can interfere with the commission's findings only if they are perverse — that is, wholly without basis, or contrary to a clear statutory direction.

The court found that the commission's conclusion — that no concluded contract existed — was not perverse. The negotiations had not resulted in a binding agreement on all essential terms. The Government Order was an approval, not a contract. The company had not shown that all the terms of a standard power purchase agreement had been agreed upon.

The court also clarified the scope of an appeal under Section 41 of the Karnataka Electricity Reforms Act. The section allows an appeal on a "question of law" — not a "substantial question of law" (a higher threshold used in some other statutes). But even so, the appellate body is constrained to questions of law. It cannot re-appreciate the entire factual record and substitute its own view for that of the expert commission.

The court noted that it is not essential for a contract to be in writing unless a statute specifically requires it. However, the absence of a written document does not create a contract where the parties were not in complete agreement on essential terms.

What this means for power deals

For companies negotiating power purchase agreements with state utilities, this judgment is a clear warning: a government approval is not a contract. Until a comprehensive agreement is signed — covering all essential terms — the deal remains open. A change in the regulatory framework can undo everything.

For regulators, the judgment affirms their expert status. Their findings on whether a contract exists will not be lightly overturned by courts — unless the finding is completely baseless.

THE PLAY: Before investing in a power project based on a government approval, ensure a fully executed power purchase agreement covering all essential terms is in place — or accept that a future regulator may rewrite the tariff.

The Supreme Court sent the case back to the High Court for a fresh determination, guided by the principles it had laid down. The company's plant still runs. But the price of its power — and the lesson for every power company in India — was rewritten by a bench in New Delhi, twenty-three years after the government first said yes.