Power distributor loses bid to limit coal cost compensation to generators

The coal policy changed. The generators had to import coal at triple the price. The power distributor said: you bid a certain efficiency, stick to it. On a morning in the Supreme Court, the bench fell silent as MSEDCL’s lawyer argued that a generator’s bid-declared efficiency should cap its compensation. Across the table, a stack of coal invoices sat thick with the weight of millions spent on imported fuel. The answer would determine whether Adani Power Maharashtra Limited (APML) and GMR Warora could recover billions in extra coal costs — or whether Maharashtra's electricity consumers would bear the burden.

When the coal tap was turned off

In 2007, the Ministry of Coal rolled out the New Coal Distribution Policy (NCDP 2007), promising 100% coal supply to power generators through Coal India. That promise was the bedrock on which APML and GMR Warora built their coal-fired plants. They signed long-term Power Purchase Agreements (PPAs — contracts to supply electricity at fixed terms) with Maharashtra State Electricity Distribution Company Limited (MSEDCL), the state's power distributor. The bids were competitive, conducted under Section 63 of the Electricity Act, 2003 (a process where tariffs are determined through open bidding, not cost-plus regulation). The PPA margins bore a handwritten note: "Coal supply as per NCDP 2007 — 100% assured."

Then, in 2013, the government changed its mind. The NCDP 2013 slashed guaranteed coal supply to 65-75% of what generators needed. The shortfall had to be filled with expensive imported coal — at roughly three times the domestic price. The generators did what any contractor would do when the government changes the rules mid-game: they invoked the 'Change in Law' clause in their PPAs. The invoices for imported coal piled up on the table, each one a claim for compensation.

The fight over what 'compensation' really means

MSEDCL argued that the generators had bid a certain Station Heat Rate (SHR — a measure of how efficiently a plant converts coal into electricity, expressed in kilocalories per kilowatt-hour). If they had bid an efficient SHR, they should be held to it, the distributor said. The compensation for imported coal, MSEDCL insisted, should be calculated using that bid-declared efficiency, not the plant's actual performance or the regulatory norms.

The generators pushed back. A Change in Law clause, they said, exists to restore the affected party to the same economic position as if the law had never changed. If the government cuts coal supply, the generator should recover the actual cost of replacing that coal — not some theoretical cost based on a bid made years earlier when coal was cheap and plentiful.

The Maharashtra Electricity Regulatory Commission (MERC) and the Central Electricity Regulatory Commission (CERC) granted partial relief. The Appellate Tribunal for Electricity (APTEL) went further, expanding the compensation. MSEDCL appealed to the Supreme Court.

Three questions, one answer

The Supreme Court framed three core disputes. First: should the SHR for computing compensation be the one the generator declared in its bid, or the lower of actual performance and regulatory norms? Second: should the Gross Calorific Value (GCV — the heat content of coal, measured in kilocalories per kilogram) be calculated on an 'as received' basis (what actually arrived at the plant) or an 'as billed' basis (what the supplier invoiced)? Third: should coal shortfall compensation be capped at the NCDP 2013 percentages, or cover the actual shortfall from the 100% assured under NCDP 2007?

MSEDCL argued that the generators should have sued Coal India for failing to supply, not passed the cost to consumers. The court rejected that. "The restitution principle under Change in Law requires restoring the affected party to the same economic position as if the Change in Law had not occurred," the bench of Justice B.R. Gavai and Justice Vikram Nath held. Distributors cannot relegate generators to remedies against Coal India — that's a separate contractual relationship. The courtroom fell silent as the judgment was read, the weight of the principle settling over the room.

Why the bid-declared SHR lost

The court turned to its own precedent in Nabha Power Limited v. Punjab State Power Corporation Limited (2018). In that case, the Supreme Court had held that in competitive bidding under Section 63, the SHR for computing Change in Law compensation should be the lower of actual SHR or normative SHR as per applicable Tariff Regulations — not the bid-declared SHR. The reasoning was simple: the bid-declared SHR reflects the generator's commercial risk and efficiency commitment. But Change in Law compensation is not about rewarding or penalising efficiency. It is about restoring the generator to the position it would have been in had the law not changed. Using the bid-declared SHR would either under-compensate (if the generator is less efficient than its bid) or over-compensate (if it is more efficient). Neither outcome serves the restitution principle.

On GCV, the court held that 'as received' basis is correct. Coal quality varies. The 'as billed' value is what the supplier claims; the 'as received' value is what actually reaches the plant. Compensation must be based on reality, not invoices. The stack of coal invoices on the table — each one stamped 'as received' — became the measure of what was owed.

The 100% promise that mattered

Perhaps the most significant finding was on coal shortfall. MSEDCL argued that compensation should be restricted to the NCDP 2013 specified percentages — 65-75%. The court disagreed. Under NCDP 2007, 100% coal supply was assured. The Change in Law was the reduction to 65-75%. Compensation for shortfall cannot be artificially capped at the new, lower baseline. It must cover the actual shortfall from the original 100% assurance.

The court also noted that MSEDCL, as an instrumentality of the State, should not take positions contradictory to Union Government policy. The Ministry of Power's letter dated 31 July 2013 had explicitly recognised generators' entitlement to pass-through costs for imported coal under Change in Law. A state-owned distributor cannot, the court held, argue against what the central government itself had acknowledged.

Procedural journey: a long road to clarity

The dispute wound through multiple forums before reaching the Supreme Court. MERC first heard the matter in Case No. 189/2013 and 140/2014, partially allowing the generators' claims on 15 July 2014. APTEL remanded the case on 4 May 2017, asking MERC to reconsider certain parameters. MERC issued a post-remand order on 7 March 2018, again granting partial relief. APTEL then substantially allowed the generators' appeal in Civil Appeal No. 684/2021, expanding the compensation. Meanwhile, CERC handled GMR's separate petition (88/MP/2018), partially allowing it on 15 November 2018. APTEL dismissed MSEDCL's appeal against that order on 16 July 2021. The Supreme Court dismissed both of MSEDCL's appeals on 3 March 2023, upholding the concurrent findings.

Precedents that shaped the outcome

The court relied on several key precedents. In Energy Watchdog v. Central Electricity Regulatory Commission & Ors. (2017), the court had established the framework for Change in Law claims under Section 63. The Jaipur Vidyut Vitaran Nigam Ltd. v. Adani Power Rajasthan Limited (2020) case reinforced that compensation must be restitutionary. Nabha Power Limited v. Punjab State Power Corporation Limited (2018) provided the specific rule on SHR computation. The court also cited Wardha Power v. Reliance Infrastructure & Ors., an unchallenged APTEL judgment, and Central Warehousing Corporation v. Adani Ports Special Economic Zone Limited (APSEZL) & Ors. (2022) on the principle of restitution.

What this means for every power contract

For practitioners, the judgment clarifies three things. First, Change in Law compensation is restitutionary, not punitive or efficiency-linked. The court's own words capture it: "the restitution principle under Change in Law requires restoring the affected party to the same economic position as if the Change in Law had not occurred." Second, the baseline for measuring 'change' is the original policy promise, not the reduced one. Third, state instrumentalities cannot cherry-pick which government policies to follow.

THE PLAY: When drafting Change in Law clauses in long-term PPAs, specify that the baseline for measuring any policy change is the policy in force at the date of bid submission, and that compensation parameters (SHR, GCV) will be determined by actuals or regulatory norms, not bid-declared values — unless the contract expressly provides otherwise.

The coal policy changed. The generators imported coal at triple the price. The Supreme Court said: the contract meant what it said.