Free Power Beyond 13% Is Not Illegal If Contractually Agreed | Supreme Court Says CERC Cap Applies Only To Tariff Calculation, Not State Royalties
Kiran Raj
The Supreme Court of India Division Bench of Justice Pamidighantam Sri Narasimha and Justice Joymalya Bagchi allowed the appeal filed by the State and set aside the judgment of the High Court. The Court held that the Central Electricity Regulatory Commission (CERC) Regulations, 2019 do not bar a generating company from supplying free power in excess of 13% to the State Government. The Court further stated that the Implementation Agreement between the parties does not stand overridden by the said Regulations. Consequently, the writ petition filed before the High Court seeking to align the Implementation Agreement with the CERC Regulations, 2019 was held to be not maintainable. The High Court’s direction to modify the contractual obligations based on the CERC order and Regulations was also quashed.
Respondent No. 1, a generating company, commissioned a 1045 MW hydroelectric power project in Himachal Pradesh. The project was established pursuant to a Memorandum of Understanding dated 28.08.1993, followed by an Implementation Agreement, which stipulated the supply of 12% of net generation as free power to the State for the first 12 years and 18% thereafter for the remaining 28 years of the 40-year term.
The Implementation Agreement was supported by a series of supplementary agreements, including the Fourth Supplementary Implementation Agreement dated 08.07.2021, which increased the project’s capacity to 1045 MW. Under Article 5.1(a) of the Agreement, the obligation to supply 18% free power was clearly recorded. The Respondent later contended that the CERC (Terms and Conditions of Tariff) Regulations, 2019 capped the free power to the home state at 13% and hence the Implementation Agreement required alignment to remain consistent with the Regulations.
CERC Regulation 55 Note 3 stipulates: “FEHS = Free energy for home State, in percent and shall be taken as 13% or actual whichever is less.” Regulation 44(1) and (4)-(5) also elaborate on how this figure impacts computation of saleable capacity and energy charges payable by beneficiaries.
The CERC, in its order dated 17.03.2022, while considering the Respondent’s tariff petition for the period 2019-2024, held that provisions in the Power Purchase Agreement (PPA) and Power Sale Agreements (PSAs) inconsistent with the Regulations stood overridden. The CERC did not consider the Implementation Agreement, but clarified that the Regulation only affected the tariff recoverable and not the quantum of free power supply agreed under contract.
Despite the CERC’s rejection of the plea to relax the cap and the absence of an appeal against the same before the Appellate Tribunal for Electricity (APTEL), the Respondent filed a writ petition before the High Court. It sought modification of the Implementation Agreement to restrict the free power obligation to 13%, claiming that contractual provisions must be realigned to conform with the CERC Regulations.
The High Court allowed the writ petition and directed the State to align the Implementation Agreement with the CERC Regulations. It held that the statutory framework overrode the contractual obligations and found the petition maintainable despite the arbitration clause in the Agreement.
The State filed a civil appeal before the Supreme Court, challenging the maintainability of the writ petition and contesting the High Court’s interpretation that the CERC Regulations capped the free power supply.
The Court recorded that "Note 3 of Regulation 55 is relevant for the calculation of saleable power, which is in turn relevant for the generating company to raise bills and for payments by beneficiaries." It was observed that "the purpose and intendment of Note 3 of Regulation 55 is for the State Commission to determine tariff by assuming that FEHS is 13%, whenever it is higher in actuality." It further clarified that "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."
The Court elaborated that "once the Regulation does not prohibit the supply of free power beyond 13%, respondent no. 1 cannot rely on it to wriggle out of its contractual obligations." It stated that such interpretation was necessary to "recognise and enforce the generating company’s freedom of contract."
Regarding the CERC’s tariff order dated 17.03.2022, the Court noted that the CERC only held that the PPA and PSAs were overridden and that "the CERC was made aware of the contractual obligation of respondent no. 1 under the Implementation Agreement, but it did not hold the same as being overridden." The order was thus "in line with the interpretation of the cap... it does not prohibit or restrain respondent no. 1 from entering into or performing a contract for supplying a higher quantum of free power."
On maintainability, the Court stated that "the High Court should not have entered into the domain of interpreting these Regulations which deal with tariff determination, as the same falls within the exclusive domain of the CERC." It further observed that "when a constitutional court is interpreting statutes, rules, or regulations that fall within the regulator’s domain, it must bear in mind the need to enable the regulator to exercise comprehensive jurisdiction."
The Bench also noted the Respondent’s contradictory positions, recording that "it is claiming that the appellant being a deemed licensee is a regulated entity... however, respondent no. 1 never sought relief against the appellant-State before the CERC and instead filed a writ petition."
In conclusion, the Bench held that "the CERC Regulations, 2019 do not prohibit respondent no. 1 from supplying free power beyond 13% to the appellant-State, and the Implementation Agreement does not stand overridden by the operation of these Regulations."
The Supreme Court concluded that "CERC Regulations, 2019 do not prohibit respondent no. 1 from supplying free power beyond 13% to the appellant-State" and "the Implementation Agreement does not stand overridden by the operation of these Regulations."
It held that "a writ petition before the High Court for aligning the Implementation Agreement with the CERC Regulations, 2019 and the CERC’s order dated 17.03.2022 is not maintainable."
The Court allowed Civil Appeal No. 12883/2024 and explicitly directed that "the order and judgment of the High Court in CWP 7667/2023 dated 28.05.2024" is set aside.
Pending applications, if any, stood disposed of and no order as to costs was made.
Advocates Representing the Parties:
For Appellant(s): Mr. Vaibhav Srivastava, A.A.G., Ms. Sugandha Anand, AOR.
For Respondent(s): Mr. P. Chidambaram, Sr. Adv., Dr. A.M. Singhvi, Sr. Adv., Mr. Mahesh Agarawal, Adv., Mr. Aman Anand, Adv., Mr. Shashwat Singh, Adv., Ms. Madhavi Agarwal, Adv., Mr. Chirag Nayak, Adv., Ms. Natasha Debroy, Adv., Mr. Shidharth Seem, Adv., Mr. E. C. Agrawala, AOR, Mr. Anand K Ganesan, Adv., Mr. Amal Nair, Adv., Mr. Nitin Saluja, AOR, Mrs. Shivani Verma, Adv., Ms. Preetika Dwivedi, AOR, Mr. Abhisek Mohanty, Adv., Mr. Gurminder Singh, Sr. Adv., Mr. Nikunj Dayal, AOR, Mr. Jatinder Singh Gill, Adv., Mr. Nikhil Nayyar, Sr. Adv., Mr. T. V. S. Raghavendra Sreyas, AOR, Mr. Siddharth Vasudev, Adv., Mr. Brahma Prakash Soni, Adv., Mr. Kshitij Maheshwari, Adv.
Case Title: The State of Himachal Pradesh & Anr. v. JSW Hydro Energy Limited & Ors.
Neutral Citation: 2025 INSC 857
Case Number: Civil Appeal No. 12883 of 2024
Bench: Justice Pamidighantam Sri Narasimha, Justice Joymalya Bagchi
