Draft Rules on Change in Law & Must Run Status & its implications

 

For speedy resolutions of change in Law issues pending between Generating Companies (Gencos) and the Distribution Companies (Discoms), a draft rule has been notified on Change in Law & Must Run Status. The objectives of the draft rules are righteous, and an attempt has been made to bring in clarity and uniformity across the country. This will also help the government in expediting revenue collection. Afterall, Government of India is the ultimate beneficiary of most of the change in law cases; be it imposition of increase in royalty or imposition of DMF /NMET charges on mined coal, imposition of clean energy (coal) cess, increase in railway freight or changes in taxes like GST & custom duty etc. These change in law items ultimately add to the cost of power and make electricity expensive.

The change in law event has been fairly defined  in the draft rule by incorporating all relevant provisions used in any standard PPA and various orders of the courts pronounced so far , however, there are few serious issues which may arise in implementation of these rules if  they are notified in its current form. Further, It will be very interesting to see how this rule on “Change in law” will be implemented itself as a change in law event.

There appears to be no problem If the change in law is relating only to increase in taxes and duties, because once such change in law event is notified, the generating companies has to claims the bills from the effective date of notification of the law and the procurer or discoms has to pays the dues. Final adjustments are carried out in the true-up of audited accounts. If there are disputes, the regulator decides the matter.

But the situation will be different for other change in law cases especially those relating to environmental laws. An important issue in this regard will be that of prospectivity vs retrospectivity. While the rules will apply prospectively, it is not clear whether its applicability will be only on future change in law events or all including those which have been notified prior to the notification of rules? Further, whether it will apply only on prospective biddings / tariff determination cases or on all cases including the past ones? The draft rule language appears to be nuanced with the intention to apply on all past cases of change in laws also including those notified prior to notification of the proposed rule. This can be seen from the language of Rule 2(b) read with Rule 3(e) having provision of “come into effect automatically after 30 days of the change is law event”.

“Rule-2(b) “Change in Law” means the occurrence of any of the following events after the date of submission of bids in case of tariff based bidding under Section 63 of the Act or after the determination of tariff by the Appropriate Commission under Section 62 of the Act.”

“Rule 3(b) The pass through will happen in an expeditious manner within a maximum of 30 days of the Change in Law event. “

“Rule 3(e) The pass through according to the formula stipulated above shall be calculated and shall come into effect automatically after 30 days of the Change in Law event. “

A summary table highlights the consequences of these rules.

Rule 3(b) & 3(e) applicability	On Change in laws	On PPA’s
Prospective	No Problem	No Problem
Retrospective	Problem	Problem

 Retrospective applicability of rule 3(b) & 3 (e ) will change the balance of equity in favour of the Gencos by absolving them from their responsibility of claiming the prudent additional capitalization cost only after complying  the change in law to that of deemed entitlement within 30 days of event.  Over and above, they will be rewarded with the benefits of carrying cost for the period of non-compliance. For example, if a tariff has been determined or discovered in 2015 and the change in law event, say that of installation of FGD occurred in 2018 which was complied by generating company in 2020 and the expenditure was claimed & allowed in 2020, the Genco still will be entitled for the carrying cost for the period 2018 during which it remained non-complied. This provision will out rightly favours the generating companies and put unfair & unjust burden on discom and consumers.

Presently, the cases of change in environmental laws are examined in context of difference between the applicability of existing standards and new standards on the plant & PPA .Further, compliance of change in environmental laws involves additional capital investment and operating costs which cannot be normative and must be computed on actual basis because every plant has different operating parameters and environmental clearance conditions; and are subjected to transparent process & prudence check. For example-

                                                                Emission Rules notified by MoEF & CC

Date of COD of Thermal Plant	Particulate Matters (PM) in mg/Nm3	SO2 (mg/Nm3)	NOx (mg/Nm3)	Mercury (g/Nm3)
Before 31.12.2003	100	600 for < 500 MW 200 for >500 MW	600	.03 for >500 MW
After 1.1.2004 & before 31.12.2016	50	300	300	.03
On or after 1.12017	30	100	100	.03

 It is evidently clear from above table that the change in law cases are to be applied differently on power plants with different capacity and different COD dates.

Further, the rule, being senior in hierarchy to the regulations and the PPAs, will supercede the existing mechanisms of compliance. Though legally, retrospectivity may not sustain, but will cause multiple litigations & delays before ultimately it is conclusively settled by the Supreme Court.

Another interesting part is relating to the formula given in Annexure-I for calculating the impact of change in law event. This formula is for only non-recurring cost and RE power whereas, in practice, thermal power plants are more affected because of their legacy issues. Also, the impact on change in law may be on both, recurring and non-recurring cost of the plant e.g. FGD equipment’s need more water and power which are met through increased auxiliary consumption by burning more coal and thereby increasing its O&M cost.

The part of the rule relating to the Must Run plants appears be fine except that it adds “all other Renewable Energy Plants”. While there are no issues with Solar , wind or Hydro power plants as must run, but other RE plants like bagasse based plants, which are not intermittent and use baggage as fuel, should not be given status of must run because unlike solar/hydro or wind, bagasse can be stored. Therefore, there appears no ground to include them in the must run list.

Also, the charges payable to the must run RE plants for their curtailment on grid security reasons should be borne by ancillary services mechanism and not the discoms, because it is the system operator (SLDC/RLDC) which decided curtailment on grid security and not discoms. It is expected that Ministry of Power will address these deficiencies/ issues in their final notification.

 

 

About the Author:

Raj Pratap Singh retired from IAS has worked at senior positions at Central & State Government including PMO and World Bank. Presently he is Chairman of UP Electricity Regulatory Commission.

Disclaimer: Views expressed in this article are author’s opinion and does not reflect any official position