Time to revisit Arbitrations in the Power Sector: Conflict between Sections 79(1)(f) and 86(1)(f) of Electricity Act, 2003 and Section 11 of Arbitration and Conciliation Act, 1996

By a judgment dated 23-09-2024, the Supreme Court dismissed a civil appeal filed by Damodar Valley Corporation¹ (DVC) challenging a judgment of the Appellate Tribunal for Electricity (APTEL) dated 28-08-2024². Supreme Court effectively upheld the APTEL ruling to the effect that:

(i) All disputes which have a bearing on the tariff of a generating company or transmission licensee would constitute tariff disputes (be it change in law or delay in completion of projects or invocation of force majeure) and fall solely within the jurisdiction of the Central Electricity Regulatory Commission³ under Section 79(1)(f) of the Electricity Act, 2003 (“E Act”).

(ii) Disputes relating to termination or breach of contract, and other disputes which do not impact the tariff, directly or indirectly, are non-tariff related disputes, which must be mandatorily referred to arbitration.

The case at hand involved a challenge by DVC (seller) invoking Section 79(1)(f) of the E Act to a purported unilateral termination of power purchase agreements (PPAs) by Madhya Pradesh Power Management Company Limited (Mppmcl) (buyer). These PPAs had an arbitration clause. By this judgment Supreme Court has revived the jurisdictional debate about an apparent conflict between provisions for adjudication of disputes under the E Act and the Arbitration & Conciliation Act, 1996 (“A&C Act”) – which seemed to have been settled in March 2008 by the Gujarat Urja Vikas Nigam Ltd. judgment by the Supreme Court⁴.

The canvas of dispute resolution in the power sector

India’s power sector besides being fifth largest in terms of generation capacity and the third largest in terms of the network, presents an evolving reality. On 10-6-2003, the E Act was brought into force as a comprehensive legislation governing the electricity sector in India (other than nuclear energy, which is governed by the Atomic Energy Act, 1962), consolidating various laws governing the sector. Amongst others, it laid statutory foundation for consumer choice, restructuring the industry, deregulating generation⁵, creating the markets while providing diverse levels of regulation of rest of the value chain by the Regulatory Commissions at State and Central levels [State Electricity Regulation Commission (SERCs) and Central Electricity Regulatory Commission (CERC)]⁶. A national Appellate Tribunal for Electricity (ATE) was constituted to hear appeals against decisions of the SERCs and CERC.⁷

Over the past 3 decades, the Indian power sector has been functionally unbundled into generation, transmission, distribution, trading and retail supply. Sources of power generation range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to varied non-conventional sources such as wind, solar, biomass and bagasse. With generation being deregulated, a unified grid operating on non-discriminatory open access and a market mechanism being introduced (with real time market through power exchanges, forwards and futures), the mosaic has shifted a long way. With the national commitments and legislative mandate towards energy transition and promotion of renewable sources of energy, the traditional structures are getting challenged with renewables introducing complexities of variability in availability of power being dependant on forces of nature — intensity of sunshine, cloud cover, wind speed, etc.

In this diverse value-chain, we are witnessing disputes across the life cycle and value chain of the power sector which can be classified as under:

(a) Development Phase (acquisition of land, right of way and other clearances);

(b) Construction Phase (design, civil construction, procurement, installation and commissioning);

(c) Operations Phase (generation, evacuation, supply);

(d) Supplier’s Issues (fuel, equipment including spares and refurbishment);

(e) Composite procurement and operations arrangements; and

(f) Market mechanism (bilateral trades, power exchanges, forwards and futures).

It is important to be mindful of the fact that only 2 of the above 6 i.e. the composite procurement and operations arrangements and the operations phase, are governed by the E Act. The other 4 elements are not regulated under the E Act and not within the ambit of the present discussion — often being subject matter of arbitrations.

To examine the underlying issues at hand, here is a comparative evaluation of the relevant provisions of law:

SNo	Attributes	E Act, 2003	A&C Act, 1996
1.	What kind of Disputes? [Arbitrable Dispute]	Limited to the Statutory Ambit. CERC has jurisdiction over disputes involving generating companies or transmission licensees with respect to tariff of central govt owned generating stations or multi-state IPPs: Sec. 79(1)(a) & (b). interstate transmission of electricity (ISTS) and tariff for ISTS: Sec. 79(1)(c) & (d). SERC has jurisdiction over any disputes between licensees (entities permitted to undertake transmission, distribution, retail supply or physical trade in electricity) and generating companies. Sec.86(1)(f) read with (2008) 4 SCC 755 Now in DVC v MPPMCL (SC dt. 23.09.2024) Supreme Court while approving APTEL judgement has in effect held that Sec. 79 is limited in coverage and all non-tariff matters must be referred to arbitration.	As per Contract. Sec 7 It can cover all phases and elements of a power project and/or trade or supply arrangements, beyond ambit of E Act — like EPC contracts; forwards and futures in electricity.
2.	Locus Standi: Amongst whom?	Locus will arise from the provisions of Sec. 86(1)(f) & 79(1)(f)	As per Contract. Sec 8 Contracting Parties + Group of companies doctrine. (2024) 4 SCC 1
3.	Who constitute the Bench?	Per Statute: Sec. 79(1)(f) & 76. Sec. 86(1)(f), 82 & 83.	As per Contract … Party autonomy. Sec. 10 & 11
4.	Basis & Jurisdiction to refer	Per Statute: Sec. 79(1)(f) & 86(1)(f) (2008) 4 SCC 755 … Even when contract has arbitration clause SC dt 23.09.2024 now seems to approve a distinction between Tariff & non-tariff disputes as the touchstone for what may be adjudicated by CERC/SERC and what be referred to arbitration.	Per Contract … Party autonomy. Sec.7 & 8
5.	Who defines governing rules on substance of the dispute?	Per Statute: Secs. 92, 94, 95 & 96: PROCEDURE Secs. 173 to 175: SUBSTANCE	Per Contract … Party autonomy. Sec.18 to 27
6.	Procedure: Open or In-camera.	Law requires transparency and gives freedom to CERC/SERC to regulate their procedure. Secs. 79(3), 86(3), 178(2), 181(2). (2017) 1 SCC 487	Confidential Proceedings + Per Contract … Party autonomy. Exception for Bilateral Investment Treaties re. public information an amicus intervention.
7.	Impact: In personam or in rem.	Disputes impacting tariff; Safety & use of Grid & open access; consumer choice; competition … IN REM.	Meant to be in personam. Yet when Extension of time and Cost overrun issues are decided for EPC contracts, the implications are in rem.
8.	Protection/ Consideration of public interest.	(2017) 1 SCC 487: Any mutual agreement must pass muster with CERC/SERC. Secs. 79(3) & 86(3): Transparency	None available.

The dispute in DVC case: CERC order

CERC

Coming back to the case at hand that triggered this article, the genesis of this case lies in 2019⁸, when the Central Commission adjudicated upon a DVC petition to hold that:

(i) The petition filed by DVC seeking recovery of the capacity charges and energy charges by Mppmcl was maintainable before it.

(ii) The dispute related to recovery of tariff which falls within its jurisdiction under Section 79(1)(a) and (f) of the E Act which will not be impacted just because the adjudication of the disputes involves consideration of termination of the PPAs which will lead to non-payment of tariff. The Commission relied on Appellate Tribunal for Electricity (APTEL’s) judgment of 2012⁹ holding that Section 79(1)(f) provides for adjudication of disputes involving tariff of a Central Government owned generating company like DVC and its billing, payment, rebate, surcharge, termination, suspension of supply, payment security mechanism, all being terms and conditions of supply.

(iii) The Commission rejected the plea that the October 2015 Amendments to Sections 5 and 8 of the Arbitration and Conciliation Act, 1996 (A&C Act) had overridden the judgment of Supreme Court in the Gujarat Urja Vikas Nigam Ltd. case¹⁰. In doing so, the Commission relied upon the Supreme Court judgment in Emaar MGF Land Ltd. v. Aftab Singh holding that the legislative intent behind the 2015 Amendment to the A&C Act is to minimise judicial discretion to refuse arbitration.¹¹ The 2015 Amendment to the A&C Act did not aim to do away with any special or additional remedies like under the Consumer Protection Act.

(iv) The Commission noted that in a series of judgments, Supreme Court has held that the Electricity Act is a special legislation with respect to the electricity industry; and that except for the Consumer Protection Act, the Atomic Energy Act and the Railways Act, the Electricity Act overrides all other laws in conflict with it.

(v) Section 11(6-A) of the A&C Act was held to be not applicable since it dealt with the appointment of arbitrators by courts.

The Appellate Tribunal for electricity

APTEL allowed the appeal of Mppmcl on 28-8-2024 to, inter alia, quash order of the Central Commission holding that:

(i) The Parliament did not intend to completely rule out the provisions of the A&C Act with respect to disputes under the E Act.

(ii) The scope of Section 79(1)(f) is distinct from Section 86(1)(f) of the E Act.

(iii) Disputes involving any impact upon the tariff of a generating company (tariff dispute) would fall solely within the jurisdiction of the Central Commission, while disputes like termination or breach of contract, which do not impact the tariff directly or indirectly (non-tariff related disputes) are mandatorily referable to arbitration.

(iv) Gujarat Urja Vikas Nigam Ltd. judgment¹² was not applicable since that judgment related to apparent conflict between Section 86 of the E Act and Section 11 of the A&C Act.

(v) There was no conflict between Section 8 of the A&C Act and Section 79(1)(f) of the E Act.

Supreme Court

DVC’s appeal against this judgment of the Tribunal was rejected at the threshold by a one-page order by the Supreme Court on 23-9-2024. In effect, the Supreme Court upheld the APTEL view, as summarised above.

It bears mention here that APTEL reinitiated this debate by a judgment in 2022¹³ setting down guidelines for Regulatory Commissions that whenever a dispute comes before CERC or SERC under Section 79(1)(f) or Section 86(1)(f) of the E Act, the Commission shall first examine and pronounce on whether the dispute is suitable to be referred to arbitration or would it require regulatory powers of the Commission to be exercised. In that case APTEL set aside the order of the State Commission of Andhra Pradesh and referred the matter to arbitration. Upon being challenged, the said APTEL judgment was stayed on 16-1-2024, noting that it might be contrary to Gujarat Urja Vikas Nigam Ltd. case¹⁴ judgment.

Genesis and past developments

At this juncture, it is useful to reflect on the statutory provisions as also the origins of this debate on 10-6-2003, when the E Act was enacted vesting powers of adjudication of disputes and of reference of such disputes to statutory arbitration by the Regulatory Commissions covered by Sections 79 and 86 of the Electricity Act.

In 2007, the Supreme Court¹⁵ decided a matter arising from Maharashtra to hold that once the E Act had provided for appointment of consumer grievance redressal forum for each distribution licensee as an ombudsman for each State under Sections 42(5) and (6), all individual grievances of consumers must be raised before this forum rather than before SERC. It reversed the view of the SERC that it had jurisdiction to decide such matters since Section 86(1)(f) empowers SERC to adjudicate upon disputes between licensees and generating companies, and to refer such disputes to arbitration.

Within months, in March 2008, Supreme Court¹⁶ decided upon certain disputes between a private power generation company (Essar) and public sector procurer of power (Gujarat Urja Vikas Nigam Ltd.) regarding disproportionate allocation of power by the generator to its own sister company at the cost of Gujarat Urja Vikas Nigam Limited. The generator approached Gujarat High Court seeking appointment of an arbitrator under Section 11 of the A&C Act and referral of the disputes to arbitration having invoked the arbitration clause and nominated a former Judge of the Supreme Court as the sole arbitrator. Instead of concurring to the nomination, the procurer invoked the jurisdiction of the State Commission under Section 86(1)(f) of the E Act to adjudicate the dispute.

Supreme Court examined the scope of Section 86(1)(f) in context of Sections 158, 173, 174 and 175 of the E Act as also the well settled principle of interpretation of statutes that “where a statute provides for a thing to be done in a particular manner, then it has to be done in that manner or not at all”. The argument of the generator that in view of Section 175 of the E Act and Section 11 of the A&C Act is also available for dispute being sent for arbitration was rejected to hold that only the SERC or CERC¹⁷ (as the case may be) can resolve a dispute between a licensee and the generating company or arbitrator nominated by SERC/CERC. All other disputes will be decided in accordance with Section 11 of the A&C Act. Supreme Court held that:

(i) Section 174 of the E Act provides that the E Act will prevail over anything inconsistent in any other law, carving out exceptions only for the Consumer Protection Act, the Atomic Energy Act and the Railways Act.

(ii) There is an inconsistency between Section 86(1)(f) of the E Act vis-à-vis Section 11 of the A&C Act regarding the jurisdiction to adjudicate or refer a dispute to arbitration.

(a) Section 86(1)(f) of the E Act is a special provision which will overrule the generation provision of Section 11 of the A&C Act for arbitration of disputes between the licensee and generating companies.

(b) SERC can either decide a dispute itself or refer it to some arbitrator. Hence the word “and” in Section 86(1)(f) means “or”.

Supreme Court then expounded perhaps as an obiter dicta, that:

(i) All disputes between a licensee and a generating company not limited to matters referred to in clauses (a) to (e) and (g) to (k) of Section 86(1) can only be resolved by the Regulatory Commission or arbitrator appointed by it, holding that there is no restriction in Section 86 regarding the nature of the dispute.

(ii) Section 86(1)(f) is restricted to the authority which is to adjudicate or arbitrate upon dispute between licensees and generating companies. Procedural and all other matters in such proceedings will be governed by the A&C Act.

This exposition of the law held the field from March 2008 till the question arose in November 2022 in the judgment of the APTEL in Southern Power Distribution Co. of AP Ltd. case¹⁸ referred to above. Amongst the judgments that followed this ratio are the judgments in Hindustan Zinc Ltd. v. Ajmer Vidyut Vitran Nigam Ltd.¹⁹ and the M.P. Power Trading Co. Ltd. v. Narmada Equipments (P) Ltd.²⁰. It is noteworthy that all these judgments arose in context of decisions related to the powers of the State Commission to appoint arbitrators, and hence interpreted the provisions of the Electricity Act and the Arbitration Act in context of Section 86(1)(f) of the E Act.

A case in which the question was tested from the point of view of a conflict between the jurisdiction of the Central and the State Commission was in BSES Rajdhani Power Ltd. v. Delhi Electricity Regulatory Commission²¹, where APTEL held that being a dispute between a licensee and a generating company with respect to terms and condition of tariff of a generating company owned and controlled by the Central Government as also regulation of supply due to default of payment:

(i) The State Commission does not have jurisdiction to adjudicate such dispute in terms of under Section 86 of the E Act.

(ii) Such jurisdiction vested in the hands of the Central Commission under Section 79 of the E Act.

(iii) The terms and conditions of tariff and regulation of supply will be covered by the Central Commission’s tariff regulations, and Central Commission’s regulation of power supply regulations.

Emerging issues for the power sector regulatory and dispute resolution mechanism

With the apparent blurring of boundaries on domain and some unaddressed issues arising with technological and market innovations, the institutional mechanism for adjudication of disputes in the power sector needs a relook. Several facets are likely to come up for consideration before courts and policy-makers, including:

(i) Which disputes belong exclusively within the domain of the statutory regulators appointed under the E Act as also of arbitrators functioning under the A&C Act.

(ii) Is there an overlapping domain of disputes between regulators and arbitrators? If so, who decides what should be adjudicated by which forum and on what basis.

(iii) Whether the domain qua power to refer the dispute to arbitration is exclusively vested with the regulator or can a party can approach a court for appointment of an arbitrator and reference of the dispute to arbitration.

(iv) How does the distinct domains allocated to the Central Commission under Section 79 of the E Act (in one sense limited to clauses (a) to (d) of sub-section (1); in another sense wider, since it covers disputes involving either the qualifying generating companies or an inter-state transmission licensee) versus that allocated to the State Commissions under Section 86 (all disputes between licensees and generators so long as they relate to intra-state activities).

(v) How to resolve the jurisdictional challenge posed by implementation of awards in arbitrations which ultimately have impact on tariff for power or consumer choice, market access or safety.

The steadily widening coverage of arbitration as an alternate mechanism for dispute resolution has, of late, received significant pushback in India due to some flaws that need to be addressed urgently. Amongst others, is the Office Memorandum dated 03-06-2024 issued by Department of Expenditure, Ministry of Finance to all governmental entities and public sector enterprises at centre and state. The deep distrust and eroding credibility of the mechanism rings through with a detailed statement of flaws based on which all public sector has been advised to not resort to arbitrations in public procurement contracts where the claim exceeds Rs. 10 crores (or US$ 1.2 million). Prolixity in pleadings, long drawn-out schedules, protracted arguments culminating in expensive and delayed adjudication by ad-hoc panels seem to be at the centre of the rejection.

The significance and share of public procurement in infrastructure development in India’s economic situation cannot be overemphasized. It is estimated that public procurement constitutes 20% to 22% of Indian GDP (around US$ 500 billion). India’s ambitious National Infrastructure Pipeline announced in 2019 had targeted overall infrastructure development with US$ 1.3 trillion over 5 years with investments from Centre (39%), State (40%) and Private (21%) sectors. Having met that the NIP now stands with a revised target of US$ 1.723 trillion during FY 2023-24 to 2029-30. In this behalf, GoI has committed 37% of its budgetary allocation to NIP in FY 2024-25. It is estimated that Re.1 of investment results in a gain of Rs. 2.5 to 3.5 in GDP.

The genesis and evolution of arbitration as a mechanism for dispute resolution in trade across cities and oceans that led to the revolution of certain rules by traders and trader guilds which found their way into the law merchant or Lex Mercatoria. These rules were inherently, private dispute, resolution rules, inter-se consenting parties. With rising burden of the docket and commercial preferences, arbitration found its way as a preferred mode of dispute resolution, even in public procurement, contracts and infrastructure disputes.

Arbitrations are characterised by

(a) party autonomy i.e. freedom of the parties to the contract to choose their arbitrators, the substantive law and the procedural law governing the arbitration by mutual consent;

(b) confidentiality;

(c) proceedings and award are not published and kept “confidential”;

(d) the rules governing the interpretation of the contract can be limited by the contract;

(e) there is no applicability of doctrine of stare decision and there is no appellate review of awards; and

(f) no third party to the contract including statutory authorities have a right to intervene or to represent or participate in arbitral proceedings. This evolution brought into play certain conceptual conflicts in applying private dispute mechanism for resolving public law issues.

In this context, it is important for us to find a way of giving a voice or a right of audience to the stakeholders of the power sector in the arbitral proceedings (being the consumers of electricity and the taxpayers) since they will carry the burden of arbitral awards in terms of tariff, safety, quality and reliability of supply, et al. In this context, it is instructive to see the ratio of the judgment to the Supreme Court in All India Power Engineer Federation v. Sasan Power Ltd.²², holding that all such matters must pass muster before the Regulatory Commission vested with (to paraphrase in my words) the statutory mandate of balancing between affordability of supply and viability of investment. This position is particularly critical since power and power supply have been read into right to life with human dignity by the Supreme Court in 1996 and are now statutorily treated as a legal right of a citizen. Here, the constitutional principles enshrined in Articles 14, 39(b) & (c) and 300-A of the Constitution of India must be the guiding factors.

Conclusion

We have not heard the last on this subject. A few matters are coming up for hearing before Coordinate Benches of the Supreme Court in the coming weeks. Another set of cases are coming up before Central Electricity Regulatory Commission (“Central Commission”).

At this juncture, we cannot help recall the words of Albert Einstein “Theory is when you everything and nothing works. Practice is when everything works and nobody knows why. We have put together theory and practice; nothing is working and nobody knows why”.

As we conclude, it will be useful to bear in mind the work of the laureates²³ honoured with the Nobel Prize for Economics 2024 for their studies of how societal institutions are formed and their impact on a country’s prosperity. These studies conclude that “poor rule of law and institutions that exploit the population (extractive institutions) do not generate growth or positive change — trapping such nations in mass poverty with a rich elite”. The solution lies in introducing more inclusive institutions governed by rule of law²⁴, which may address concerns of technique of successful failure demonstrated by state agencies perpetuating capability trap in development known as isomorphic mimicry in the words of Lant Pritchett.