APTEL Sets Aside UPERC Order On Thermal Pollution Costs, Ball Back With Govt On Costs

Leading law Firm J Sagar Associates, represented by a team comprising Mr. Amit Kapur, Joint Managing Partner, and Mr. Akshat Jain, Partner, have delivered a diwali gift to the thermal power sector in India. More precisely, all those thermal plants that have been caught up in the issue of upgrading their pollution control game by installing Flue Gas Desulphurisation (FGD) equipment. The issue, as always , was one of costs, with the industry caught up in a blame game with their State Electricity Regulatory Commissions  on the liability for these costs.    

J Sagar Associates, reprsenting Lalitpur Power Generation Company Limited (LPGCL) before the Appellate Tribunal for Electricity (APTEL) had challenged the  Uttar Pradesh ERC’s Order denying Change in Law relief and in-principle approval for incurring capex for complying with by Ministry of Environment, Forest and Climate Change (MoEFCC’s) Notification dated 07.12.2015. This order prescribed revised emission norms for thermal power plants. 

In its Judgement dated 13.11.2020 passed in Lalitpur Power Generation Co. Ltd. v. UPERC & Anr., APTEL recognized that approval for FGD installation is a sensitive issue of national importance having significant commercial implication on the entire power sector. Saying this, APTEL has declared the Notification dated 07.12.2015 as a Change in Law event while setting aside UPERC’s Order.

With this order, APTEL effectively accepted the contention of LPGCL and now  additional capitalization on account of change in law, as sought by LPGCL, can be granted in terms of the CERC (Terms and Conditions of Tariff) Regulation, 2019 and CEA’s recommendation.

It also stated that SERCs have powers under the Electricity Act to fill up the gaps in supplementing the rules/regulations (if the same are silent on certain aspects) by issuing instructions consistent with the Electricity Act.

The tariff impact of the additional capital expenditure incurred on account of change in law shall be claimed by LPGCL as per the applicable Tariff Regulations.

The order is being considered as a landmark on the road to apportioning costs for lessening thermal pollution, or yet one more opportunity to delay the process, already running years behind schedule, for almost 80 percent of the  thermal sector that has come under its ambit now.

Central Pollution Control Board (CPCB) had issued phase-wise timelines to 189 TPPs in the country aggregating to approx. 166.7 GW (Total coal and lignite fired thermal capacity on date is approx. 205 GW) of installed thermal capacity to comply with the revised emission norms prescribed by MoEFCC’s Notification dated 07.12.2015. The claim is that this  entails an approx. expenditure of Rs. 80,000 Crores, or Rs 50 lakhs per MW,  which is only the base Cost of FGD system and excludes Interest during Construction (IDC), taxes & duties, FERV, expenditure towards project management & engineering services and pre-operative expenses, which is to be allowed at actuals after commissioning of the FGD system.

In effect, this whole amount has to be recovered from eventual consumers, or tax payers, as the case might be.

CERC’s Regulations provided for in-principle approval of cost to be incurred by generating companies for installation of FGD system. However, most SERC Regulations are silent on this aspect. Hence, on one hand generating companies regulated by CERC were being allowed in-principle approval of the FGD cost, thus being able to obtain the necessary funds from the lenders to comply with the stringent emission norms. However, generating companies regulated by SERCs were denied in-principle approval of the FGD cost, resulting in delay and imminent breach of timelines prescribed by CPCB, thereby attracting penalty. This created a discriminatory landscape where generating companies situated in similar situation were meted different treatment over the same notification, resulting in regulatory uncertainty.

With the government already sympathetic to the thermal cause, as evinced by the repeated deadline extensions and quite efforts made to find a way out, one fears that the latest rule will only push back the process of upgradations even further beyond 2022, the current deadline.