Supreme Court Upholds HP Govt’s Right To 18% Free Power From JSW: CERC Regulations Can’t Override Contractual Commitments

Summary

The Supreme Court of India’s ruling on the JSW Hydro dispute greatly impacts the ongoing controversy concerning the balance of regulation and contracting within the power sector. In the ruling, the court defended the Government of Himachal Pradesh’s (HP) entitlement to receive 18% of free power from JSW Hydro Energy Ltd. in line with the 1999 Implementation Agreement. The Court observed that CERC (Central Electricity Regulatory Commission) Regulations which cap free power eligibility at 13% in the context of tariff computation are legally inconsequential in case of contracts which allow for higher free power, provided such contracts are not barred by the regulation.

Case Timeline

• 1999: Implementation Agreement executed between Government of Himachal Pradesh and JSW Hydro Energy Ltd.
• 2019: CERC regulations issued limiting free power to 13% for the purposes of tariff calculation.
• Post 2019: JSW Hydro Energy Ltd. complies with 2019 CERC regulations and restricts free power supply to 13%.
• Himachal Pradesh High Court: Upholds the decision made by the JSW Hydro Energy Ltd. and CERC.
• Supreme Court appeal: HP Government appeals High Court’s ruling.
• 16 July 2025: Supreme Court allows appeal, reinstates 18% free power obligation.

Issue Raised

Whether JSW Hydro Energy Ltd. can restrict its supply of free electricity to 13% on the basis of CERC’s 2019 Tariff Regulations, despite the contractual obligation to supply 18% free power under the 1999 agreement with the State of Himachal Pradesh.

Appellants’ (State of HP) Arguments

• The 1999 Implementation Agreement is a binding contract wherein JSW agreed to provide 18% free power after an initial 12-year period.
• The CERC Regulations do not prohibit higher free power supply; they only cap free power for tariff computation, not for royalty or contractual considerations.
• The supply of free electricity is in the nature of royalty for allowing JSW to utilise natural resources (river water).
• JSW cannot escape contractual obligations by selectively interpreting regulatory provisions.

Respondents’ (JSW Hydro) Arguments

• Based on the 2019 CERC Regulations, Free electricity supplied for purposes of computing the tariff is capped at 13% and anything over that is not allowed.
• Alleged that the Regulation has preference over all previous agreements.
• Alleged that providing more than 13% would be behaving irrationally and would also be against the current regulatory norms.

Judgment Highlights

Held: “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.”

• CERC regulations are relevant only for tariff determination, not for overriding pre-existing commercial contracts.
• Rejected JSW’s plea that free power supply beyond 13% is ultra vires the regulatory regime.
• Stated that JSW’s obligation under the Implementation Agreement is akin to royalty for use of natural resources, a separate class from tariff-linked supply.
• Criticized JSW for bypassing the proper forum (APTEL) and directly approaching the High Court.
• Emphasized that freedom to contract and its enforceability remain intact unless explicitly overridden by law or regulation.

Analysis

• This decision emphasizes the importance of negotiated contracts in the energy and infrastructure sectors.
• Expressed through the CERC Regulations, regulatory instruments cannot alter government contracts, especially ones involving the use of natural resources, neither retroactively nor by implication.
• In distinguishing between contractual free power (as a form of royalty) and regulatory free power (for tariff computation), the Court made a vital legal distinction critical for current and future negotiations of power projects.
• This judgment serves as a caution with respect to project developers seeking to escape obligations by invoking narrow regulatory interpretations.
• This, in conjunction with JSW’s bypassing the Appellate Tribunal for Electricity, underscores the importance of forum hierarchy, a point the Supreme Court made in their judgment.