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In the recent case of , the Supreme Court found the balance between regulatory authority and contractual sanctity. This came as the court resolved a longstanding dispute about the amount of free power supplied from a hydroelectric project. The judgment not only interprets the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019 (CERC regulations), but also confirms the primacy of specialised regulatory bodies in adjudicating sector-specific issues.

The implementation agreement for the Karcham Wangtoo Hydroelectric Project between the Himachal Pradesh state and JSW stipulated that JSW would supply 12% of net power generation free of charge for the first 12 years from the commercial operation date (COD) and 18% for the subsequent 28 years. The COD of 12 September 2011 triggered JSW’s obligation to supply free power. However, the CERC regulations capped the free power contribution to tariff calculations at 13%.

In 2019, JSW petitioned the CERC to approve its tariff for the years 2019 to 2024 and for truing up, or adjusting previously set tariffs to reflect actual usage, the years 2014 to 2019. JSW also requested relaxation of the 13% cap on free power under note 3 of regulation 55 of the CERC regulations. It argued that its contractual obligation required it to supply 18% free power after the first 12 years from the COD.

The CERC, in March 2022, rejected this application, holding that it was bound by its own regulations and that only 13% of free power could be considered for tariff determination. The commission declared that, although the CERC regulations override inconsistent provisions in power purchase and power sales agreements, they do not prohibit the amount of free power used in tariff calculations from exceeding 13%.

However, such excess must be borne by the generator and not passed on to consumers. JSW then applied to Himachal Pradesh to redraw the implementation agreement to match the CERC regulations and the 2022 order. The state refused, insisting that the contractual obligation to provide 18.46% of free power, according to supplementary agreements, was binding. The state issued notices to JSW and the relevant load dispatch centre to compel the performance of the contract. JSW applied to the Himachal Pradesh High Court, which ordered modification of the implementation agreement in line with the CERC regulations.

The state appealed to the Supreme Court. The court allowed the appeal, holding that the 13% cap under the CERC regulations is relevant only for the determination of tariffs. It does not prohibit a generating company from supplying free power in excess of the limit. The cost of excess supply, however, cannot be passed on to consumers and must be borne by the generator. The implementation agreement, a contractual arrangement, remains binding. The obligation to supply 18% free power is a form of royalty or consideration for the use of public resources, such as land and river water. It is not invalidated by the CERC regulations. The court emphasised that the interpretation of sector-specific regulations is within the exclusive domain of the CERC. The high court erred in accepting the case and modifying the implementation agreement. The Supreme Court pointed out that JSW had not challenged the CERC’s 2022 order before the Appellate Tribunal for Electricity.

This decision defines the scope of regulatory provisions, affirming that tariff-related caps do not nullify contractual obligations unless explicitly agreed. It reinforces the principle that high courts should not adjudicate matters within the jurisdiction of regulatory bodies. By upholding the sanctity of contracts, the judgment provides reassurance to investors and developers in the infrastructure sector, who rely on long-term agreements with individual states. The court’s interpretation ensures consumers are protected from excessive tariff increases, while states are free to negotiate higher free power levels.

JSW is a leading example of how regulatory frameworks and contractual commitments are able to coexist without conflict. This decision not only resolves a contentious dispute, but also sets a precedent for settling future conflicts in the evolving energy sector.

Mani Gupta is a partner and Rahul Bangia is a senior associate at Sarthak Advocates & Solicitors