Introduction

The case of Power Grid Corporation of India Limited (PGCIL) v. Uttar Pradesh Power Corporation Limited (UPPCL) was adjudicated by the Central Electricity Regulatory Commission (CERC) on May 16, 2016. The central issue revolved around the determination of annual transmission charges for the fees and charges associated with the Sub-Load Dispatch Centre (SLDC) at Modipuram, under UPPCL, for the period spanning 2014-2019. PGCIL sought clarification and determination of transmission charges under the applicable CERC regulations and sought to ensure that the methodologies employed were both transparent and in line with regulatory standards.

Summary of the Judgment

The CERC evaluated PGCIL's petition filed under Regulation 86 of the Conduct of Business Regulation 1999 and the Terms and Conditions of Tariff Regulations, 2014. The Commission reviewed historical data and prior orders to determine the appropriate annual transmission charges for the SLDC at Modipuram. Emphasis was placed on the application of the Capital Recovery Factor (CRF) methodology, considering both loan and equity components. The judgment upheld the methodologies previously applied, detailed the capital recovery charges, and addressed additional claims related to reimbursement fees and regulatory obligations. The Commission also highlighted the necessity to reassess the CRF methodology for communication systems, directing further examination and recommendations.

Analysis

Precedents Cited

The judgment extensively referred to prior CERC orders to establish consistency in tariff determination methodologies:

• Petition No. 87/2007: Established the initial fee and charges based on a capital cost of Rs. 353.21 lakh as of March 31, 2009.
• Petition No. 73.TT/2012: Approved the fee and charges for the period 2009-2014, employing the CRF concept for loan and equity recovery.
• Petition No. 68/2010: Laid down guidelines for continuing levelized tariffs in the absence of specific regulatory provisions, emphasizing the need for separate tariff regulations for communication systems.
• Petition No. 240.TT/2013: Reinforced the continuation of levelized tariffs for existing assets and mandated the application of earlier principles for the determination of optic fibre fees.

These precedents collectively shaped the Commission’s approach in ensuring a uniform and regulated method for fee determination, maintaining consistency across different regulatory periods.

Legal Reasoning

The Commission's legal reasoning was anchored in the framework of the 2009 and 2014 Tariff Regulations. Key points included:

• Application of Capital Recovery Factor (CRF): The CRF was utilized to determine both loan and equity recovery charges. The formula employed was:
  Recovery Factor = i × (1+i)n ÷ [(1+i)n -1] where i represents the rate of recovery and n the period of recovery.
• Weighted Average Rate of Interest: A weighted average interest rate of 8.4457% per annum was determined based on existing loans, guiding the loan recovery calculations.
• Return on Equity (RoE): The RoE was set at 15.50% post-tax, diverging from the grossed-up RoE in prior regulations to prevent distortion in the CRF-based recovery.
• Levelized Tariff Continuation: In scenarios lacking specific regulatory provisions, the Commission continued with levelized tariffs, ensuring stability and predictability in fee structures.
• Capital Recovery and Operating Expenses: Detailed assessments of capital recovery charges and the exclusion of O&M expenses were integral to the fee determination.

By meticulously applying these principles, the Commission ensured that the fee structure was both equitable and reflective of actual capital and operational expenditures.

Impact

This judgment has significant implications for the electricity transmission sector:

• Standardization of Fee Determination: By reaffirming the use of CRF and specific RoE rates, the judgment sets a standardized methodology for future fee determinations across similar entities.
• Regulatory Clarity: The decision underscores the importance of clear regulatory frameworks, especially for components like communication systems within the transmission infrastructure.
• Financial Planning for Utilities: Utilities can now better forecast their revenue streams and capital recovery periods, aiding in financial planning and investment strategies.
• Future Regulatory Amendments: The Commission's directive to review the CRF methodology indicates a proactive approach in refining regulatory practices, which may lead to more nuanced and effective tariff regulations.

Complex Concepts Simplified

Capital Recovery Factor (CRF)

The CRF is a financial tool used to calculate the annuity payment (constant yearly charge) required to recover a loan or investment over a specified period with interest. The formula ensures that the total amount recovered equals the initial investment plus the interest accrued.

Return on Equity (RoE)

RoE represents the profitability relative to shareholders' equity. In this context, it indicates the return that equity investors expect from the transmission asset investment.

Weighted Average Rate of Interest

This rate is the average interest rate across all loans, weighted by the proportion of each loan in the total debt portfolio. It provides a single, representative interest rate for calculating loan recovery charges.

Levelized Tariff

A levelized tariff maintains a consistent rate over a period, providing stability to both the utility and consumers. It does not fluctuate based on short-term variations in costs or investments.

Operating and Maintenance (O&M) Expenses

O&M expenses encompass the costs associated with the day-to-day operation and upkeep of the transmission assets. In this case, PGCIL did not claim any O&M expenses.

Conclusion

The CERC's judgment in Power Grid Corporation of India Limited v. Uttar Pradesh Power Corporation Limited underscores the Commission's commitment to maintaining a robust and transparent framework for tariff determination. By upholding the Capital Recovery Factor methodology and emphasizing standardized approaches to fee calculation, the Commission ensures fairness and financial viability within the electricity transmission sector. The decision not only addresses the immediate concerns of PGCIL and UPPCL but also sets a precedent for future regulatory practices, fostering an environment of clarity and predictability for all stakeholders involved.