Central Electricity Regulatory Commission's Landmark Decision on Transmission Tariff Truing Up: Establishing Rigorous Capital Cost Controls

Introduction

In the case of Power Grid Corporation Of India Limited, Saudamini v. Bihar State Power (Holding) Company Ltd. And Others, adjudicated by the Central Electricity Regulatory Commission (CERC) on June 3, 2020, significant legal principles regarding the truing up of transmission tariffs were established. The petitioner, Power Grid Corporation of India Ltd. (PGCIL), sought approval for the truing up of transmission tariffs for various assets under the Eastern Region Strengthening Scheme VII for the tariff periods 2014-19 and 2019-24. The respondents, transmission and distribution licensees, did not file any replies, prompting the Commission to proceed based on the submissions of the petitioner.

Summary of the Judgment

The petitioner requested the CERC to approve the trued-up transmission tariffs for multiple assets, encompassing 400 kV bays, fixed line reactors, and associated sub-stations in Chaibasa, Ranchi, Kharagpur, and Purulia. The Commission meticulously examined revised cost estimates (RCE), capital cost allocations, and justifications for cost over-runs. Key determinations included:

Approval of trued-up transmission tariffs for both the 2014-19 and 2019-24 tariff periods.
Rejection of unsubstantiated cost over-runs, particularly those related to transmission charge mismatches.
Admittance of Additional Capital Expenditure (ACE) within the original scope and cut-off dates as per the 2019 Tariff Regulations.
Adjustment of depreciation rates for IT equipment in accordance with regulatory guidelines.
Approval of reimbursement for filing fees and publication expenses, while deferring considerations like GST recovery pending future legislative changes.

Analysis

Precedents Cited

The Commission referenced several prior petitions and judgments to inform its decision-making process. Notably:

Petition No. 210/TT/2016 and Petition No. 63/TT/2018: These established foundational guidelines for capital cost admittance and truing up procedures.
APTEL Judgment dated 14.9.2019 in Appeal No.74 of 2017: This clarified the treatment of initial spares, mandating their allowance as a percentage of the project cost.
Petition No.238/MP/2017 (DMTCL Case): Demonstrated the Commission's stance on disallowing transmission charge mismatches as additional capital expenditure, reinforcing the principle that such costs are the responsibility of defaulters.

These precedents underscored the Commission's commitment to stringent cost verification and adherence to regulatory frameworks, ensuring that only justified expenditures are incorporated into tariff calculations.

Legal Reasoning

The Commission's legal reasoning was anchored in the adherence to the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014 and 2019. Key aspects of the reasoning include:

RCE Adherence: The Commission emphasized that any cost truing up must align with the previously approved Revised Cost Estimates. Unapproved cost over-runs without substantive justification were disallowed.
Capital Cost Allocation: Costs such as transmission charge mismatches were deemed defaulters' liabilities and not permissible as additional capital expenditure.
Depreciation Rates: Compliance with established depreciation rates for IT equipment was mandated, rejecting retroactive apportionment of costs during truing up.
ACE Admittance: Strict criteria were applied for admitting Additional Capital Expenditure, ensuring it fell within the original scope and respected cut-off dates.
Precedence Consistency: The Commission maintained consistency with previous rulings, reinforcing its stance against unwarranted cost claims.

This meticulous approach ensures financial prudence and regulatory compliance, safeguarding the interests of beneficiaries and maintaining tariff integrity.

Impact

This judgment has profound implications for future tariff petitions and the broader regulatory landscape:

Enhanced Scrutiny: Transmission licensees will face increased scrutiny regarding cost claims, necessitating robust justifications and adherence to approved estimates.
Cost Control: The decision reinforces the importance of controlling capital expenditures and discourages arbitrary cost inflations.
Regulatory Compliance: Emphasizes strict compliance with CERC regulations, setting a precedent for how additional costs and capital expenditures are treated.
Beneficiary Protection: Ensures that transmission charges remain fair and justified, protecting beneficiaries from unwarranted financial burdens.

Ultimately, the judgment fosters a transparent and accountable framework for tariff determination, promoting equity within the electricity sector.

Complex Concepts Simplified

Truing Up of Tariffs

Truing Up refers to the process of adjusting previously determined tariffs based on actual costs incurred. It ensures that the tariffs reflect true economic expenses, preventing over-recovery or under-recovery by transmission companies.

Revised Cost Estimates (RCE)

Revised Cost Estimates are updated projections of a project's capital and operational expenditures. They account for variations from initial estimates due to factors like inflation, scope changes, or unforeseen expenses.

Additional Capital Expenditure (ACE)

Additional Capital Expenditure encompasses costs beyond the original scope of a project, incurred after the project's commencement. The CERC regulates ACE to ensure it aligns with regulatory guidelines and original project objectives.

Interest During Construction (IDC) and Incidental Expenditure During Construction (IEDC)

Interest During Construction (IDC) is the interest on loans taken to finance the construction of a project. Incidental Expenditure During Construction (IEDC) includes ancillary costs incurred during the project's construction phase, such as site security.

Weighted Average Life (WAL)

Weighted Average Life is an actuarial method used to calculate the average useful life of a project or asset, considering the proportions of various components and their respective lifespans. It aids in accurate depreciation and financial planning.

Conclusion

The CERC's decision in Power Grid Corporation Of India Limited, Saudamini v. Bihar State Power (Holding) Company Ltd. And Others serves as a pivotal reference point for future tariff petitions. By enforcing stringent adherence to Revised Cost Estimates and disallowing unjustified cost over-runs, the Commission upholds financial integrity and regulatory compliance. The judgment underscores the necessity for transmission companies to meticulously manage and justify their expenditures, ensuring that tariffs remain equitable and reflective of actual economic costs. This fosters a transparent and accountable electricity sector, benefiting both service providers and beneficiaries alike.