Central Electricity Regulatory Commission's Landmark Judgment on Transmission Tariff Truing Up and Initial Spares in PGCIL v. KP Transco

Introduction

The case of Power Grid Corporation of India Ltd. v. Karnataka Power Transmission Corporation Ltd. and Others (S). was adjudicated by the Central Electricity Regulatory Commission (CERC) on February 1, 2021. This pivotal judgment addressed the petition filed by the Power Grid Corporation of India Limited (PGCIL), a deemed transmission licensee, seeking adjustments in transmission tariffs for specific transmission assets associated with the Hyderabad (Maheshwaram) Pooling Station in the Southern Region.

The core issues in the case revolved around the truing up of transmission tariffs for the period from the Commercial Operation Date (COD) to March 31, 2019, under the 2014 Tariff Regulations, and the determination of tariffs for the subsequent period from April 1, 2019, to March 31, 2024, under the 2019 Tariff Regulations. Additionally, PGCIL sought approval for various financial adjustments, including the return on equity (RoE), initial spares, and recovery of certain charges from beneficiaries.

The respondents included distribution licensees and power departments, primarily beneficiaries in the Southern Region, with Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO) being a significant respondent.

Summary of the Judgment

The CERC meticulously examined PGCIL's submissions concerning the truing up of Annual Fixed Charges (AFC) for the 2014-2019 tariff period and the determination of tariffs for the 2019-2024 period. Key findings and decisions of the court include:

Truing Up of AFC: CERC approved the trued-up AFC for both tariff periods, ensuring that the transmission charges accurately reflect the incurred costs and capital expenditures.
Additional Return on Equity (RoE): The court allowed for an additional RoE of 0.5% for specific assets, contingent upon the segregation of costs as per prior directives.
Initial Spares Allocation: Aligning with the Appellate Tribunal for Electricity (APTEL) judgment dated September 14, 2019, CERC revised the methodology for allocating initial spares based on the overall project cost rather than asset-wise, rectifying previous inconsistencies.
Capital Cost and Additional Capital Expenditure (ACE): Approval was granted for the capital costs and ACE claimed by PGCIL, ensuring that all expenditures were within the authorized financial framework.
Reimbursement of Fees and Charges: The court sanctioned the reimbursement of petition filing fees, publication expenses, licensee fees, and Regional Load Dispatch Centre (RLDC) fees as per the stipulated regulations.
Rejection of Separate O&M Expenses for PLCC: CERC denied PGCIL's claim for separate Operation & Maintenance (O&M) expenses for the Power Line Carrier Communication (PLCC) system, emphasizing its inclusion within sub-station expenses to prevent double counting.

Analysis

Precedents Cited

A critical aspect of the judgment was the reliance on the APTEL judgment dated September 14, 2019, in Appeal No. 74 of 2017. This precedent shifted the approach to allocating initial spares from an asset-wise basis to an overall project cost basis. Previously, CERC had considered initial spares on an individual asset basis, which was later deemed inconsistent with broader project evaluations.

Additionally, the judgment referenced earlier CERC orders, including decisions from July 5, 2018, in Petition No. 157/TT/2017, and January 24, 2021, in Petition No. 126/TT/2020, which provided foundational guidelines on RoE, O&M expenses, and other financial components within transmission projects.

Legal Reasoning

The CERC's legal reasoning was rooted deeply in the provisions of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014 and the subsequent 2019 regulations. The Commission emphasized adherence to statutory guidelines, ensuring that PGCIL's claims were justified, substantiated with adequate financial documentation, and aligned with regulatory norms.

A notable element was the Court's alignment with APTEL's jurisprudence on initial spares, advocating for a holistic project cost evaluation over fragmented asset assessments. This approach promotes financial prudence and consistency in tariff determinations.

Furthermore, in adjudicating the RoE adjustments, the Commission incorporated the effective tax rates as per the Minimum Alternate Tax (MAT) provisions, ensuring that the grossed-up RoE accurately reflected PGCIL's tax obligations.

Impact

This judgment has far-reaching implications for future tariff determinations in the power transmission sector. By reinforcing the methodology for allocating initial spares and validating comprehensive project cost assessments, CERC sets a precedent for enhanced financial transparency and consistency. Transmission licensees will now align their financial claims with a project-wide perspective, potentially streamlining tariff adjustment processes.

Additionally, the clear delineation regarding the treatment of PLCC under sub-station expenses prevents double counting, fostering clarity and fairness in cost recoveries. This decision may influence similar future petitions, ensuring that financial claims are evaluated within a consistent regulatory framework.

Complex Concepts Simplified

For better comprehension, the following legal and technical terms are elucidated:

Truing Up: Adjusting previously sanctioned tariffs to reflect actual costs incurred and ensuring that the transmission charges are fair and accurate for both the licensee and beneficiaries.
Initial Spares: These are spare parts capitalized in the project cost to ensure uninterrupted operation and maintenance of the transmission assets. Proper allocation is crucial to prevent financial discrepancies.
Return on Equity (RoE): The rate of return a company seeks on the capital invested by its shareholders. In this context, an additional RoE was sought to compensate for the timely completion of specific assets.
Additional Capital Expenditure (ACE): Expenses incurred beyond the initially approved capital cost, which can be claimed under specific regulatory provisions if justified.
Minimum Alternate Tax (MAT): A provision under the Income Tax Act where companies are taxed at a specified rate irrespective of their profit levels, ensuring that businesses contribute to tax liabilities.

Conclusion

The CERC's judgment in Power Grid Corporation of India Ltd. v. Karnataka Power Transmission Corporation Ltd. and Others (S) serves as a cornerstone in the regulatory landscape of power transmission tariffs in India. By adhering to judicial precedents and reinforcing comprehensive project cost evaluations, the Commission ensures that tariff determinations are both fair and reflective of actual expenditures.

The decision not only validates PGCIL's claims but also sets a clear pathway for future tariff petitions, emphasizing consistency, financial prudence, and alignment with established legal frameworks. Stakeholders in the power transmission sector can anticipate a more streamlined and equitable approach to tariff adjustments, fostering a stable and transparent regulatory environment.