Introduction

In the landmark case of Power Grid Corporation Of India Ltd., Saudamini v. Madhya Pradesh Power Management Company Ltd. And Others, adjudicated by the Central Electricity Regulatory Commission (CERC) on February 18, 2021, significant advancements were made in the determination and adjustment of transmission tariffs. This case revolves around the Petition filed by Power Grid Corporation of India Ltd. (the Petitioner), seeking the truing-up of transmission tariffs from the Commercial Operation Date (COD) to March 31, 2019, and the establishment of tariffs for the period from April 1, 2019, to March 31, 2024, under the 2014 and 2019 Tariff Regulations, respectively.

The core issues addressed include the truing-up of annual fixed charges, determination of effective tax rates for Return on Equity (RoE), handling of Additional Capital Expenditures (ACE), depreciation methodologies, and the authorization of various ancillary costs such as Operation & Maintenance (O&M) expenses and Interest on Working Capital (IWC).

Summary of the Judgment

The CERC meticulously evaluated the Petitioner's claims for truing-up transmission tariffs and determining future tariffs for specific transmission assets under the “System Strengthening in North/West Part of WR for IPP Projects in Chattisgarh (IPP-E)” transmission project. The Commission approved the trued-up Annual Fixed Charges for the 2014-19 period and established the Annual Fixed Charges for the 2019-24 period, considering various factors such as capital costs, time over-runs, maintenance expenditures, and regulatory compliance.

Key outcomes of the judgment include:

• Approval of trued-up transmission tariffs for the 2014-19 period.
• Determination and approval of tariffs for the 2019-24 period based on combined transmission assets.
• Adoption of Weighted Average Life (WAL) for depreciation and capital cost calculations.
• Clarification on the treatment of Initial Spares in compliance with previous appellate judgments.
• Sanction of projected Additional Capital Expenditures (ACE) subject to truing-up.
• Rejection of separate O&M expenses for Power Line Carrier Communication (PLCC) systems.
• Establishment of methodologies for Interest on Loan (IoL) and Interest on Working Capital (IWC).

Analysis

Precedents Cited

The judgment heavily referenced the Appellate Tribunal for Electricity (APTEL) decision dated September 14, 2019, in Appeal No. 74 of 2017. APTEL's ruling emphasized the importance of determining Initial Spares based on the overall project cost during the truing-up process rather than on an individual asset basis. This precedent guided the CERC in allowing the Petitioner to compute Initial Spares for the 2019-24 tariff period based on the combined capital cost, ensuring consistency and adherence to prudential norms.

Additionally, the judgment referenced previous CERC orders from various petition numbers (e.g., Petition No. 303/TT/2020) to maintain consistency in tariff determination methodologies, especially concerning O&M expenses and capital cost allocations.

Legal Reasoning

The CERC adopted a structured approach in evaluating the Petitioner's claims, ensuring compliance with the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2014 and 2019. The Commission assessed the capital costs, depreciation rates, and the debt-equity ratio as per the stipulated regulations.

Key aspects of the legal reasoning include:

• Capital Cost Validation: The Commissioner validated the trued-up capital costs, ensuring that projected ACE remained within the Revised Cost Estimate (RCE) approved apportioned capital costs.
• Depreciation Methodology: Adoption of Weighted Average Rate of Depreciation (WAROD) in line with regulatory requirements, differentiating between IT and non-IT equipment.
• Interest Calculations: Verification of IoL based on actual loan portfolios and the applicability of floating interest rates, with provisions for future adjustments during truing-up.
• O&M Expenses: Strict adherence to normative rates for O&M expenses, with specific exclusions and justifications, notably the rejection of separate O&M claims for PLCC systems.
• Return on Equity (RoE): Ensuring that RoE calculations were based on notified Minimum Alternate Tax (MAT) rates, aligning with tax compliance requirements.

Impact

This judgment sets a significant precedent in the regulatory framework governing electricity transmission tariffs in India. Key impacts include:

• Standardization of Initial Spares Calculation: By aligning Initial Spares calculation with overall project costs during truing-up, the judgment promotes financial prudence and consistency across projects.
• Depreciation Practices: The clear delineation between IT and non-IT equipment depreciation rates ensures accurate financial representation and compliance with regulatory standards.
• Enhanced Transparency: The requirement for detailed justifications and supporting documents for ACE and other financial claims fosters transparency and accountability among transmission licensees.
• Tax Compliance: Mandating RoE computations based on notified MAT rates reinforces tax compliance, ensuring that financial returns are aligned with statutory obligations.
• Operational Efficiency: The rejection of separate O&M claims for PLCC systems prevents financial redundancies, promoting efficient resource utilization.

Future cases involving transmission tariff determinations will likely reference this judgment to guide similar truing-up and tariff setting processes, ensuring adherence to established regulatory principles.

Complex Concepts Simplified

Truing-Up of Transmission Tariffs

Truing-up refers to the regulatory process of adjusting previously determined tariffs to reflect actual costs incurred versus initially estimated costs. This ensures that transmission licensees are neither undercompensated nor overcharged for the services they provide.

Initial Spares

Initial Spares are reserve components and equipment kept on hand to maintain and ensure the efficient operation of transmission systems. They are capitalized as part of the project costs, subject to regulatory ceiling limits, to account for future maintenance needs.

Additional Capital Expenditure (ACE)

ACE encompasses any extra costs incurred beyond the original budget of a project. This can include costs from deferring work, contractual obligations, or addressing unforeseen challenges during project execution. ACE must be justified and remains subject to regulatory approval to ensure financial prudence.

Weighted Average Rate of Depreciation (WAROD)

WAROD is a method used to calculate depreciation based on the average lifespan of all assets within a project, weighted by their individual values. This approach provides a more accurate reflection of asset depreciation over time.

Return on Equity (RoE)

RoE represents the financial return that equity investors earn on their investment in a company. In regulatory contexts, it is calculated on a pre-tax basis and is influenced by effective tax rates, ensuring that licensees earn a fair return while complying with tax obligations.

Conclusion

The CERC's decision in Power Grid Corporation Of India Ltd., Saudamini v. Madhya Pradesh Power Management Company Ltd. And Others reinforces the importance of regulatory compliance, financial prudence, and transparency in the determination of transmission tariffs. By meticulously addressing aspects such as capital costs, depreciation, ACE, and RoE, the Commission ensures that tariff structures are fair, justifiable, and reflective of actual operational expenses.

This judgment not only resolves the specific disputes raised by the Petitioner but also establishes a robust framework for future tariff determinations in the electricity transmission sector. The emphasis on adhering to regulatory norms, coupled with the incorporation of adjudicative precedents, sets a high standard for licensees and stakeholders, fostering a more equitable and efficient electricity market in India.