Central Electricity Regulatory Commission Sets Precedent on Transmission Tariff and Force Majeure Condonation in Power Grid Corporation Case

Introduction

In the landmark case of Power Grid Corporation of India Limited vs. Central Electricity Regulatory Commission (CERC), the CERC addressed crucial aspects of transmission tariff determination under the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019. Filed on February 22, 2023, by the Power Grid Corporation (hereafter referred to as the Petitioner), the petition sought the determination of transmission tariffs for specific transmission assets within the Western Region-Eastern Region corridor. The key issues revolved around the approval of capital costs, condonation of time over-runs due to the COVID-19 pandemic, and the recovery of various charges and expenses associated with transmission assets.

The respondents in the case included various distribution licensees and power departments primarily from the Western and Northern Regions, who are the beneficiaries of the transmission services provided by the Petitioner.

Summary of the Judgment

The CERC, after thorough examination of the submissions from both the Petitioner and the Respondents, delivered an order that primarily focused on the determination and approval of the transmission tariff for the specified assets under the 2019 Tariff Regulations for the period from COD (Commercial Operation Date) to March 31, 2024. Key decisions included:

Approval of the capital cost claimed by the Petitioner, which was within the approved estimates without any cost over-runs.
Condonation of the time over-run of 73 days attributed to the COVID-19 pandemic, recognizing it as a force majeure event beyond the Petitioner's control.
Approval of various components of the transmission tariff, including Depreciation, Interest on Loan, Return on Equity (RoE), Operation & Maintenance (O&M) Expenses, and Interest on Working Capital (IWC).
Rejection of premature claims related to Goods and Services Tax (GST) on transmission charges, as GST was not applicable at the time of the judgment.
Entitlement of the Petitioner to reimbursement of filing fees, publication expenses, license fees, and RLDC fees as per the applicable regulations.

The judgment meticulously analyzed each request and counter-arguments, ensuring that the decisions were in alignment with the 2019 Tariff Regulations and the prevailing legal framework.

Analysis

Precedents Cited

In this judgment, the CERC primarily referenced the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019. While specific prior cases were not explicitly cited in the provided text, the judgment heavily relied on the statutory provisions outlined in the 2019 Tariff Regulations. Notably, the court adhered to regulations concerning capital cost determination, interest calculations, depreciation, and the handling of unforeseen events like COVID-19 under the force majeure clause. This adherence underscores the importance of regulatory compliance in tariff determinations and sets a procedural benchmark for future cases.

Legal Reasoning

The CERC's legal reasoning followed a structured approach:

Compliance with Regulatory Provisions: The Commission meticulously evaluated the Petitioner’s claims against the 2019 Tariff Regulations. Each component of the tariff, including capital costs, depreciation, interest on loans, and return on equity, was assessed for compliance with the stipulated norms.
Assessment of Cost Over-runs: Upon examining the Petitioner’s assertion that there was no cost over-run, the Commission analyzed the detailed breakdown of costs. It concluded that the estimated completion cost was within the approved budget, thereby disallowing any cost over-runs.
Condonation of Time Over-runs: Recognizing the unprecedented impact of the COVID-19 pandemic, the Commission evaluated the Petitioner’s request to condone the 73-day delay. It referenced the Ministry of Power’s circular extending the Scheduled Commercial Operation Date (SCOD) by five months for affected projects, thereby justifying the condonation as per Regulation 22(2) of the 2019 Tariff Regulations.
Justification of Transmission Charges: Each component of the transmission charges was justified with adherence to regulatory norms. For instance, the Initial Spares were allowed within the norms, and the Interest on Loan was calculated based on the weighted average rate of interest as prescribed.
Rejection of GST Claims: The Commission reasoned that since GST was not levied on transmission services at the time, the Petitioner’s claim for GST on transmission charges was premature and therefore disallowed.

This methodical approach ensured that the judgment was not just a decision on tariff determination but a comprehensive compliance check with the established regulations.

Impact

The judgment holds significant implications for the electricity transmission sector:

Regulatory Compliance: It reinforces the necessity for transmission licensees to adhere strictly to the 2019 Tariff Regulations, ensuring that all claims and tariffs are within the approved frameworks.
Handling Force Majeure: By condoning delays caused by unprecedented events like the COVID-19 pandemic, the judgment provides a clear precedent on how regulatory bodies can offer flexibility in light of force majeure, ensuring that unforeseen global crises do not unduly penalize entities.
Tariff Determination Framework: The detailed breakdown and approval of various tariff components set a benchmark for future tariff determination cases, promoting transparency and consistency in how tariffs are calculated and deemed justifiable.
Financial Planning for Transmission Entities: Transmission entities can now better plan their financials, knowing that certain cost elements like initial spares and working capital interests have been clarified and approved under specific regulations.
Tax Implications: The dismissal of premature GST claims underscores the importance of understanding current tax laws and their applicability to specific services, preventing future litigation on similar grounds.

Overall, this judgment not only settles the immediate dispute but also provides a framework for handling similar cases in the future, balancing the interests of both transmission entities and their beneficiaries.

Complex Concepts Simplified

1. Capital Cost

Definition: The total expenditure incurred or projected to be incurred up to the date of commercial operation of a project, including interest during construction, capitalized spares, and additional costs as specified in the regulations.

Application in Judgment: The Commission evaluated the capital cost claimed by the Petitioner, ensuring it included all permissible expenditures and was within the approved budget without any over-runs.

2. Force Majeure

Definition: Unforeseeable circumstances that prevent someone from fulfilling a contract, such as natural disasters or pandemics.

Application in Judgment: The Petitioner's delay in commissioning was attributed to the COVID-19 pandemic. The Commission recognized this as a force majeure event and condoned the 73-day delay.

3. Return on Equity (RoE)

Definition: The financial ratio that measures the ability of a company to generate profits from its shareholders' investments.

Application in Judgment: The RoE was calculated based on the base rate and adjusted for the Mandatory Alternate Tax (MAT) rate, ensuring it was within the regulatory ceiling.

4. Interest on Working Capital (IWC)

Definition: The interest payable on the capital required for the day-to-day operations of a business.

Application in Judgment: The IWC was computed as per the normative basis defined in the regulations, considering receivables, maintenance spares, and O&M expenses.

5. Additional Capital Expenditure (ACE)

Definition: Expenditures incurred after the commercial operation date but within the original scope of the project that can be capitalized for tariff determination.

Application in Judgment: ACE claims by the Petitioner for balance and retention payments were allowed, subject to truing up and compliance with the regulatory provisions.

Conclusion

The CERC's judgment in the Power Grid Corporation case is a comprehensive affirmation of regulatory frameworks governing transmission tariff determinations. By meticulously evaluating each claim against the 2019 Tariff Regulations, the Commission ensured that the tariff determination was both fair and compliant. The condonation of the time over-run due to COVID-19 sets an important precedent on how force majeure events should be treated in regulatory contexts, providing a balanced approach that safeguards the interests of transmission entities without unfairly burdening beneficiaries. Furthermore, the detailed approval of various cost components underlines the importance of transparency and adherence to regulatory norms in tariff determination processes. This judgment not only resolves the immediate disputes but also serves as a guiding framework for future cases, promoting consistency, fairness, and regulatory compliance in the electricity transmission sector.