Introduction

The case of Power Grid Corporation of India Limited v. North-Eastern Electric Power Corporation Ltd. (Neepco Ltd.) and Others was adjudicated by the Central Electricity Regulatory Commission (CERC) on February 20, 2021. The petitioner, Power Grid Corporation of India Ltd., sought determination of the transmission tariff for the period from the Commercial Operation Date (COD) to March 31, 2019, under the CERC’s 2014 Tariff Regulations. The primary focus was on the "Hot Line Speech Communication (Computer Dialling) System for Grid Operation" installed in NERLDC and seven SLDCs across the North Eastern Region.

The key issues revolved around the approval of transmission tariffs, capital costs, handling of additional capitalization, operation and maintenance (O&M) expenditures, return on equity (ROE), and the implications of time and cost overruns in project execution.

Summary of the Judgment

CERC meticulously examined the petitioner’s claims and the associated financials. The commission approved the COD as April 1, 2018, and scrutinized the capital costs, ensuring no cost overrun was present. However, the petitioner’s claim of a time overrun of 166 days was not condoned due to inconsistencies and insufficient justification. Additionally, O&M expenses were not approved as the petitioner failed to provide the necessary auditor’s certificate. Certain components like Incidental Expenditure During Construction (IEDC) were partially allowed, subject to future adjustments.

Analysis

Precedents Cited

The judgment heavily relied on the provisions of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014. Specifically, Regulations 8, 9, 14, 19, 24, 25, 26, 27, 28, and 52 were pivotal in determining the allowances and conditions for tariff computation. The commission also referenced previous orders, such as the order dated January 27, 2017, in Petition No. 53/TT/2016, to guide the approval process of similar transmission assets.

Legal Reasoning

The commission's reasoning was anchored in achieving regulatory compliance and ensuring prudence in financial claims. For instance:

• Capital Cost Determination: Under Regulation 9, the capital cost was meticulously calculated by considering the apportioned approved cost, expenditure up to COD, and additional capital expenditure, ensuring alignment with the original project scope.
• Time Overrun: Despite the petitioner attributing delays to external factors like landslides and strikes, the commission found inconsistencies in the explanations and documentation, leading to the non-condonation of the 166-day overrun.
• O&M Expenses: The absence of an auditor’s certificate for the claimed O&M expenses led to their disallowance, emphasizing the necessity of robust financial substantiation.
• Return on Equity (ROE): ROE was calculated based on the base rate adjusted for the applicable Minimum Alternate Tax (MAT) rate, in accordance with Regulations 24 and 25.

Impact

This judgment sets a clear precedent for how transmission tariffs are determined, particularly highlighting the stringent requirements for substantiating financial claims. Future petitions will need to ensure:

• Comprehensive and consistent documentation of capital and operational expenditures.
• Prompt inclusion of all project assets in investment approvals to avoid ambiguities.
• Provision of necessary auditor’s certificates to validate financial claims.

Moreover, the non-condonation of time overruns underscores the importance of adhering to project timelines or providing unequivocal evidence when delays are attributable to uncontrollable factors.

Complex Concepts Simplified

Capital Cost

Capital cost refers to the total expenditure incurred in setting up the transmission asset, including construction, equipment, and related costs up to the COD.

Return on Equity (ROE)

ROE is the financial return expected by the investors of the company. In this case, the ROE was adjusted based on the applicable tax rates to determine the final rate used in tariff calculations.

Incidental Expenditure During Construction (IEDC)

IEDC includes additional costs incurred during the construction phase, such as administrative expenses and minor adjustments, capped at a specified percentage of the hard cost to maintain financial prudence.

Operational and Maintenance (O&M) Expenses

O&M expenses cover the costs related to the day-to-day functioning and upkeep of the transmission asset. Approval of these expenses requires thorough financial verification, typically through auditor certifications.

Conclusion

The CERC’s decision in Power Grid Corporation v. NEEPCO Ltd. reinforces the regulatory framework governing transmission tariff determinations. By delineating clear guidelines on the approval of capital costs, handling of time overruns, and validation of operational expenses, the commission ensures financial discipline and accountability. This judgment serves as a critical reference for future cases, emphasizing the necessity for meticulous documentation, adherence to project timelines, and compliance with regulatory norms to secure favorable tariff determinations.