Introduction

The case of Power Grid Corporation Of India Limited v. Himachal Pradesh State Electricity Board And Others (S). was adjudicated by the Central Electricity Regulatory Commission (CERC) on January 10, 2022. The primary petitioner, Power Grid Corporation of India Limited (PGCIL), a deemed transmission licensee, sought the truing up of transmission tariffs for the periods 2009-2014 and 2014-2019, as well as the determination of tariffs for the 2019-2024 period. The respondents comprised various distribution licensees, power utilities, and power departments primarily benefiting from the Northern Region's transmission services.

The transmission assets in question were associated with the “765 kV System for Central Part of Northern Grid Part-I in Northern Region,” including major transmission lines and substations. The core issues revolved around the accurate determination and adjustment of transmission tariffs based on revised cost estimates (RCE), capital expenditures, and adherence to the CERC's Tariff Regulations of 2014 and 2019.

Summary of the Judgment

CERC meticulously examined PGCIL's petitions for tariff truing up and determination across multiple tariff periods. The Commission upheld PGCIL's claims, allowing for adjustments based on approved RCEs and actual capital expenditures. Key decisions included:

• Approval of trued-up transmission tariffs for the 2009-2014 and 2014-2019 periods.
• Determination of transmission tariffs for the 2019-2024 period based on combined assets.
• Approval of Additional Capital Expenditure (ACE) under specified regulatory provisions.
• Regulation of Operation & Maintenance (O&M) expenses in line with normative rates.
• Reimbursement allowances for filing fees and publication expenses.
• Conditions for the reimbursement of license fees and Regional Load Dispatch Centre (RLDC) fees.
• Considerations regarding Goods and Services Tax (GST) and security expenses.

The Commission emphasized adherence to regulatory frameworks, ensuring that tariff adjustments were both prudent and justified, reflecting actual costs and expenditures.

Analysis

Precedents Cited

The judgment predominantly referenced the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014 and the 2019 Tariff Regulations. These regulations outline the procedures and guidelines for tariff determination, capital cost allocation, depreciation, and other financial considerations essential for transmission licensees like PGCIL.

Specific provisions addressed included:

• Regulation 6 (2014 Regulations): Detailing tariff determination for transmission systems.
• Regulation 7 (2014 Regulations): Outlining application procedures for tariff determination.
• Regulation 19 (2014 & 2019 Regulations): Governing Capital Cost and Debt-Equity ratios.
• Regulation 25 (2019 Regulations): Addressing Additional Capitalization.
• Regulation 33 & 34 (2019 Regulations): Defining depreciation and interest on working capital.

These regulations served as foundational pillars guiding the Commission's decisions, ensuring consistency and regulatory compliance in tariff determinations.

Legal Reasoning

CERC's legal reasoning was rooted in the meticulous application of the aforementioned tariff regulations. The Commission conducted a thorough prudence check of PGCIL's submissions, ensuring all financial claims were substantiated by approved RCEs and auditor certifications.

Key aspects of the legal reasoning included:

• Capital Cost Allocation: The Commission verified that PGCIL's capital costs were within approved apportioned costs as per RCEs, allowing revisions where justified.
• Effective Date of Commercial Operation (E-COD): E-COD was calculated to determine the elapsed life of assets, influencing depreciation and tariff calculations.
• Depreciation: Depreciation was computed based on the actual capital cost and the remaining useful life of assets, adhering to the straight-line method as prescribed.
• Return on Equity (RoE): RoE was grossed up based on effective tax rates, particularly considering the application of Minimum Alternate Tax (MAT) rates.
• Operation & Maintenance (O&M) Expenses: O&M expenses were evaluated against normative rates, ensuring claims were within regulatory allowances.
• Additional Capital Expenditure (ACE): ACE claims were scrutinized under specific regulatory provisions, allowing only those expenditures that met criteria related to undischarged liabilities and project scope.

CERC ensured that all adjustments and determinations were not only compliant with existing regulations but also reflected the true cost and operational realities of the transmission projects.

Impact

This judgment holds significant implications for future tariff determinations and truing up processes within the power transmission sector. Key impacts include:

• Regulatory Compliance: Reinforces the necessity for transmission licensees to adhere strictly to CERC's tariff regulations, particularly in cost allocation and expenditure claims.
• Financial Prudence: Sets a precedent for conducting detailed prudence checks, ensuring that tariffs reflect actual and approved expenditures.
• Tariff Determination Framework: Provides a clear framework for combining assets and determining tariffs for multi-period tariff blocks, enhancing transparency and consistency.
• ACE and RoE Adjustments: Clarifies the conditions under which ACE and RoE can be adjusted, offering guidance for similar cases in the future.

Overall, the decision strengthens regulatory oversight, encourages meticulous financial documentation, and ensures that tariff calculations remain fair and reflective of actual costs.

Complex Concepts Simplified

Truing Up of Tariff

Truing up refers to the process of adjusting previously determined tariffs to align them with the actual costs incurred. This ensures that transmission licensees like PGCIL recover their true costs, preventing over or under-recovery in tariff calculations.

Additional Capital Expenditure (ACE)

ACE pertains to capital expenditures beyond the original scope of the project. In this context, ACE allows PGCIL to claim additional costs incurred due to unforeseen liabilities or changes, ensuring that such expenses are recoverable through tariffs.

Debt-Equity Ratio

The Debt-Equity Ratio represents the proportion of debt to equity in the funding structure of a project. In tariff calculations, this ratio is crucial for determining the cost of capital and return on equity, influencing the overall tariff rates.

Return on Equity (RoE)

RoE is the profit generated on the equity invested in the project. It is a component of the tariff calculation, ensuring that investors receive a fair return on their investment, adjusted for applicable tax rates.

Operation & Maintenance (O&M) Expenses

O&M Expenses cover the costs associated with operating and maintaining the transmission infrastructure. These expenses are standardized through normative rates, ensuring consistency and fairness in tariff calculations.

Conclusion

The CERC's decision in Power Grid Corporation Of India Limited v. Himachal Pradesh State Electricity Board And Others (S). underscores the Commission's commitment to regulatory rigor and financial prudence in tariff determinations. By approving the trued-up tariffs and setting a clear framework for future tariff periods, CERC ensures that transmission licensees can recover their actual costs, fostering a fair and transparent power transmission ecosystem.

This judgment serves as a pivotal reference for similar cases, highlighting the importance of adherence to regulatory guidelines, meticulous documentation, and justified financial claims. It not only impacts PGCIL and its beneficiaries but also sets a benchmark for transmission tariff determinations across the industry, promoting consistency, fairness, and financial integrity.