Introduction

The Central Electricity Regulatory Commission (CERC) delivered a pivotal judgment on November 10, 2022, addressing a review petition filed by the Power Grid Corporation of India Limited (PGCIL). The crux of the dispute revolved around the calculation and allocation of Operation & Maintenance (O&M) Expenses and Interest During Construction (IDC) for specific transmission assets within the Northern Region. The case primarily focused on whether O&M Expenses should be based solely on the capital cost as of the Commercial Operation Date (COD) or extend up to the cut-off date, encompassing the entire original project cost.

Summary of the Judgment

In the original order dated August 19, 2021, under Petition No. 468/TT/2020, CERC had trued up the tariffs for the 2014-2019 and 2019-2024 periods concerning three Static VAR Compensators (SVCs) in Northern Region transmission assets. PGCIL challenged this order via a review petition, asserting that CERC erroneously restricted O&M Expenses to the capital cost as of COD and incorrectly deducted IDC based on computational discrepancies.

Upon reviewing the submissions, CERC upheld the IDC deductions of ₹9.88 lakh, deeming the review petition's claim of ₹7.99 lakh as insufficiently substantiated. However, CERC acknowledged the need for a more holistic approach to calculating O&M Expenses. By relaxing certain clauses of the 2019 Tariff Regulations under Regulation 76, CERC revised the O&M Expenses to account for the entire Plant and Machinery cost up to the cut-off date, excluding IDC, IEDC, land cost, and civil works. This adjustment was made to align the O&M Expenses with the original scope of work and to ensure consistency with Regulation 3(45) defining O&M Expenses.

Analysis

Precedents Cited

PGCIL referenced the Andhra Pradesh High Court's APTEL judgment dated December 10, 2008, in Appeal Nos. 151 and 152 of 2007 (NTPC Ltd. v. CERC), which was subsequently upheld by the Supreme Court in Civil Appeal No. 4112-13 of 2009 (CERC v. NTPC Limited). These cases reinforced the principle of considering the original scope and expenditures up to significant milestones like COD in tariff calculations. Additionally, CERC drew upon its previous order in Petition No. 658/TT/2020 dated October 18, 2021, which had similarly relaxed regulatory clauses to accommodate comprehensive cost evaluations.

Legal Reasoning

The cornerstone of CERC's legal reasoning lay in the interpretation of "Original Project Cost" as defined under Regulation 3(46) of the 2019 Tariff Regulations. CERC emphasized a purposive approach, advocating for a contextual understanding that encompasses all capital expenditures within the original project scope up to the cut-off date. This interpretation ensures that O&M Expenses accurately reflect the total investment in the transmission assets, beyond just the capital outlay up to COD.

Furthermore, CERC highlighted the necessity to differentiate between O&M Expenses and IDC, as delineated in Regulation 3(45). By excluding IDC, IEDC, land costs, and civil works from O&M computations, CERC maintained regulatory consistency and prevented anomalous financial treatments that could disadvantage utilities like PGCIL.

Impact

This judgment sets a significant precedent in the realm of electricity tariff regulation, particularly concerning the calculation of O&M Expenses. By broadening the base for O&M calculations to include the complete Plant and Machinery cost up to the cut-off date, CERC ensures a more equitable distribution of expenses and revenues. This decision may influence future tariff revisions and regulatory frameworks, promoting a more comprehensive assessment of project costs in tariff determinations.

Additionally, the rejection of the PGCIL's contention regarding IDC deductions underscores the necessity for stringent documentation and accurate financial reporting. Utilities must ensure precise computations and transparent disclosures to withstand regulatory scrutiny.

Complex Concepts Simplified

Operation & Maintenance (O&M) Expenses: These are the costs incurred in the day-to-day functioning of transmission assets, including manpower, maintenance, repairs, spares, insurance, and overheads.

Interest During Construction (IDC): This refers to the interest accumulated on borrowed funds during the construction phase of a project before it becomes operational.

Original Project Cost: As per Regulation 3(46), it encompasses all capital expenditures within the original scope of the project up to a specified cut-off date, including additional costs like IDC, IEDC (Interest on Equity and Debt Capital), land acquisition, and civil works.

Commercial Operation Date (COD): The date when a project is fully constructed and begins its intended commercial operations.

Regulation 76 (Power to Relax): This regulation empowers CERC to relax any provisions of the tariff regulations, provided reasons are documented, allowing flexibility to accommodate unique project circumstances.

Conclusion

The CERC's judgment in favor of PGCIL establishes a more inclusive framework for calculating O&M Expenses, ensuring that all relevant capital expenditures up to the cut-off date are duly considered. This decision promotes fairness and accuracy in tariff determinations, aligning regulatory practices with the comprehensive financial realities of transmission projects. By reaffirming the importance of precise IDC computations and expanding the basis for O&M expenses, CERC has fortified the regulatory environment, fostering greater transparency and accountability within the power sector.

Stakeholders within the electricity sector must heed this judgment, adapting their financial planning and regulatory compliance strategies accordingly. Future cases will likely reference this precedent, further shaping the landscape of electricity tariff regulations in India.