CERC Establishes Comprehensive Framework for Tariff Truing-Up in Transmission Assets: Power Grid Corporation Case

Introduction

In the landmark case of Power Grid Corporation of India Ltd. vs. Central Electricity Regulatory Commission (CERC), adjudicated on February 8, 2021, the petitioner, a deemed transmission licensee, sought the truing-up of tariffs for the period from April 1, 2014, to March 31, 2019, and the determination of tariffs for the subsequent period from April 1, 2019, to March 31, 2024. The case centered around the tariff adjustments for transmission assets associated with the RAPP 5&6 in the Northern Region, encompassing various high-voltage transmission lines, sub-stations, and related equipment.

Summary of the Judgment

The Central Electricity Regulatory Commission meticulously reviewed the petitions submitted by Power Grid Corporation of India Limited (PGCIL) concerning the truing-up of tariffs for existing transmission assets and the establishment of tariffs for new periods under the 2014 and 2019 Tariff Regulations. After considering submissions, replies, and rejoinders from stakeholders, including BSES Rajdhani Power Limited (BRPL) and Uttar Pradesh Power Corporation Ltd. (UPPCL), the Commission approved the majority of the requested tariff adjustments while addressing specific contentions raised by the respondents.

Key decisions included the approval of trued-up Annual Fixed Charges (AFC) for the specified tariff periods, clarification on depreciation rates for IT equipment, and the rejection of separate Operation & Maintenance (O&M) expenses for Plant Load Control Centres (PLCC). Additionally, the Commission addressed claims related to Goods and Services Tax (GST), security expenses, capital spares, and the reimbursement of filing and publication expenses.

Analysis

Precedents Cited

The judgment references multiple prior petitions and orders, notably:

Petition No. 340/2010 and Petition No. 147/TT/2011: Earlier tariff determinations for the 2009-14 period.
Petition No. 557/TT/2014: Initial truing-up and tariff determination for the 2014-19 period.
Petition No. 19/TT/2020 and Petition No. 126/TT/2020: Addressing depreciation rates and O&M expenses for specific assets.

These precedents provided a foundational framework for evaluating the current petitions, ensuring consistency in regulatory decisions regarding tariff adjustments and expense reimbursements.

Legal Reasoning

The Commission's legal reasoning was anchored in the provisions of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014 and 2019. Key aspects of the reasoning included:

Truing-Up of Tariffs: The Commission evaluated whether the additional capital expenditures (ACE) and other claimed costs were justified and within the approved capital cost limits.
Depreciation Policies: Addressed discrepancies in the depreciation rates applied to IT equipment, ultimately enforcing a consistent rate as per the 2014 and 2019 Regulations.
Return on Equity (RoE): Ensured that RoE calculations were grossed up based on the effective tax rates under the Minimum Alternate Tax (MAT) provisions, aligning with regulatory standards.
Operation & Maintenance Expenses: Approved O&M expenses based on normative rates, while rejecting separate claims for PLCC to prevent double charging.
Security Expenses and Capital Spares: Directed the petitioner to consolidate claims for security expenses in a separate petition, streamlining the reimbursement process.

The Commission emphasized adherence to regulatory frameworks, ensuring that all tariff components were calculated transparently and in alignment with established norms.

Impact

This judgment has significant implications for future tariff determinations in the transmission sector:

Regulatory Compliance: Transmission licensees must meticulously follow the CERC regulations when claiming and adjusting tariffs, particularly concerning depreciation and RoE calculations.
Cost Allocation: Clear guidelines on the allocation and truing-up of various costs, such as O&M and working capital, provide a standardized approach, reducing ambiguity in future petitions.
Tax Implications: The emphasis on MAT rates for RoE calculations underscores the need for transmission entities to align their financial practices with tax provisions, ensuring accurate tariff formulations.
Process Efficiency: By directing separate petitions for specific expenses (e.g., security expenses), the Commission promotes a more organized and efficient regulatory process.

Overall, the judgment reinforces the importance of adherence to regulatory standards, ensuring fair and transparent tariff determination for transmission assets.

Complex Concepts Simplified

Truing-Up of Tariffs

Truing-up refers to the process of adjusting previously approved tariffs to reflect the actual costs incurred. This ensures that transmission licensees recover their costs accurately without overcharging or undercharging the beneficiaries.

Depreciation and Weighted Average Rate of Depreciation (WAROD)

Depreciation is the allocation of the cost of an asset over its useful life. WAROD is a method used to calculate an average depreciation rate for assets with varying depreciation schedules, ensuring a uniform approach in financial reporting.

Return on Equity (RoE)

RoE represents the profitability relative to shareholders' equity. In tariff determinations, RoE is 'grossed up' to account for taxes, ensuring that transmission entities achieve a fair return on their investments after tax obligations.

Operation & Maintenance (O&M) Expenses

O&M expenses encompass the costs associated with the day-to-day functioning and upkeep of transmission assets. These are calculated based on normative rates established by regulatory bodies to ensure consistency and fairness in cost recovery.

Interest on Working Capital (IWC)

IWC covers the cost of funds tied up in operational activities, such as receivables and maintenance spares. The rate of interest on IWC is determined based on normative bank rates, ensuring that transmission entities can recover the costs of maintaining operational liquidity.

Conclusion

The CERC's judgment in the Power Grid Corporation of India Ltd. case establishes a robust framework for the truing-up and determination of tariffs for transmission assets. By meticulously applying regulatory provisions, the Commission ensures that tariffs reflect actual costs while maintaining fairness for both transmission entities and beneficiaries. Key takeaways include the necessity for precise financial practices, adherence to depreciation and RoE guidelines, and a structured approach to handling O&M and IWC expenses. This judgment not only resolves the immediate petitions but also sets a precedent for future tariff determinations, promoting transparency, consistency, and regulatory compliance in the energy sector.