Introduction

The Central Electricity Regulatory Commission (CERC) delivered a pivotal judgment on October 25, 2022, addressing a petition filed by the Power Grid Corporation of India Limited (Power Grid). The petitioner sought the truing up of transmission tariffs for the period from April 1, 2014 (Commissioning of Assets/Dated of Commercial Operation - COD) to March 31, 2019, under the CERC's 2014 and 2019 Tariff Regulations. Additionally, Power Grid aimed to establish the transmission tariff for the subsequent period from April 1, 2019, to March 31, 2024, concerning a comprehensive array of transmission assets associated with the Pallatana Gas Based Power Project and Bongaigaon Thermal Power Station in the North Eastern Region.

Summary of the Judgment

CERC meticulously reviewed Power Grid's assertions regarding capital cost recoveries, interest during construction (IDC), incidental expenditure during construction (IEDC), return on equity (RoE), operation and maintenance (O&M) expenses, and initial capital spares. The Commission acknowledged cost overruns as per the Revised Cost Estimates (RCE and RCE-II) and sanctioned them after ensuring adherence to regulations. The truing up of tariffs for the 2014-19 period fueled the approval of transmission charges, AFC (Annual Fixed Charges), and reimbursement claims without facing objections from the respondents. Furthermore, CERC delineated the methodology for calculating tariffs for the 2019-24 period, encompassing Weighted Average Life (WAL), depreciation rates, debt-equity ratios, and IWC (Interest on Working Capital).

Analysis

Precedents Cited

The judgment leaned significantly on the Authority for the Promotion of Clean Technologies and Environmental Regulation (APTEL) decision dated December 2, 2019 (Appeal No. 95 of 2018 and No. 140 of 2018), which emphasized that IEDC must be computed on an actual basis after a prudence check. CERC also referenced its earlier orders and the 2014 Tariff Regulations to ensure consistency and compliance.

Legal Reasoning

CERC followed a rigorous approach in evaluating Power Grid's claims:

• Capital Cost Allowance: The Commission scrutinized the apportioned capital costs against the Fixed Base (FR) and allowed an overall cost over-run under RCE and RCE-II, ensuring that additional expenditures were within regulatory bounds.
• Depreciation: In alignment with the 2019 Tariff Regulations, CERC set a Weighted Average Rate of Depreciation (WAROD) for the assets, ensuring that depreciation claims were justified and adhered to the stipulated norms.
• Interest on Loan (IoL) and Return on Equity (RoE): Both IoL and RoE were calculated based on actual rates and capital structures, with provisions to adjust for floating interest rates in future periods.
• Operation & Maintenance Expenses: O&M expenses were calculated using defined norms for sub-station bays, transformers, and transmission lines, excluding separate claims for PLCC (Power Line Carrier Communication) as per prior determinations.
• Initial Spares: CERC adhered to APTEL's precedent, allowing initial spares based on the overall project cost rather than individual asset costs, ensuring a holistic approach.

Impact

This judgment sets a robust precedent for future transmission tariff determinations, emphasizing:

• Regulatory Compliance: Firms must meticulously align their capital expenditures and tariff claims with CERC's guidelines to ensure approval.
• Comprehensive Cost Assessment: The approval of cost overruns under RCE and RCE-II underlines the importance of accurate and revised cost estimations.
• Standardization: The adoption of standardized depreciation rates and IWC calculations fosters consistency across the sector.
• Holistic Approach: By considering the transmission system as an integrated entity, CERC promotes a unified methodology in tariff determination.

Complex Concepts Simplified

Truing-Up of Transmission Tariff

Truing-up involves adjusting previously determined tariffs to reflect actual costs incurred, ensuring that transmission licensees can recover their legitimate expenses while beneficiaries are charged fairly.

Revised Cost Estimates (RCE and RCE-II)

RCEs are approved adjustments to the original project cost estimates, accounting for any deviations due to unforeseen expenses or project scope changes. RCE-II refers to a further revision when the project is substantially complete.

Interest During Construction (IDC)

IDC represents the interest accrued on loans taken to finance the construction of transmission assets. It's a crucial component in determining the total capital cost recoverable through tariffs.

Weighted Average Life (WAL)

WAL is a measure used to determine the effective useful life of the entire transmission project, ensuring that depreciation rates are applied consistently across all assets.

Debt-Equity Ratio

This ratio indicates the proportion of a company's funding that comes from debt versus equity. CERC mandates a standardized ratio to ensure equitable return on equity for transmission licensees.

Conclusion

The CERC's judgment in the Power Grid Corporation of India Limited petition underscores the Commission's commitment to ensuring transparency, fairness, and regulatory compliance in the determination of transmission tariffs. By meticulously analyzing capital costs, depreciation, and operational expenses, CERC has fortified the framework governing tariff truing-up, setting a benchmark for future cases. This decision not only facilitates the financial health of transmission licensees but also safeguards the interests of beneficiaries by ensuring that tariff adjustments are justifiable and grounded in actual costs.