CERC Establishes Comprehensive Framework for Truing Up Transmission Tariffs: Power Grid Corp v. MP Power Mgmt Co

Introduction

The case of Power Grid Corporation of India Limited v. Madhya Pradesh Power Management Company Limited And Others adjudicated by the Central Electricity Regulatory Commission (CERC) on July 6, 2020, marks a significant development in the realm of transmission tariff determination. This petition, initiated by Power Grid Corporation of India Ltd. (hereinafter referred to as the "Petitioner"), sought the truing up of transmission tariffs for the 765 kV Line bays at the Jabalpur Pooling Station for the Gadarwara STPS (NTPC)-Jabalpur Pooling Station Transmission Line (hereinafter referred to as the "transmission asset") under the "POWERGRID Works associated with Part A of Transmission system for Gadarwara STPS of NTPC" in the Western Region.

The core issues revolved around the adjustment (truing up) of transmission tariffs for the periods 2014-19 and 2019-24, adherence to the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2014 and 2019, and the recovery of various financial components such as interest on loans, return on equity, and operational expenses.

The respondents in this case were primarily transmission and distribution licensees, including M.P. Power Management Company Limited (MPPMCL) and Maharashtra State Electricity Distribution Company Limited (MSEDCL), who are direct beneficiaries of the transmission services provided by the Petitioner.

Summary of the Judgment

The CERC meticulously examined the petitions filed by the Petitioner, addressing each prayer in accordance with the applicable tariff regulations of 2014 and 2019. The Commission's decision encompassed the approval of trued-up transmission tariffs, allowances for various financial adjustments, and the recovery of specific charges from the beneficiaries.

Key decisions include:

Approval of the trued-up transmission tariff for the 2014-19 tariff period and determination of the transmission tariff for the 2019-24 period.
Allowance for the recovery of shortfalls or refunds related to Return on Equity (ROE) due to changes in the applicable Minimum Alternate Tax (MAT) rates.
Approval for the reimbursement of petition filing fees and publication expenses.
Authorization for the Petitioner to bill and recover Licensee fees, RLDC (Regional Load Dispatch Centre) fees, and charges separately from the beneficiaries.
Clarification regarding the handling of GST on transmission charges, deeming the Petitioner's prayer premature as GST was not applicable at the time.
Guidance on the disallowed and allowed components for Interest on Loan (IOL), Depreciation, and Operation & Maintenance (O&M) Expenses.

The Commission emphasized adherence to prudence checks, justified the approval or disallowance of specific claims, and provided directives for future filings related to security expenses and capital spares.

Analysis

Precedents Cited

While the judgment primarily references the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2014 and 2019, it implicitly builds upon established principles of tariff determination and financial accountability within the electricity transmission sector. Previous decisions, such as Petition No. 250/TT/2017, set the groundwork for understanding the Commission's stance on capital expenditure, interest computations, and regulatory compliance.

These precedents influenced the Commission's meticulous approach in evaluating the Petitioner’s claims, ensuring consistency and fairness in tariff regulation.

Legal Reasoning

The Commission's legal reasoning was anchored in the detailed assessment of the Petitioner's financial claims against the backdrop of the 2014 and 2019 Tariff Regulations. The primary considerations included:

Adherence to Regulatory Framework: Ensuring that all claims for truing up and tariff adjustments conformed to the specified regulations.
Prudence Check: Verifying the legitimacy and necessity of the claimed expenditures to prevent cost overruns and ensure economic efficiency.
Transparency and Accountability: Requiring the Petitioner to furnish detailed justifications, contracts, and assessment orders to substantiate its claims, especially concerning ROE and capital expenditure adjustments.
Fairness to Beneficiaries: Balancing the financial viability of the Petitioner with the economic interests of the transmission and distribution licensees (beneficiaries).

The Commission meticulously analyzed each component of the Petitioner's claims, allowing those within regulatory norms while disallowing or adjusting those that lacked sufficient justification or exceeded approved budgets.

Impact

This judgment has profound implications for the electricity transmission sector:

Standardization of Tariff Truing Up: Establishing a clear framework for adjusting tariffs based on actual expenditures and regulatory compliance.
Enhanced Financial Scrutiny: Signaling a stringent review process for claims related to capital expenditure, interest computations, and ROE adjustments.
Guidance for Future Petitions: Providing a reference point for transmission entities to structure their financial claims, ensuring alignment with CERC regulations.
Protection of Beneficiaries' Interests: Ensuring that beneficiaries are not subjected to unwarranted financial burdens by enforcing prudence in expense claims.

Future cases will likely reference this judgment to guide the truing up process, financial adjustments, and regulatory compliance in transmission tariff determinations.

Complex Concepts Simplified

Truing Up of Transmission Tariffs

Truing up refers to the adjustment of tariffs to reflect the actual costs and expenditures incurred during a tariff period. It ensures that the tariffs charged are fair and based on real financial data, preventing overcharging or undercharging.

Return on Equity (ROE)

Return on Equity (ROE) is the profit generated for each unit of equity invested by shareholders. In regulatory terms, it represents the rate of return that the company is allowed to earn on its equity base, ensuring investors receive a fair return while maintaining reasonable costs for consumers.

Interest on Loan (IOL)

Interest on Loan (IOL) pertains to the interest expenses incurred on borrowed capital used for funding projects. Regulatory authorities determine the permissible IOL to ensure companies do not pass excessive interest costs onto consumers.

Additional Capital Expenditure (ACE)

Additional Capital Expenditure (ACE) refers to unforeseen or deferred expenditures that arise during a project’s implementation. ACE can include costs due to change in laws, compliance requirements, or delays, and is subject to regulatory approval for inclusion in tariff calculations.

Operation & Maintenance (O&M) Expenses

Operation & Maintenance (O&M) Expenses are the costs associated with running and maintaining transmission assets. These expenses ensure the reliability and efficiency of the transmission system.

Conclusion

The CERC's judgment in the case of Power Grid Corporation of India Ltd. v. Madhya Pradesh Power Management Company Ltd. underscores the Commission's commitment to meticulous financial oversight and regulatory compliance in tariff determinations. By approving the trued-up transmission tariffs and setting clear guidelines for future adjustments, the Commission has fortified the framework within which transmission entities operate, ensuring financial prudence and fairness to both the service providers and their beneficiaries.

This decision not only resolves the specific disputes raised by the Petitioner but also sets a precedent for handling similar cases in the future. Transmission entities must now align their financial claims with the rigorous standards set forth by the CERC, ensuring transparency, accuracy, and regulatory adherence in their tariff-related proceedings.

Ultimately, this judgment contributes to the stability and reliability of the electricity transmission sector, fostering an environment where financial practices are transparent and equitable, benefiting both providers and consumers alike.