Introduction

The case of Power Grid Corporation of India Ltd. v. Madhya Pradesh Power Management Company Ltd. And Others (S) adjudicated by the Central Electricity Regulatory Commission (CERC) on February 2, 2021, marks a significant development in the realm of electricity tariff regulation in India. The principal focus of the petition was the truing up of tariffs for a specific transmission project under the CERC's Terms and Conditions of Tariff Regulations, 2014 and, subsequently, under the Terms and Conditions of Tariff Regulations, 2019.

The petitioner, Power Grid Corporation of India Ltd. (PGCIL), a deemed transmission licensee, sought the approval of trued-up transmission tariffs for the period from Commercial Operation Date (COD) to March 31, 2019, and the determination of tariffs for the 2019-24 period. The transmission assets in question encompassed various 765 kV Line Bays and associated sub-station equipment across the Western and Northern Regions.

Summary of the Judgment

The CERC meticulously scrutinized the submissions by PGCIL and the responses from respondents, predominantly distribution and transmission licensees benefiting from the project. The Commission approved the trued-up transmission tariffs for the 2014-19 period and sanctioned the tariffs for the 2019-24 period, subject to certain conditions and future adjudications.

Key components of the tariff approved included Depreciation, Interest on Loan (IoL), Return on Equity (RoE), Interest on Working Capital (IWC), and Operation & Maintenance (O&M) Expenses. The Commission also addressed and accommodated the implications of the APTEL's judgment dated September 14, 2019 concerning the treatment of Initial Spares, aligning with the regulatory framework.

While the majority of the petition was disposed of favorably, the issue of sharing transmission charges was deferred for further deliberation, pending comprehensive hearings involving all stakeholders.

Analysis

Precedents Cited

The judgment extensively referenced prior orders and regulations, notably:

• Petition No.261/TT/2015: The foundational order wherein tariffs for the 2014-19 period were initially determined.
• APTEL's Judgment in Appeal No.74 of 2017: A pivotal precedent influencing the treatment of Initial Spares, stipulating that prudence checks should consider capital costs on an overall project basis during truing up, rather than asset-wise.
• Petition No.343/2010 and Petitions No.147/TT/2011: Earlier determinations of tariffs for the 2009-14 period, providing a historical context for the current petition.

The integration of APTEL's judgment underscored the Commission's commitment to evolving its regulatory practices in alignment with appellate determinations, thereby ensuring consistency and legal robustness in tariff computations.

Legal Reasoning

The CERC's legal reasoning was anchored in meticulous adherence to the 2014 and 2019 Tariff Regulations, ensuring each component of the tariff was calculated based on substantiated financial data and regulatory provisions. Key aspects included:

• Truing Up Mechanism: Adjusting the approved tariffs based on actual incurred costs versus projected estimates, ensuring fair and transparent tariff determination.
• Return on Equity (RoE): Calculation adjustments based on the Minimum Alternate Tax (MAT) rates, reflecting the company's tax obligations and ensuring an equitable return.
• Initial Spares: Alignment with APTEL's directive to calculate Initial Spares based on the total project cost during truing up, preventing asset-wise disparities.
• Depreciation: Utilization of the Weighted Average Rate of Depreciation (WAROD), ensuring a standardized and fair depreciation calculation across assets.

The Commission's approach balanced regulatory compliance with financial prudence, ensuring that tariffs not only reflected actual costs but also safeguarded the interests of both the transmission licensee and the beneficiaries.

Impact

This judgment sets a notable precedent in electricity tariff regulation by:

• Standardizing Cost Components: Providing a clear framework for truing up tariffs, which can be emulated in future tariff determinations.
• Influencing Future Tariff Petitions: The comprehensive treatment of financial components like RoE, IoL, and initial spares will guide future petitions, ensuring consistency and adherence to regulatory norms.
• Enhancing Transparency: By delineating the methodologies for cost computations and adjustments, the judgment fosters greater transparency in tariff determination, bolstering stakeholder confidence.

Moreover, the deferment of the transmission charge sharing issue indicates a thorough and inclusive approach, ensuring that all relevant parties are adequately represented and considered in regulatory decisions.

Complex Concepts Simplified

Truing Up

Truing Up refers to the process of adjusting previously approved tariffs based on the actual costs incurred versus the estimates made during the initial tariff determination. This ensures that the transmission company neither suffers undue losses nor charges exorbitant tariffs due to cost fluctuations.

Return on Equity (RoE)

Return on Equity (RoE) is the remuneration payable to the equity shareholders of a company, reflecting the profitability and efficiency of the company in generating returns on its equity investments. In tariff regulations, it ensures that the transmission licensee receives a fair return on the capital invested by its shareholders.

Interest on Loan (IoL)

Interest on Loan (IoL) pertains to the interest expenses borne by the transmission licensee on the loans taken for capital investments. Accurate computation of IoL is crucial as it directly impacts the annual fixed charges levied on beneficiaries.

Additional Capital Expenditure (ACE)

Additional Capital Expenditure (ACE) encompasses unforeseen or additional expenses incurred during the project execution phase, beyond the initially sanctioned budget. Regulation-wise, it includes costs like un-discharged liabilities and deferred works.

Minimum Alternate Tax (MAT)

Minimum Alternate Tax (MAT) is a provision under the Indian Income Tax Act that ensures tax is paid on book profits. For businesses operating under MAT, the effective tax rate influences the calculation of RoE, ensuring tax obligations are duly reflected in tariff determinations.

Conclusion

The CERC's judgment in the matter of Power Grid Corporation of India Ltd. v. Madhya Pradesh Power Management Company Ltd. represents a milestone in the regulatory oversight of electricity tariffs in India. By instituting a robust framework for truing up tariffs, addressing complications arising from Initial Spares per APTEL's directives, and meticulously calculating financial metrics like RoE in alignment with MAT rates, the Commission has fortified the integrity and fairness of tariff determination.

Furthermore, the deferment of the transmission charge sharing issue underscores the Commission's commitment to comprehensive and inclusive deliberations, ensuring that all stakeholders' interests are harmoniously balanced. This judgment not only resolves immediate financial discrepancies but also carves a path for future tariff determinations, emphasizing transparency, regulatory compliance, and equitable stakeholder remuneration.

As the electricity sector continues to evolve, such judicious and forward-thinking regulatory decisions will be pivotal in sustaining balanced growth, fostering investment, and ensuring consumer protection in the long run.