CERC Establishes Precedent on Transmission Tariff Determination for Upgraded Conductors and Cost Overruns

Introduction

The case of Essar Power Transmission Company Limited v. Essar Power M.P. Limited and Others adjudicated by the Central Electricity Regulatory Commission (CERC) on March 14, 2022, marks a significant milestone in the determination of transmission tariffs for upgraded transmission assets. The dispute centered around the approval and calculation of transmission tariffs for the 400 kV D/C Mahan-Sipat Transmission Line and its associated infrastructure developed by Essar Power Transmission Company Limited (EPTCL).

The primary parties involved were EPTCL as the petitioner and Essar Power M.P. Limited (EPMPL) along with several other entities as respondents. The core issues revolved around the amendment of conductor configurations from triple to quad moose conductors, substantial cost overruns, and delays attributed to uncontrollable factors such as forest clearance and Right of Way (RoW) issues. Additionally, the case scrutinized EPTCL's adherence to competitive bidding processes and the allocation of increased costs to transmission tariffs.

Summary of the Judgment

The CERC evaluated EPTCL's petition for determining the transmission tariff for the 400 kV D/C Mahan-Sipat Transmission Line and associated assets from the Commercial Operation Date (COD) to March 31, 2019. The court meticulously analyzed the cost overruns, the legitimacy of tariff adjustments related to conductor upgrades, and the accountability of EPTCL concerning project delays.

Key findings include:

Approval of tariff allocation considering a 76:24 split between PoC (common pool) and EPMPL respectively.
Cerd determination to condone time overruns attributable to force majeure events such as delays in forest clearance and RoW issues.
Disallowance of the 12% margin cost paid to EPMPL's subsidiary due to non-adherence to international competitive bidding processes.
Mandate for EPTCL to recalibrate tariffs to reflect the actual cost of quad moose conductor configurations, with the increased costs borne by EPMPL as per earlier undertakings.

Ultimately, the CERC sanctioned the transmission charges for the specified period, ensuring that EPTCL could recover justified costs without unfairly burdening consumers.

Analysis

Precedents Cited

The judgment references several key precedents that influenced the decision-making process:

North Karanpura Transmission Co. Ltd. v. Central Electricity Regulatory Commission (CERC): This case emphasized the necessity of competitive bidding in project execution to ensure cost-effectiveness and protect consumer interests.
Jindal Power Ltd. v. PGCIL & Others: Highlighted the importance of adhering to regulatory frameworks during tariff determinations, especially when modifications to project specifications occur post-license approval.
Adani Transmission (India) Ltd. v. CERC & Others: Reinforced the principle that any amendments to project configurations must align with the original conditions of tariff approvals and that deviations require regulatory consent.

These precedents collectively underscored the CERC's commitment to transparency, accountability, and adherence to established regulatory processes in tariff determinations.

Legal Reasoning

The CERC's legal reasoning was multifaceted, focusing on regulatory conformity, equitable cost allocation, and the mitigation of undue consumer burden. Key elements include:

Regulatory Compliance: EPTCL was mandated to comply with the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014. The modification from triple to quad moose conductors required explicit approval, ensuring that such changes were justified and did not unduly inflate costs.
Cost Allocation: Recognizing the 24% cost increase due to conductor upgrade, the CERC enforced the commitment that EPMPL would absorb this additional cost, hence protecting consumers from bearing the brunt of infrastructural enhancements beyond the original project scope.
Prudence in Tariff Determination: The Commission conducted a prudence check, scrutinizing claimed costs against market norms and regulatory guidelines. Elements such as Indirect Costs (IDC), Financing Charges (FC), Operation and Maintenance Expenses (O&M), and Interest on Working Capital (IWC) were meticulously examined and adjusted accordingly.
Condonation of Delays: CERC acknowledged delays arising from uncontrollable factors like forest clearance and RoW issues as force majeure events, thereby condoning these delays and excluding them from cost overruns affecting tariff calculations.
Competitive Bidding Adherence: Stemming from the North Karanpura case, the CERC found that EPTCL's awarding of contracts to its subsidiary without adhering to international competitive bidding norms resulted in unjustified cost increments, leading to the disallowance of the 12% margin cost.

This comprehensive legal reasoning aligns with the regulatory intent to ensure that tariffs are both fair and reflective of actual project costs, while also safeguarding consumer interests.

Impact

The judgment has far-reaching implications for future transmission projects and regulatory practices:

Enhanced Regulatory Scrutiny: Transmission companies must adhere strictly to competitive bidding processes. Any deviation, especially favoritism towards affiliates, will result in disallowed costs.
Cost Transparency: Companies are obligated to maintain transparent and well-documented cost structures. Unexplained or unjustified cost over-runs are unlikely to be sanctioned without robust evidence.
Protection Against Unwarranted Tariff Increases: Consumers are protected from bearing additional costs arising from project optimizations or upgrades that were not part of the original contractual or regulatory framework.
Precedent for Handling Force Majeure: The acceptance of delays due to uncontrollable factors sets a clear precedent, allowing companies to seek condonation for such delays without being penalized in tariff determinations.
Alignment with Environmental and Land Use Regulations: The necessity to obtain proper clearances and manage RoW issues is reinforced, ensuring that infrastructural projects are environmentally and socially compliant.

Overall, the judgment reinforces the importance of regulatory adherence, transparency in cost management, and the protection of consumer interests in the energy sector.

Complex Concepts Simplified

Transmission Tariff

Transmission tariff refers to the fees charged for transporting electricity from power generation sources to distribution networks. It encompasses various costs like infrastructure maintenance, operational expenses, and capital investments.

Quad Moose Conductor

A quad moose conductor consists of four moose-shaped strands bundled together to enhance the transmission capacity of electrical lines. Upgrading to quad moose conductors increases the line's ability to handle higher loads and ensures reliability under demanding conditions.

Capital Cost and Additional Capital Expenditure (ACE)

Capital Cost is the initial investment required to build transmission infrastructure, including land acquisition, construction, and installation of equipment. Additional Capital Expenditure (ACE) refers to unforeseen costs that arise during or after the construction phase, often due to project modifications or external factors.

Force Majeure

Force majeure refers to extraordinary events or circumstances beyond the control of the parties involved, such as natural disasters or regulatory delays, which prevent the fulfillment of contractual obligations.

Right of Way (RoW)

RoW pertains to the legal right to pass through property owned by others. In the context of transmission projects, securing RoW is essential for laying electrical lines without facing ownership disputes or hindrances from landowners.

Interlocutory Application (IA)

An IA is a temporary or interim application filed during ongoing legal proceedings, seeking immediate relief or adjustments without concluding the main case.

Conclusion

The CERC's judgment in Essar Power Transmission Company Limited v. Essar Power M.P. Limited and Others underscores the critical balance between infrastructure development and regulatory compliance. By meticulously analyzing cost allocations, adhering to competitive bidding principles, and safeguarding consumer interests, the Commission has set a robust precedent for future transmission tariff determinations. This decision not only clarifies the obligations of transmission companies in managing project costs and delays but also reinforces the regulatory framework that ensures fairness and transparency in the energy sector.

Moving forward, transmission entities must prioritize adherence to bidding norms, maintain transparency in cost management, and proactively address project delays through proper channels. The compliance with these directives will be instrumental in fostering a sustainable and consumer-friendly energy infrastructure landscape.