CERC Establishes Rigorous Standards for Transmission Tariff Determination in PGCIL v. Karnataka Power Transmission Corp

Introduction

The case Power Grid Corporation of India Limited (PGCIL) v. Karnataka Power Transmission Corporation Limited was adjudicated by the Central Electricity Regulatory Commission (CERC) on January 29, 2015. PGCIL filed a petition seeking approval for the determination of transmission tariff for the Loss and Own Load (LILO) of the existing Bangalore-Salem 400 kV Sub-Station at Hosur. The petition encompassed issues related to capital cost, cost over-runs, depreciation, operation and maintenance (O&M) expenses, and the calculation of interest on loans.

Summary of the Judgment

The CERC approved the transmission tariff for the specified assets, adhering strictly to the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2009. The Commission scrutinized PGCIL's claims, particularly focusing on capital cost overruns, and restricted the capital expenditure to the apportioned approved cost due to the absence of a revised cost estimate approved by PGCIL's Board. Additionally, the CERC validated the components of depreciation, O&M expenses, and interest on loans as per the stipulated regulations, while rejecting PGCIL's request to recover service tax separately.

Analysis

Precedents Cited

The judgment referenced Appeal No. 165 of 2012 dated November 28, 2013, where the Appellate Tribunal for Electricity upheld a similar approach of restricting capital expenditure to the apportioned approved cost in the face of cost overruns. This precedent reinforced the Commission's stance on maintaining financial prudence and adherence to initially approved budgets unless formally revised.

Legal Reasoning

The CERC's decision was anchored in the meticulous application of the 2009 Tariff Regulations. Key aspects of the legal reasoning included:

Capital Cost Determination: The Commission restricted capital costs to the initially apportioned approved estimates due to the absence of a Revised Cost Estimate (RCE) approved by PGCIL’s Board, citing Regulation 7(1) and precedent from Appeal No. 165 of 2012.
Cost Over-runs: Identified primarily due to increased line length and additional requirements in the substation, the over-runs were not accommodated beyond the apportioned costs without formal justification and Board approval.
Depreciation and O&M Expenses: Calculated in strict compliance with Regulation 17 and Regulation 19, ensuring consistency and regulatory compliance.
Interest on Loans: Determined based on the weighted average rate of interest per Regulation 16, ensuring accurate reflection of financial liabilities.
Rejection of Service Tax Recovery: The Commission deemed the petitioner's request premature as there was no current imposition of service tax on transmission charges.

Impact

This judgment underscores the CERC's commitment to financial prudence and regulatory compliance in tariff determinations. By restricting capital costs to approved estimates unless formally revised, the Commission ensures that transmission tariffs remain fair and justifiable. Future petitions involving cost over-runs will likely face similar scrutiny, emphasizing the necessity for timely and formal revisions of cost estimates to accommodate unforeseen expenses.

Complex Concepts Simplified

Transmission Tariff

Transmission tariff refers to the charges levied for the transportation of electricity from generation points to distribution networks. It covers costs like infrastructure investment, maintenance, and operational expenses.

Capital Cost

Capital cost pertains to the total expenditure incurred in establishing the transmission infrastructure, including construction, equipment, and financing charges.

Revised Cost Estimate (RCE)

An RCE is an updated projection of the total costs required to complete a project, accounting for any variances from the initially approved budget.

Depreciation

Depreciation is the allocation of the cost of a tangible asset over its useful life, reflecting the wear and tear or obsolescence of the asset.

Operation and Maintenance (O&M) Expenses

O&M expenses are the costs associated with the daily operation and upkeep of transmission infrastructure, ensuring reliable electricity delivery.

Conclusion

The PGCIL v. Karnataka Power Transmission Corporation Limited judgment serves as a pivotal reference for the determination of transmission tariffs within the Indian electricity sector. By enforcing strict adherence to approved capital costs and requiring formal revisions for any deviations, the CERC fortifies its role in ensuring financial accountability and regulatory compliance. This decision not only impacts PGCIL but also sets a precedent for future tariff determinations, promoting transparency and fiscal discipline among transmission entities.