Introduction

In the landmark case of Power Grid Corporation of India Ltd. v. Madhya Pradesh Power Management Company Ltd. and Others (S)., decided by the Central Electricity Regulatory Commission (CERC) on February 15, 2021, the regulatory body addressed critical aspects of tariff determination and adjustments for transmission assets. The petitioner, Power Grid Corporation of India Limited (PGCIL), a deemed transmission licensee, sought to true up tariffs for the period from the Commercial Operation Date (COD) to March 31, 2019, and to determine future tariffs up to March 31, 2024, for specific transmission lines associated with the Kakrapar Atomic Power Project 3 & 4 in the Western Region.

The key issues revolved around the calculation and admissibility of various financial components such as Return on Equity (RoE), Depreciation, Interest on Loan (IoL), Operation & Maintenance (O&M) Expenses, Initial Spares, and others, in accordance with the CERC's Tariff Regulations of 2014 and 2019. The respondents in this case were distribution licensees and power departments primarily benefiting from the transmission services provided by PGCIL.

Summary of the Judgment

The CERC meticulously evaluated PGCIL's petitions and claims regarding the truing up of tariffs and the determination of future tariffs. After detailed consideration of the submissions, affidavits, and previous orders, the Commission made several key determinations:

• Truing Up of Annual Fixed Charges: The CERC approved the trued-up annual fixed charges for the 2014-19 period, adjusting specific components like Depreciation, IoL, RoE, IWC, and O&M Expenses in accordance with established norms.
• Determination of 2019-24 Tariff Period: For the subsequent tariff period, the Commission determined the annual fixed charges based on projected capital expenditures and adherence to regulatory guidelines.
• Initial Spares and O&M Expenses: The Commission disallowed PGCIL's claim for higher Initial Spares rates for GIS Substations and rejected separate O&M Expenses claims for Protected Load Communication Control (PLCC), reinforcing the integration of such costs within substation norms.
• Return on Equity (RoE) and Interest on Working Capital (IWC): The CERC affirmed the methodology for calculating RoE based on Minimum Alternate Tax (MAT) rates and specified the acceptable approaches for determining IWC rates.
• Goods and Services Tax (GST): The Commission dismissed claims related to future GST impositions on transmission charges as premature, given the current tax structure.

Overall, the Judgment provided a comprehensive framework for tariff adjustments, ensuring compliance with regulatory standards and preventing undue claims by transmission licensees.

Analysis

Precedents Cited

Throughout the Judgment, the CERC referenced previous petitions and orders to maintain consistency and uphold regulatory integrity. Notable references include:

• Petition No. 19/TT/2020: Addressed earlier issues regarding depreciation claims and methodology, establishing a precedent that capital expenditure apportionments cannot be retrospectively adjusted during truing up.
• Petition No. 274/TT/2019: Clarified the calculation of effective tax rates based on notified MAT rates, which influenced the Commission’s approach to grossing up RoE in the current case.
• Petition No. 126/TT/2020: Dealt with the admissibility of separate O&M expenses for PLCC, setting a guideline that such expenses should be integrated within substation O&M norms to prevent double charging.

These precedents collectively reinforced the CERC’s commitment to stringent regulatory compliance and uniformity in tariff determinations across similar cases.

Legal Reasoning

The CERC’s legal reasoning in this Judgment was anchored in meticulous adherence to the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2014 and 2019. Key aspects of the reasoning include:

• Regulatory Compliance: The Commission ensured that all claims by PGCIL were evaluated against specific regulatory provisions, allowing only those expenditures that were explicitly permitted under the regulations.
• Prudence Check: A thorough prudence check was conducted to validate the adequacy and accuracy of the claimed costs, particularly for categories like Initial Spares and Depreciation.
• Methodological Rigor: The CERC employed precise calculation methodologies, such as the Weighted Average Rate of Depreciation (WAROD) for Depreciation and RoE adjustments based on MAT rates, ensuring transparency and fairness in tariff determinations.
• Prevention of Double Charging: By rejecting separate claims for PLCC O&M Expenses, the Commission safeguarded against the possibility of beneficiaries being overcharged for integrated services.

This structured and regulation-focused approach not only resolved the immediate disputes but also established a clear methodology for future tariff-related petitions.

Impact

The Judgment has far-reaching implications for the electricity transmission sector:

• Standardization of Tariff Calculations: By clearly delineating the components and permissible claims for tariffs, the CERC has standardized the tariff calculation process, ensuring uniformity and predictability for both licensees and beneficiaries.
• Regulatory Clarity: The explicit disallowance of certain claims, such as higher Initial Spares rates and separate PLCC O&M Expenses, provides clear guidelines for transmission licensees, reducing ambiguities and potential disputes.
• Financial Discipline: The emphasis on prudence checks and adherence to regulatory norms fosters financial discipline among licensees, encouraging accurate and justified cost recoveries.
• Future Petition Handling: The established precedents will streamline the handling of similar future petitions, enabling quicker resolutions based on the clarified guidelines.

Ultimately, the Judgment fortifies the regulatory framework governing electricity transmission tariffs, promoting fairness and efficiency within the sector.

Complex Concepts Simplified

Truing Up of Tariffs

Truing up refers to the process of adjusting previously approved tariffs to reflect actual costs incurred during the operation of transmission assets. This ensures that the charges levied on beneficiaries are fair and accurately represent the financial realities of the transmission licensee.

Return on Equity (RoE)

Return on Equity (RoE) is the profit a company earns on the investment shareholders have made in the company. In this context, RoE is adjusted based on the applicable tax rates to ensure that the return reflects the net profitability after tax obligations.

Interest on Working Capital (IWC)

Interest on Working Capital (IWC) is the interest charged on the capital required for day-to-day operations of the transmission system. IWC ensures that the licensee can maintain its operations without financial strain.

Additional Capital Expenditure (ACE)

Additional Capital Expenditure (ACE) pertains to extra investments made beyond the original scope of the project. ACE can include costs for unplanned works, improvements, or adjustments necessary for the transmission system’s optimal functioning.

Weighted Average Rate of Depreciation (WAROD)

Weighted Average Rate of Depreciation (WAROD) is a calculated average depreciation rate that accounts for the different depreciation rates of various assets within the transmission system. WAROD ensures a balanced and accurate representation of asset value reduction over time.

Protected Load Communication Control (PLCC)

Protected Load Communication Control (PLCC) systems are integral communication infrastructure components used for monitoring and controlling transmission assets. The CERC clarified that O&M expenses for PLCC should be included within substation norms to avoid duplicate charging.

Conclusion

The CERC's Judgment in Power Grid Corporation of India Ltd. v. Madhya Pradesh Power Management Company Ltd. and Others (S) underscores the Commission's unwavering commitment to regulatory compliance, fiscal prudence, and transparency in tariff determinations. By meticulously reviewing and adjusting tariff components in accordance with established regulations, the CERC has not only addressed the immediate concerns of PGCIL and the respondents but has also set a robust precedent for future tariff-related cases.

Key takeaways from the Judgment include:

• Adherence to Regulations: Emphasizing strict compliance with CERC's Tariff Regulations ensures that tariff computations are fair, justified, and transparent.
• Preventing Financial Discrepancies: Through detailed truing up and prudence checks, the Commission prevents overcharging beneficiaries, safeguarding their financial interests.
• Clear Guidelines for Licensees: By disallowing ambiguous claims and reinforcing permissible expenditure categories, the Judgment provides clear operational guidelines for transmission licensees.
• Foundation for Future Cases: Established precedents and clarified methodologies will streamline the resolution of similar petitions, fostering a stable and predictable regulatory environment.

In essence, this Judgment is a testament to the CERC's role in fostering a fair and efficient electricity transmission sector, balancing the financial interests of licensees with the protections afforded to beneficiaries.