CERC Establishes Robust Framework for Transmission Tariff Truing-Up: Insights from Power Grid Corp. of India Limited v. Karnataka Power Transmission Corp. Limited

Introduction

The case of Power Grid Corporation of India Limited (PGCIL) v. Karnataka Power Transmission Corporation Limited (KPTCL) and Others adjudicated by the Central Electricity Regulatory Commission (CERC) on February 18, 2022, marks a significant milestone in the regulatory oversight of transmission tariffs in India. This comprehensive petition sought the truing-up of transmission tariffs for assets related to the "Transmission System for Ultra Mega Solar Park in Anantpur District, Andhra Pradesh." The central issues revolved around the accurate determination of tariffs, adjustment of capital costs, handling of delays in commissioning, and the rightful allocation of additional revenue components such as Return on Equity (RoE).

Summary of the Judgment

CERC meticulously reviewed the petitions filed by PGCIL, addressing each prayer with detailed financial and regulatory scrutiny. The Commission approved the trued-up transmission tariffs for the period from the commercial operation date to March 31, 2019, and determined tariffs for the subsequent period from April 1, 2019, to March 31, 2024. Key decisions included:

• Disallowance of a 39-day time over-run in the commissioning of Asset-II, attributing delays to PGCIL's project execution failures.
• Approval of capital costs and Additional Capital Expenditure (ACE) within regulated limits, ensuring no cost over-runs.
• Adjustment and approval of Depreciation, Interest on Loan (IoL), Return on Equity (RoE), Operation & Maintenance (O&M) Expenses, and Interest on Working Capital (IWC) as per the prevailing regulations.
• Reimbursement of filing fees and publication expenses to PGCIL, along with the allowance to recover Licensee fees and RLDC charges.
• Clarification on the treatment of GST and security expenses, deferring resolution pending separate petitions.

Analysis

Precedents Cited

The judgment referenced pivotal cases and regulatory guidelines that shaped the decision-making process:

• APTEL Judgment (Appeal No. 74 of 2017): Affirmed the eligibility for additional RoE based on compliance with regulatory timelines, emphasizing that internal project schedules do not override regulatory deadlines.
• Special Civil Appeal No. 5343 of 2018 (Torrent Power Ltd. v. Union of India): Reinforced the exclusion of GST on transmission charges, aligning with the High Court of Gujarat's stance.
• CERC Orders (e.g., Petition No. 26/TT/2016 and Petition No. 133/TT/2017): Provided foundational guidelines for truing-up capital costs, depreciation rates, and handling delays.

Legal Reasoning

CERC's legal reasoning was anchored in the stringent application of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014 and 2019. The Commission emphasized:

• Prudence and Compliance: Ensuring all financial claims were substantiated with audited certificates and aligned with regulatory norms.
• Regulatory Neutrality: Rejecting PGCIL's justifications for delays that fell outside acceptable parameters, thereby maintaining regulatory integrity.
• Transparency in Cost Allocation: Meticulously adjusting capital costs by excluding non-recoverable items like grants and adhering to the prescribed debt-equity ratios.
• Future-Proofing Tariffs: Addressing potential future scenarios like GST implementation, albeit deferring immediate decisions pending legislative clarity.

Impact

This judgment sets a robust precedent for future transmission tariff determinations by:

• Enhancing Accountability: Holding transmission licensees accountable for project execution delays, discouraging negligence.
• Standardizing Financial Adjustments: Providing a clear framework for truing-up tariffs, ensuring financial fairness for both licensees and beneficiaries.
• Clarifying Regulatory Practices: Offering detailed guidelines on handling complex financial components like RoE, IoL, and IWC, thereby reducing ambiguity in future petitions.

Complex Concepts Simplified

Truing-Up of Tariffs

Truing-up refers to the regulatory adjustment of tariffs based on actual costs incurred and revenues earned, ensuring that transmission licensees are neither undercompensated nor overcharge beneficiaries.

Return on Equity (RoE)

Return on Equity is the profit generated by a company relative to shareholders' equity. In regulated tariffs, RoE ensures that transmission licensees earn a reasonable return on their investments, incentivizing efficient operations while protecting consumer interests.

Interest on Loan (IoL)

Interest on Loan pertains to the cost of borrowing funds for capital investments. Correct computation of IoL is crucial for accurate tariff determination, reflecting the true cost of capital employed in transmission projects.

Weighted Average Rate of Depreciation (WAROD)

WAROD is a method to calculate depreciation by considering the varying depreciation rates of different assets, providing a more accurate financial picture over time.

Additional Capital Expenditure (ACE)

ACE refers to extra funds required to complete a project beyond the initially approved budget. Proper regulation ensures that ACE is justified and falls within defined limits, preventing unjustified cost overruns.

Conclusion