CERC Reinforces APTEL Precedents on Initial Spares and Capital Expenditure in Setting Transmission Tariffs

Introduction

The case of Power Grid Corporation Of India Limited v. Madhya Pradesh Power Management Company Ltd. And Others adjudicated by the Central Electricity Regulatory Commission (CERC) on June 1, 2020, delves into the intricacies of transmission tariff truing-up for combined assets. The petitioner, Power Grid Corporation of India Ltd. (PGCIL), sought adjustments in transmission tariffs encompassing various high-voltage assets deployed for IPP (Independent Power Producer) Generation Projects in Chhattisgarh. The core issues revolved around the allocation of capital costs, initial spares, depreciation methodologies, and the inclusion of IT assets in the gross block calculations.

Summary of the Judgment

CERC meticulously examined PGCIL's petitions for truing up transmission tariffs for the 2014-19 period and determining tariffs for 2019-24. Key deliberations included the inclusion of initial spares costs as per APTEL's 2019 judgment, handling additional capital expenditures post-cut-off dates, and the appropriate depreciation rates for IT equipment introduced in the gross block. CERC upheld the inclusion of initial spares based on the percentage of the total project cost, aligned with APTEL's directive, while disallowing the retroactive apportionment of IT assets without prior justification. Adjustments were also made to interest on loans (IoL) and return on equity (RoE) based on actual floating rates and MAT (Minimum Alternate Tax) rates, respectively. O&M expenses were scrutinized and approved as per regulated norms.

Analysis

Precedents Cited

The Judgment heavily references the APTEL’s judgment dated September 14, 2019, in Appeal No. 74 of 2017, which clarified the treatment of initial spares as a percentage of the total project cost. This precedent was pivotal in CERC's decision to allow initial spares based on aggregate project cost rather than individual asset ceilings. Additionally, CERC referred to its own prior orders, including Petition No. 49/TT/2016, ensuring consistency in tariff determinations over multiple periods.

Legal Reasoning

CERC's legal reasoning centered on the strict adherence to the tariff regulations enshrined in the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2009, 2014, and 2019. The Commission emphasized that capital cost truing-up should not involve apportionment unless explicitly justified. It upheld the allowance of additional capital expenditures under specified regulations, ensuring that such claims were substantiated with audited documents and adhered to prudency checks. The Court meticulously recalibrated depreciation rates and RoE based on actual financial rates and regulatory guidelines, ensuring financial accuracy and regulatory compliance.

Impact

This Judgment sets a significant precedent by reinforcing the application of APTEL's guidelines on initial spares, ensuring that transmission licensees allocate capital costs comprehensively based on total project costs. It underscores the importance of regulatory compliance and thorough justification in tariff petitions, potentially influencing future tariff truing-up processes across the electricity sector. Moreover, by disallowing retroactive inclusion of IT assets without prior approval, CERC emphasizes the need for transparency and pre-approval in capital expenditure claims, fostering greater accountability among transmission licensees.

Complex Concepts Simplified

Initial Spares: Components or spare parts kept on hand to replace faulty or worn-out equipment to ensure uninterrupted transmission operations.
Capital Expenditure (CapEx): Funds used by a company to acquire or upgrade physical assets such as buildings, machinery, or equipment.
Return on Equity (RoE): A measure of financial performance calculated by dividing net income by shareholders' equity, indicating how effectively equity is being used to generate profits.
Interest on Loan (IoL): The cost paid by an entity for borrowing funds, typically expressed as a percentage of the principal amount.
Interest on Working Capital (IWC): Interest accrued on the funds used for day-to-day operations, calculated based on components like receivables and maintenance spares.
Truing-Up: The process of adjusting tariffs to reflect actual costs incurred versus estimated costs initially approved.
Minimum Alternate Tax (MAT): A type of tax that ensures that companies pay at least a minimum amount of tax, irrespective of deductions and exemptions.

Conclusion

The CERC's Judgment in the Power Grid Corporation Of India Limited v. MPPMCL case serves as a definitive guide on the truing-up of transmission tariffs, particularly in the nuanced areas of initial spares allocation and capital expenditure inclusion. By aligning its decision with APTEL's precedents and rigorously adhering to established tariff regulations, CERC not only upheld financial and regulatory prudence but also set clear expectations for future tariff petitions. This ensures a balanced approach that safeguards the interests of both transmission licensees and their beneficiaries, fostering a transparent and accountable regulatory environment in India's electricity sector.