CERC Sets New Standards for Transmission Tariff Truing Up and Cost Over-Runs: Analysis of Power Grid Corporation Judgment 2023

Introduction

The Power Grid Corporation of India Limited (PGCIL), a leading transmission utility, filed a comprehensive petition seeking the truing-up of transmission tariffs for the period spanning from the Commencement of Operations Date (COD) to March 31, 2019, under the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014 (“2014 Tariff Regulations”). Additionally, PGCIL sought the determination of transmission tariffs for the subsequent period from April 1, 2019, to March 31, 2024, under the 2019 Tariff Regulations. This petition encompassed a myriad of transmission assets under the “Eastern Region Strengthening Scheme XII” in the Eastern Region of India.

The primary parties involved in this case are:

Petitioner: Power Grid Corporation of India Limited (PGCIL)
Respondents: Beneficiaries including Bihar State Power Holding Company Limited (BSPHCL), distribution licensees, power departments, power utilities, and other transmission licensees procuring transmission services from PGCIL.

Summary of the Judgment

The Central Electricity Regulatory Commission (CERC), after thorough examination and consideration of submissions from both PGCIL and responders, rendered a detailed judgment addressing various aspects of transmission tariff determination and adjustments. Key highlights of the judgment include:

Approval of the trued-up Annual Fixed Charges (AFC) for the 2014-2019 tariff period after a prudence check of all components.
Rejection of BSPHCL’s contentions regarding cost over-runs, Minimum Alternate Tax (MAT) rates, Return on Equity (RoE) adjustments, depreciation, and O&M expenses.
Adoption of precedents set by the Appellate Tribunal for Electricity (APTEL) in determining initial spares based on overall project cost rather than on an asset-wise basis.
Detailed computation and approval of Interest During Construction (IDC) and Incidental Expenditure During Construction (IEDC).
Reimbursement allowances for filing fees, publication expenses, license fees, and RLDC fees as per relevant regulations.
Consideration of Goods and Services Tax (GST) recovery, deemed premature and thus not allowed at present.
Establishment of new norms for handling capital cost, cost over-runs, and depreciation in alignment with updated 2019 Tariff Regulations.

Analysis

Precedents Cited

The judgment prominently references the Appellate Tribunal for Electricity’s (APTEL) decision dated September 14, 2019, in Appeal No. 74 of 2017. In this precedent, APTEL criticized the Central Commission’s methodology of restricting initial spares on an individual asset basis. Instead, APTEL advocated for a prudence check on initial spares based on the overall project cost during the truing-up exercise. CERC adopted this guidance, allowing initial spares to be calculated proportionally to the combined capital cost, thereby promoting a more holistic and financially sound approach.

Legal Reasoning

CERC’s decision is anchored in a meticulous examination of the components impacting transmission tariffs, including capital costs, IDC, IEDC, depreciation, and initial spares. The Commission emphasized adherence to the 2019 Tariff Regulations, notably in:

Capital Cost Truing Up: Ensuring that approved capital costs do not exceed Revised Cost Estimates (RCE-I and RCE-II) and are substantiated by audited certificates.
Cost Over-Runs: Allowing cost variations within the approved RCEs while rejecting unsupported or vague justifications from BSPHCL.
Interest During Construction: Calculating IDC based on actual loan rates and discharging it as ACE, aligning with Regulation 32 of the 2019 Tariff Regulations.
Depreciation: Applying a Weighted Average Rate of Depreciation (WAROD) consistent with the regulated rates, and distinguishing between IT equipment and substation assets.
Initial Spares: Implementing APTEL’s directive to base initial spares on the overall project cost, thereby enhancing budgetary accuracy and project sustainability.

Impact

This landmark judgment sets several critical precedents for future tariff determinations and financial management within the power transmission sector:

Enhanced Financial Prudence: By mandating a project-wide approach to capital costs and initial spares, CERC ensures more accurate and economically viable tariff structures.
Regulatory Alignment: The decision underscores the necessity for transmission entities to adhere strictly to regulatory frameworks, promoting transparency and accountability.
Dispute Resolution Framework: The judgment provides a clear pathway for addressing disputes related to cost over-runs, depreciation, and other financial discrepancies, thereby reducing litigation uncertainties.
Operational Efficiency: By accurately accounting for O&M expenses and initial spares, the decision fosters operational efficiency and long-term sustainability of transmission assets.

Complex Concepts Simplified

Transmission Tariff Truing Up

Truing up refers to the process of adjusting the tariffs based on actual expenditures and cost overruns incurred during the project implementation phase. It ensures that the transmission utility recovers its legitimate costs without overburdening the consumers.

Annual Fixed Charges (AFC)

AFC comprises the fixed costs associated with the transmission project, including depreciation, interest on loans, return on equity, and interest on working capital. It forms the baseline for calculating the transmission tariff.

Revised Cost Estimates (RCE)

RCEs are updated cost projections for the transmission project, factoring in inflation, scope changes, and unforeseen expenditures. They serve as benchmarks against which actual costs are measured and approved.

Interest During Construction (IDC)

IDC is the interest accrued on borrowed funds during the construction phase of the project. It is capitalized as part of the project’s capital cost and amortized over the project’s operational life.

Initial Spares

Initial spares are essential replacement parts for transmission equipment, provided at the project's outset to ensure reliability and minimize downtime. Their cost is factored into the overall capital expenditure.

Return on Equity (RoE)

RoE represents the return earned on the equity invested in the project. It is a critical component of AFC, ensuring that investors receive a fair return on their investment.

Conclusion

The CERC’s comprehensive judgment in the Power Grid Corporation of India Limited case marks a pivotal moment in the regulatory oversight of transmission tariffs. By instituting robust norms for truing up, cost over-run management, and initial spares calculation based on overarching project costs, the Commission has fortified the financial integrity and operational sustainability of the power transmission sector. This decision not only delineates clear pathways for future tariff determinations but also reinforces the principles of transparency, prudence, and accountability within the regulatory framework.

Stakeholders across the transmission and distribution spectrum, including utilities, regulators, and consumers, stand to benefit from the enhanced clarity and fairness embedded in this judgment. As the power sector continues to evolve amidst growing demand and infrastructural challenges, such regulatory benchmarks will be instrumental in fostering a resilient and equitable energy ecosystem.