CERC Upholds IEDC Claims on Actual Basis and Reaffirms Regulatory Boundaries in Power Grid Corporation Tariff Petition

Introduction

The Central Electricity Regulatory Commission (CERC) rendered a pivotal judgment on October 31, 2022, concerning the petition filed by Power Grid Corporation of India Limited (PGCIL). As a deemed transmission licensee, PGCIL sought the truing up of transmission tariffs for the periods 2014-2019 and 2019-2024 for specific transmission assets associated with the System Strengthening-XII project in the Southern Region. The petition encompassed multiple facets, including transmission tariffs, additional capitalization, and various financial recoveries.

Summary of the Judgment

CERC meticulously examined PGCIL's claims, which ranged from transmission tariff approvals to the recovery of shortfalls and allowances for various capital expenditures. Notably, the Commission addressed contentious issues related to Interest and Incidental Expenditures During Construction (IEDC), Initial Spares, and the Return on Equity (RoE). The key determinations include:

Approval of the trued-up Transmission Tariff for 2014-19 and determination for 2019-24.
Allowance of additional capitalization as incurred up to March 31, 2019.
Rejection of excessive depreciation claims and endorsement of WAROD methodology.
Affirmation of IEDC allowances based on actual expenditures rather than imposed percentage caps, aligning with APTEL's precedents.
Dismissal of KPTCL’s challenges regarding bilateral billing as reviews cannot serve as appeals.

Analysis

Precedents Cited

The judgment leaned heavily on prior rulings, particularly those from the Appellate Tribunal of Electricity (APTEL) and the Supreme Court of India. Significant references include:

APTEL Judgment (2.12.2019, Appeal No. 95 of 2018): Established that IEDC should be computed on an actual basis after due prudence, rejecting arbitrary percentage limitations.
Supreme Court in Parison Devi v. Sumitri Devi (1997) and Kamlesh Verma v. Mayawati (2013): Clarified that review petitions are not substitutes for appeals and should strictly adhere to Order 47 Rule 1 of the CPC.

These precedents underscored the necessity for regulatory bodies to adhere strictly to their framed regulations and the judiciary's stance on procedural correctness in reviews and appeals.

Legal Reasoning

The Commission's legal analysis delved deep into the compliance of PGCIL with the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2014 and 2019. Key aspects include:

IEDC Allowance: Contrary to its initial stance restricting IEDC to 10.75% of the hard cost, CERC overturned this limitation by aligning with APTEL's stance, thereby permitting IEDC based on actual expenditures. This adjustment ensures financial claims reflect true cost burdens rather than arbitrary ceilings.
Depreciation on IT Equipment: The Court addressed PGCIL's attempt to segregate IT equipment costs post-truing up. Following precedent, it restricted depreciation rates to 5.28% for the 2014-19 period, reserving higher rates for subsequent periods as per regulatory guidelines.
Review Petition Dismissal: KPTCL's attempt to challenge the bilateral billing was dismissed on procedural grounds, reinforcing the principle that review petitions cannot be avenues for appeals.
Initial Spares and O&M Expenses: CERC approved claims based on overall project costs rather than individual asset assessments, ensuring a holistic financial evaluation.

Impact

This judgment has multifaceted implications:

Regulatory Clarity: By upholding IEDC claims on an actual expenditure basis, the judgment provides clearer financial guidelines for transmission licensees, potentially influencing future tariff petitions.
Judicial Oversight: The reaffirmation regarding the nature of review petitions deters entities from misusing reviews as appeals, ensuring procedural integrity.
Financial Practices: Encourages meticulous financial planning and documentation by transmission entities, knowing that actual expenditures will be the basis for tariff adjustments.
Stakeholder Relations: Sets a precedent for how CERC interacts with distribution licensees like KPTCL, emphasizing equitable charge sharing and adherence to regulatory frameworks.

Complex Concepts Simplified

Interest and Incidental Expenditures During Construction (IEDC)

IEDC refers to the interest and expenses incurred during the construction phase of a project before it becomes commercially operational. Initially, CERC aimed to limit these expenditures to a percentage of the project's hard costs. However, aligning with judicial precedents, they now allow such costs based on actual expenditures, ensuring accurate financial representation.

Weighted Average Rate of Depreciation (WAROD)

WAROD is a method to calculate depreciation based on the proportionate weights of different assets' life spans within a project. This ensures that depreciation expenses more accurately reflect the useful lives and usage of various components.

Bilateral Billing

This refers to the practice where transmission charges are billed directly between two parties (e.g., PGCIL and KPTCL) without involving a central channel. The judgment reinforces that such billing arrangements are to be executed based on the project's operational readiness and regulatory approvals.

Conclusion

The CERC's judgment in favor of PGCIL marks a significant affirmation of actual expenditure-based financial claims over arbitrary percentage limitations. By adhering to judicial precedents and emphasizing regulatory compliance, the Commission ensures that transmission licensees receive fair and accurate tariff adjustments, fostering a transparent and equitable electricity transmission framework. Additionally, the reinforcement of procedural boundaries concerning review petitions safeguards the integrity of the regulatory and judicial processes, promoting trust and adherence among stakeholders.