CERC’s Landmark Ruling on PGCIL’s Transmission Tariff Petition: Asset Management and Tariff Determination

Introduction

On February 8, 2021, the Central Electricity Regulatory Commission (CERC) delivered a pivotal judgment in Petition No. 406/TT/2020 filed by the Power Grid Corporation of India Ltd. (PGCIL). The case centered around the truing-up of transmission tariffs for the 2014-19 period and the determination of tariffs for the 2019-24 period under the respective CERC (Terms and Conditions of Tariff) Regulations of 2014 and 2019. The key issues addressed included asset management, return on equity (RoE), additional capital expenditure (ACE), tax implications, and operational expenses associated with the Sasan Ultra Mega Power Project (UMPP) transmission system.

Summary of the Judgment

The CERC meticulously examined PGCIL's requests for adjusting tariffs based on actual expenditures and changes in financial parameters. Notably, the Commission addressed concerns related to:

De-capitalization and re-capitalization of shifted assets.
Clarification and disallowance of separate Operation & Maintenance (O&M) expenses for power line carrier communication (PLCC) equipment.
Reimbursement of petition filing fees and publication expenses.
Calculation and truing-up of RoE considering the Minimum Alternate Tax (MAT) implications.
Disallowance of previously contested claims and adherence to established tariff regulations.

Ultimately, the Commission permitted the truing-up of tariffs where justified, disallowed certain claims to maintain regulatory consistency, and emphasized adherence to procedural norms.

Analysis

Precedents Cited

The judgment referenced several pivotal cases and prior orders to guide its decision-making process. Notably:

Petition No. 195/TT/2016: Addressed the de-capitalization of assets during inter-unit transfers, establishing that such assets must be removed from the original transmission system's accounts and re-capitalized in the new system.
APTEL Judgment in Appeal 74 of 2017: Clarified the methodology for calculating initial spares based on overall project costs rather than asset-wise allocations.
Petition No. 19/TT/2020: Determined depreciation methodologies, reinforcing that capital expenditure apportionments should not be altered during truing-up exercises.
Petition No. 126/TT/2020: Declined separate O&M expenses for PLCC equipment, emphasizing their integration within sub-station expenses.

Legal Reasoning

The Commission's reasoning was anchored in strict adherence to the existing tariff regulations. Key aspects included:

Asset Management: The CERC underscored that any assets not in commercial operation must be excluded from capital costs, aligning with Regulation 9(6) of the 2014 Tariff Regulations. This was exemplified in the treatment of the 765 kV shunt reactors at Sasaram, which were de-capitalized upon shifting.
O&M Expenses for PLCC: Moving away from PGCIL's request for separate O&M charges for PLCC, the Commission reinforced that PLCC equipment is an integral part of sub-station operations and must adhere to sub-station O&M norms.
Return on Equity (RoE): Addressing tax concerns, the CERC accepted PGCIL's justification for computing RoE based on MAT rates, provided it was substantiated with appropriate assessments and documentation.
Depreciation and ACE: The Commission maintained consistency in depreciation rates and capital expenditure claims, rejecting PGCIL's attempts to retrospectively adjust depreciation methodologies during truing-up exercises.

Impact

This judgment sets significant precedents in the realm of transmission tariff determination:

Regulatory Consistency: Reinforces the necessity for transmission entities to adhere strictly to tariff regulations, discouraging retrospective financial adjustments.
Asset Accountability: Establishes clear guidelines for handling asset shifts, ensuring that capital costs are accurately represented in the relevant transmission systems.
Integrated Expense Management: Clarifies the treatment of integrated systems like PLCC within broader operational frameworks, preventing double-counting of expenses.
Tax Considerations in RoE: Highlights the importance of transparent and accurate tax computations in determining RoE, especially under MAT provisions.

Complex Concepts Simplified

De-capitalization and Re-capitalization of Assets

When transmission assets (like reactors) are shifted from one sub-station to another, they must be removed from the original sub-station's accounts (de-capitalized) and added to the new sub-station's accounts (re-capitalized). This ensures that tariffs reflect only active and operational assets, maintaining financial transparency.

Return on Equity (RoE) and Minimum Alternate Tax (MAT)

RoE is the profit rate that investors expect from their investment in the company. Under MAT provisions, companies are taxed based on their book profits, ensuring that they pay a minimum tax even if certain deductions reduce their taxable income. In tariff calculations, RoE must be adjusted ("grossed up") to account for the effective tax rate, ensuring that investors receive the expected returns after taxes.

Initial Spares and Capital Expenditure (ACE)

Initial spares refer to essential spare parts that ensure the reliability and uninterrupted operation of transmission systems. ACE encompasses additional investments made beyond the original capital expenditure to maintain or enhance the system. Properly accounting for these ensures that tariffs accurately reflect the costs involved in maintaining a robust transmission infrastructure.

Conclusion

The CERC's judgment in Petition No. 406/TT/2020 serves as a cornerstone for future transmission tariff determinations, emphasizing regulatory adherence, transparent asset management, and accurate financial computations. By setting forth clear guidelines on asset de-capitalization, integrated expense management, and RoE calculations under MAT, the Commission ensures that tariff structures remain fair, transparent, and reflective of true operational costs. This ruling not only upholds the integrity of the regulatory framework but also safeguards the interests of both transmission entities and their beneficiaries.