Clarifying Project Timeline Computation Under CERC Tariff Regulations: Damodar Valley Corporation v. CERC and Others

Introduction

The case of Damodar Valley Corporation (DVC) v. Central Electricity Regulatory Commission (CERC) and Others, adjudicated by the Appellate Tribunal for Electricity on February 20, 2020, revolves around the interpretation of the timeline for establishing and commissioning a thermal power project. The central dispute pertains to the calculation of cost over-runs, specifically Interest During Construction (IDC), and whether the timeline should commence from the issuance of the Letter of Award (LoA) or the date of investment approval.

Key Issues:

Determination of the correct reference date for computing project timelines for IDC.
Applicability of CERC’s Tariff Regulations, 2009.
Impact of the Appellate Tribunal for Electricity's (APTEL) prior judgments on the current case.

Parties Involved:

Appellant: Damodar Valley Corporation (DVC)
Respondents: Central Electricity Regulatory Commission (CERC), Delhi Transco Ltd, BSES Yamuna Power Limited, BSES Rajdhani Power Limited, Tata Power Delhi Distribution Limited, and Madhya Pradesh Power Trading Company Ltd.

Summary of the Judgment

The Appellate Tribunal upheld CERC’s decision to calculate the project timeline for IDC based on the issuance of the Letter of Award (LoA) dated June 30, 2004, rather than the date of formal investment approval provided on September 8, 2005. DVC contended that using the investment approval date was erroneous and sought recalculation from that point to avoid disallowance of IDC claims due to time over-runs.

The Tribunal examined the Tariff Regulations, 2009, particularly focusing on Regulations 7 and 15, and concluded that the timeline specified in the LoA was appropriate for calculating both Return on Equity (RoE) incentives and IDC. The Tribunal dismissed DVC’s appeal, maintaining that the Commission’s approach was aligned with existing regulations and precedent judgments.

Analysis

Precedents Cited

The judgment extensively references the APTEL judgment dated January 12, 2012, in the matter of Power Grid Corporation of India Ltd v. CERC & Ors. In that case, the tribunal held that the period for executing a project should commence from the date of the Letter of Award (LoA) rather than the date of investment approval. This precedent was pivotal in shaping CERC’s stance in the DVC case.

Additionally, the Tribunal referred to another APTEL judgment dated May 28, 2018, in Damodar Valley Corporation v. Delhi Transco Ltd and Others, Appeal No. 153 of 2015, which reinforced the interpretation that the LoA serves as the commencement point for project timelines, especially for projects of national importance with tight deadlines, such as those associated with the Commonwealth Games 2010.

Legal Reasoning

The Tribunal focused on the specifics of the CERC Tariff Regulations, 2009, particularly:

Regulation 7: Defines Capital Cost, including IDC, based on loan amounts and equity ratios.
Regulation 15: Pertains to Return on Equity (RoE) and specifies timelines for project completion incentives.
Appendix-II: Details the completion time schedules based on investment approval or LoA.

CERC interpreted these regulations to mean that for the purposes of calculating IDC and RoE, the relevant timeline should begin with the issuance of the LoA, as it marks the formal commencement of the project. The Tribunal agreed with this interpretation, asserting that the LoA logically follows the investment approval and signifies the project's active phase.

Furthermore, the Tribunal dismissed DVC’s argument of a regulatory contradiction by clarifying that the 2012 provisional tariff determination did not settle the time over-run issue definitively, leaving CERC’s subsequent actions within its regulatory purview.

Impact

This judgment reinforces the precedence that the Letter of Award (LoA) is the definitive starting point for project timelines concerning IDC and RoE calculations under CERC regulations. It underscores the importance of adhering to regulatory frameworks and interpretations established by regulatory bodies and their tribunals.

For future projects, especially those involving significant timelines and financial arrangements, this judgment clarifies that administrative approvals and formal investment sanctions, while essential, do not alter the commencement point for project execution as defined by regulatory agreements like the LoA.

Moreover, it highlights the courts’ deference to regulatory bodies in interpreting their own regulations, provided such interpretations are consistent with established precedents and the literal terms of the regulations.

Complex Concepts Simplified

Interest During Construction (IDC)

Interest During Construction (IDC) refers to the interest expenses incurred during the period when a project is being constructed but is not yet operational. These costs are capitalized and added to the project's total capital cost for tariff determination.

Return on Equity (RoE)

Return on Equity (RoE) is the financial metric representing the profitability relative to shareholders' equity. In the context of Tariff Regulations, RoE is an incentive mechanism, where additional returns may be granted for timely project completion.

Letter of Award (LoA)

Letter of Award (LoA) is the official document issued by a company to a contractor, signifying the official start of a contractual agreement for project execution. It serves as a critical reference point for project timelines.

Investment Approval

Investment Approval is the formal sanction granted by a company's board or relevant authority to undertake a project, ensuring that necessary financial and strategic considerations have been addressed.

Conclusion

The Damodar Valley Corporation v. CERC and Others judgment serves as a critical elucidation of how project timelines are to be computed under the CERC Tariff Regulations, 2009. By affirming that the issuance of the Letter of Award (LoA) is the appropriate starting point for calculating both IDC and RoE, the Tribunal provided clarity and consistency in the application of regulatory frameworks.

This decision emphasizes the necessity for project stakeholders to meticulously adhere to contract terms and regulatory guidelines. It also reinforces the authority of regulatory bodies like CERC in interpreting their regulations, ensuring that project financing and tariff determinations align with established legal and procedural standards.

Overall, the judgment provides a definitive reference for future disputes regarding project timelines and financial computations in the energy sector, ensuring that both regulatory compliance and contractual obligations are duly respected.