Approval of Transmission Tariff for Farakka STPS: Power Grid Corporation Of India Ltd. v. Bihar State Electricity Board

Introduction

The case of Power Grid Corporation Of India Ltd. v. Bihar State Electricity Board adjudicated by the Central Electricity Regulatory Commission (CERC) on August 4, 2003, addresses the approval of transmission tariffs associated with the Farakka Super Thermal Power Station (STPS) in the Eastern Region. The petitioner, Power Grid Corporation of India Ltd. (PGCIL), sought tariff approval for the period from April 1, 2001, to March 31, 2004, based on terms stipulated in the CERC's notification dated March 26, 2001.

The core issues in this case revolve around the determination and approval of various components of transmission tariffs, including interest on loans, depreciation, return on equity, and operation & maintenance (O&M) expenses. Additionally, the case explores the inclusion of Foreign Exchange Rate Variation (FERV) in the capital costs and the methodologies employed in calculating these components.

Summary of the Judgment

The CERC thoroughly examined the petitioner's claims for transmission charges, ensuring adherence to regulatory guidelines outlined in the notification dated March 26, 2001. The Commission approved the transmission charges for the specified period, detailing each component's calculation and validating the methodologies employed by PGCIL. Key approvals include:

• Interest on Loan: Calculated based on the normative average loan and weighted interest rates.
• Interest on Working Capital: Approved at a rate of 11.5%, considering maintenance spares and receivables.
• Depreciation: Allowed as per straight-line method and historical cost, with a weighted average rate of 2.80%.
• Return on Equity: Set at 16% of paid-up and subscribed capital, including notional equity from FERV.
• O&M Expenses: Normalized and approved based on detailed calculations, excluding abnormal expenses.

The Commission also outlined conditions for the inclusion of FERV and mandated PGCIL to certify no additional foreign loans were drawn post-commercial operation. Additionally, the approval encompasses other charges like Development Surcharge, income tax, incentives, and filing fees, subject to confirmation of non-inclusion in O&M charges.

Analysis

Precedents Cited

While the judgment primarily deals with the specific tariff components of Farakka STPS, it references broader regulatory frameworks and previous tariff-setting methodologies established by the CERC and the Ministry of Power. The principles for calculating FERV, depreciation, and return on equity are consistent with Accounting Standard 11 issued by the Institute of Chartered Accountants of India, ensuring alignment with national accounting practices.

Legal Reasoning

The Commission's legal reasoning is rooted in adherence to the CERC's notification dated March 26, 2001. Key aspects include:

• Capital Cost Calculation: PGCIL's adherence to the capital cost as approved by the Ministry of Power was validated, ensuring no additional capitalization was claimed post-April 1, 2001.
• FERV Inclusion: The method employed by PGCIL to calculate FERV was scrutinized and approved, provided it directly arose from foreign exchange rate variations and was not attributable to any controllable factors.
• Depreciation and Return on Equity: The Commission verified that depreciation was calculated on historical cost, not exceeding 90% of the approved original cost, and return on equity was aligned with the prescribed 16% rate.
• O&M Expenses Normalization: Detailed examination of O&M expenses ensured they were reasonable, excluding abnormal costs like significant repairs or discretionary expenses.

The Commission emphasized transparency, requiring PGCIL to furnish additional confirmations and adhere to stipulated calculation methodologies, thereby ensuring the tariff's fairness and compliance with regulatory standards.

Impact

This judgment reinforces the CERC's commitment to meticulous tariff determination, setting a precedent for future tariff approvals. It underscores the importance of:

• Standardized Calculation Methods: Ensuring consistency in how tariffs are calculated across different projects and regions.
• Transparency and Accountability: Mandating detailed disclosures and justifications for each tariff component.
• Regulatory Compliance: Aligning tariffs with established accounting standards and regulatory notifications.

For utilities and regulatory bodies, this judgment serves as a benchmark for preparing, presenting, and evaluating tariff petitions, fostering a balanced and equitable energy sector.

Complex Concepts Simplified

Foreign Exchange Rate Variation (FERV)

FERV refers to the impact of fluctuating exchange rates on the cost of loans denominated in foreign currencies. In this case, PGCIL accounted for FERV by considering the difference between the exchange rate at the loan's origination and the rate at the end of the fiscal year. This adjustment ensures that exchange rate volatility is reflected in the transmission tariff.

Return on Equity (ROE)

ROE represents the profitability measure that calculates the return generated on shareholders' equity. PGCIL was entitled to a 16% ROE on its paid-up and subscribed capital, including notional equity arising from FERV, ensuring a fair return for investors.

Operation & Maintenance (O&M) Expenses Normalization

Normalization of O&M expenses involves adjusting actual expenses to a standard or average level, excluding atypical costs. This process ensures that the tariffs reflect regular operational costs, providing stability and predictability in transmission charges.

Advance Against Depreciation (AAD)

AAD allows utilities to receive upfront funds based on the difference between scheduled loan repayments and allowable depreciation. This provision aids in managing cash flows effectively, ensuring that utilities can continue operations without financial strain.

Conclusion

The CERC's judgment in the case of Power Grid Corporation Of India Ltd. v. Bihar State Electricity Board exemplifies a thorough and structured approach to tariff approval. By meticulously evaluating each tariff component and ensuring adherence to established guidelines, the Commission upholds regulatory integrity and fosters a fair energy market. The case highlights the critical balance between utility profitability and consumer cost, setting a robust framework for future tariff determinations.

Stakeholders in the energy sector can draw valuable insights from this judgment, particularly in the realms of financial transparency, regulatory compliance, and methodological consistency. As the energy landscape continues to evolve, such judgments will play a pivotal role in shaping equitable and sustainable energy policies.