Introduction

The case Power Grid Corporation Of India Ltd. v. Bihar State Power (Holding) Company Ltd. And Others was adjudicated by the Central Electricity Regulatory Commission (CERC) on January 27, 2021. The primary petitioner, Power Grid Corporation of India Ltd. (PGCIL), sought a truing-up of the transmission tariff for the period from Commercial Operation Date (COD) to March 31, 2019, under the 2014 Tariff Regulations, and the determination of tariff for the period from April 1, 2019, to March 31, 2024, under the 2019 Tariff Regulations. The case revolves around the transmission project titled “Transfer of Power from Generation Projects in Sikkim to NR/WR Part-A” in the Eastern Region, encompassing multiple assets including transmission lines, substations, and ancillary equipment.

The key issues addressed in this case include the approval of transmission tariffs, handling of additional capital expenditures (ACE), time over-runs in project execution, calculation of Interest During Construction (IDC) and Incidental Expenditure During Construction (IEDC), depreciation methodologies, and the treatment of Operation and Maintenance (O&M) expenses, particularly regarding the Power Line Carrier Communication (PLCC) system.

Summary of the Judgment

The CERC meticulously examined PGCIL's claims for truing-up transmission tariffs and determining future tariffs in compliance with the 2014 and 2019 Tariff Regulations. The Commission scrutinized the capital and operational expenditures, time over-runs, and justified the allowances for IDC, IEDC, and ACE. Significant aspects of the judgment include:

• Approval of Trued-Up Tariffs: The Commission approved the trued-up transmission tariffs for the 2014-19 period and sanctioned the tariffs for the 2019-24 period after adjusting for validated claims and disallowing unjustified expenses.
• Time Over-Run: The Commission condoned the initial time over-run for Asset-1 but disallowed additional time over-runs for Assets-2(a) and 2(b), citing insufficient justification for delays caused by adverse weather conditions.
• Interest and Equity: Adjustments were made to IDC and IEDC claims based on the approval of time over-runs. The Return on Equity (RoE) was grossed up based on notified Minimum Alternate Tax (MAT) rates.
• O&M Expenses: The Commission disallowed separate O&M expenses claimed for PLCC systems, aligning with previous judgments to prevent double charging.
• Additional Capital Expenditure (ACE): ACE claims within the original scope up to the cut-off date were approved, while ACE claims beyond the cut-off date were scrutinized and approved only if justified.
• Debt-Equity Ratio: The Commission adhered to the debt-equity ratio guidelines set forth in the 2019 Tariff Regulations, maintaining a 70:30 ratio.

Analysis

Precedents Cited

The Commission referenced several previous orders and petitions, notably:

• Petition No. 258/TT/2015: Pertained to the initial determination and truing up of tariffs for the 2014-19 period.
• Petition No. 19/TT/2020: Addressed the issue of depreciation rates and the treatment of IT equipment costs, establishing that capital expenditure apportionment cannot be altered during tariff truing up.
• Petition No. 274/TT/2019: Dealt with the effective tax rates applicable for Return on Equity, especially under the Minimum Alternate Tax regime.
• Petition No. 126/TT/2020: Clarified the non-admissibility of separate O&M expenses for PLCC systems, ensuring consistency in transmission system charges.

These precedents played a crucial role in shaping the Commission's approach to the present case, ensuring consistency and adherence to established regulations.

Legal Reasoning

The Commission employed a meticulous review process to validate PGCIL's claims, focusing on compliance with the respective tariff regulations. Key aspects of the legal reasoning include:

• Time Over-Run: While initial delays were condoned as beyond the control of PGCIL, additional delays attributed to heavy rainfall were disallowed due to the absence of evidence showing that the rainfall was extraordinary or that PGCIL had taken adequate measures to mitigate the delays.
• IDC and IEDC: Adjustments were based on approved time over-runs. Disallowed periods for additional delays led to the reduction of IDC and IEDC claims, ensuring that only justified expenses were approved.
• O&M Expenses for PLCC: Aligning with previous rulings, the Commission disallowed separate O&M expenses for PLCC systems to prevent beneficiaries from being overcharged.
• Depreciation: The Commission upheld the weighted average rate of depreciation, rejecting PGCIL's attempt to segregate and apply higher depreciation rates to IT equipment retrospectively.
• Debt-Equity Ratio and RoE: Following the 2019 Tariff Regulations, the Commission maintained a 70:30 debt-equity ratio and grossed up RoE based on notified MAT rates, ensuring financial prudence and regulatory compliance.
• ACE Considerations: ACE within the original scope and up to the cut-off date was approved, while ACE beyond the cut-off required stringent justification, reflecting the Commission's focus on fiscal responsibility.

Impact

This judgment sets several important precedents impacting future cases and the broader domain of electricity transmission regulation:

• Strict Adherence to Regulations: Emphasizes the necessity for transmission licensees to strictly comply with tariff regulations, especially in areas like time over-runs, ACE claims, and O&M expenses.
• Prevention of Double Charging: Reinforces the policy against reimbursing beneficiaries for the same expense multiple times, as seen in the disallowance of separate O&M expenses for PLCC systems.
• Depreciation Practices: Clarifies the treatment of depreciation rates and capital expenditure apportionment during tariff truing up, discouraging retrospective adjustments that could distort financial metrics.
• Handling of Force Majeure: Sets a precedent on the evaluation of force majeure claims, requiring robust evidence to substantiate claims of extraordinary events affecting project timelines.
• Effective Tax Rate for RoE: Establishes the methodology for grossing up RoE based on notified MAT rates, ensuring that RoE calculations reflect actual tax liabilities.

Overall, the judgment fosters transparency, accountability, and fiscal prudence in the transmission sector, aligning with regulatory objectives and protecting the interests of both transmission licensees and beneficiaries.

Complex Concepts Simplified

1. Truing-Up of Tariffs

Truing-up refers to the adjustment of previously approved tariffs to reflect actual expenditures, ensuring that the transmission licensee neither overrecovers nor underrecovers costs from beneficiaries.

2. Additional Capital Expenditure (ACE)

ACE includes expenditures beyond the original project scope that are necessary for project completion. ACE claims are scrutinized to ensure they fall within regulatory guidelines and are justified.

3. Interest During Construction (IDC) and Incidental Expenditure During Construction (IEDC)

IDC covers the interest on funds borrowed to finance the construction of the project. IEDC includes incidental costs like sundry expenses and other financial costs incurred during construction.

4. Return on Equity (RoE)

RoE is the financial return earned by the company on the equity capital invested. It is crucial for determining the profitability and financial viability of the transmission project.

5. Weighted Average Rate of Depreciation (WAROD)

WAROD is an averaged depreciation rate applied across different asset types within a project, considering their respective depreciation rates and capital costs.

6. Operation and Maintenance (O&M) Expenses

O&M Expenses encompass the costs associated with the day-to-day operation and maintenance of transmission infrastructure. These are normatively determined based on asset types and capacities.

Conclusion

The judgment in Power Grid Corporation Of India Ltd. v. Bihar State Power (Holding) Company Ltd. And Others reinforces the Central Electricity Regulatory Commission's commitment to maintaining stringent regulatory oversight over transmission tariffs. By meticulously evaluating claims for truing-up, ACE, O&M expenses, and financial metrics like RoE, the Commission ensures fiscal prudence and safeguards the interests of electricity consumers. The decision underscores the importance of adherence to regulatory frameworks, robust documentation, and justified expenditure claims by transmission licensees. Furthermore, by clarifying the treatment of complex elements like PLCC systems and setting clear methodologies for depreciation and tax considerations, the Commission provides a robust framework for future tariff determinations, fostering a balanced and transparent electricity transmission sector.