CRRC's Comprehensive Truing Up of Transmission Tariffs: New Precedents in Depreciation and Return on Equity

Introduction

The case of Power Grid Corporation Of India Ltd. v. Karnataka Power Transmission Corporation Ltd. And Others (S) was adjudicated by the Central Electricity Regulatory Commission (CRRC) on July 22, 2021. Power Grid Corporation of India Ltd., a deemed transmission licensee, filed a petition seeking the truing up of transmission tariffs for the periods 2014-2019 and 2019-2024. The petition pertained to the Combined Asset associated with the Neyveli Lignite Corporation-II (NLC-II) Expansion Project in the Southern Region, encompassing various transmission lines, substations, transformers, and other related assets.

Summary of the Judgment

The CRRC approved the petitioner’s request to true up the transmission tariff for the 2014-2019 period and established new tariffs for 2019-2024. The Commission meticulously reviewed the components of the transmission charges, including depreciation, interest on loans, return on equity (RoE), interest on working capital (IWC), and operation & maintenance (O&M) expenses. Key decisions included the alignment of depreciation rates with regulatory norms, validation of RoE calculations based on Minimum Alternate Tax (MAT) rates, and rejection of separate O&M expenses claims for Programmable Logic Control Centers (PLCC) based on precedent.

Analysis

Precedents Cited

The CRRC relied extensively on its prior judgments to guide the current decision. Notably, the Commission referenced its order dated May 9, 2020, in Petition No. 19/TT/2020, which addressed similar issues related to depreciation rates for IT equipment. This precedent underscored the Commission’s stance on maintaining consistency in depreciation methodologies and restricting apportionment of capital expenditure during truing up exercises.

Legal Reasoning

The Commission's legal reasoning was founded on adhering to the provisions outlined in the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014 and 2019. The CRRC emphasized prudence in allowing capital costs, ensuring that claimed expenditures fell within approved revised cost estimates (RCE). The differentiation between IT and non-IT equipment depreciation rates was a focal point, aligning with regulatory guidelines to prevent inconsistent financial claims.

For RoE calculations, the Commission mandated the use of MAT rates applicable to the petitioner, ensuring that the pre-tax RoE reflected the actual tax obligations of the company. This approach ensured that the beneficiaries indirectly bore the tax implications through their transmission charges.

In rejecting the separate O&M expenses for PLCC, the Commission adhered to its prior judgment, reinforcing that PLCC expenses should be integrated within substation costs rather than treated as a distinct category.

Impact

This judgment sets a significant precedent in the regulation of transmission tariffs within the Indian electricity sector. By clarifying the treatment of depreciation rates, especially for IT equipment, and the calculation of RoE based on MAT rates, the CRRC establishes a framework that promotes financial transparency and consistency across tariff determinations. Future petitions dealing with similar financial structs, depreciation methodologies, and tariff adjustments will likely reference this decision, reinforcing the Commission's commitment to regulatory compliance and equitable cost recovery.

Complex Concepts Simplified

Truing Up of Transmission Tariff

Truing up refers to the process of adjusting the previously approved tariffs to reflect actual costs incurred, ensuring that the transmission licensee neither gains nor suffers financial losses. This mechanism ensures that tariffs remain fair and reflective of real expenditures.

Depreciation Rates

Depreciation is the reduction in the value of assets over time due to usage and wear. In this case, the CRRC differentiated between IT and non-IT equipment, assigning different depreciation rates as per regulatory norms to ensure accurate financial representation of asset values.

Return on Equity (RoE)

RoE is the profit generated from the shareholders' equity. The CRRC mandated that RoE calculations incorporate the Minimum Alternate Tax (MAT) rates, ensuring that the tax obligations of the company are reflected in the tariffs charged to beneficiaries.

Interest on Working Capital (IWC)

IWC covers the costs associated with maintaining the operational liquidity required for daily business functions. The Commission prescribed normative rates based on the State Bank of India's (SBI) Marginal Cost of Lending Rate (MCLR) plus 350 basis points, ensuring standardized calculation across tariff petitions.

Conclusion

The CRRC’s decision in Power Grid Corporation Of India Ltd. v. Karnataka Power Transmission Corporation Ltd. And Others (S) exemplifies a meticulous approach to tariff regulation, emphasizing adherence to established norms and precedents. By reinforcing standardized depreciation rates, aligning RoE with actual tax obligations, and maintaining consistency in O&M expense treatments, the Commission ensures financial transparency and fairness in the transmission tariff structures. This judgment not only resolves the immediate petition but also serves as a guiding beacon for future regulatory decisions within the electricity transmission sector.