Introduction

The case of Power Grid Corporation Of India Ltd. v. Karnataka Power Transmission Corporation Ltd. (Kptcl) And Others was adjudicated by the Central Electricity Regulatory Commission (CERC) on February 6, 2021. The petitioner, Power Grid Corporation of India Ltd. (PGCIL), a deemed transmission licensee, sought the determination of transmission tariff for specific transmission assets under the "System Strengthening-XXIII in Southern Region" project for the period from Commercial Operation Date (COD) to March 31, 2019. The key assets involved included replacements and additions of high-capacity transformers and bus reactors at various substations.

The primary issues revolved around the approval of transmission tariffs, consideration of capital costs, additional capitalization, operating and maintenance (O&M) expenditures, and the treatment of regional spares. Additionally, the petitioner sought reimbursement for petition filing fees, publication expenses, and the inclusion of GST impacts, among other reliefs.

Summary of the Judgment

In its deliberation, the CERC evaluated PGCIL’s claims for tariff determination across five specific transmission assets. While the tariff for five assets was considered, the Commission excluded certain assets pending further assessment as directed in previous orders. The Commission scrutinized various financial components including depreciation, interest during construction (IDC), incidental expenditure during construction (IEDC), initial spares, and return on equity (ROE). The determination hinged on adherence to the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014.

Key decisions included:

• Approval of COD for Assets-1, 2, and 3 based on submitted certificates.
• Exclusion of de-capitalization claims for certain replaced assets referencing APTEL judgments.
• Allowance of initial spares in compliance with regulation norms.
• Disallowance of certain IEDC and IDC claims due to discrepancies and uncontrollable factors like contractor delays.
• Approval for reimbursement of petition filing fees and publication expenses.
• Premature dismissal of GST-related reimbursement claims.

Analysis

Precedents Cited

The judgment prominently referenced decisions from the Appellate Tribunal for Electricity (APTEL), specifically:

• APTEL Judgment dated 25.4.2016 in Appeal No. 98 of 2015: Established that assets exceeding their useful life and not in use cannot have their capital costs retained for tariff purposes.
• APTEL Judgment dated 08.05.2014 in Appeal No. 173/2013 and dated 01.05.2015 in Appeal No. 97/2013: Emphasized that without explicit regulatory provisions, capitalization of spare/additional assets post-use is impermissible.

These precedents significantly influenced the Commission’s stance on de-capitalization and capitalization of replaced assets, ensuring adherence to regulatory frameworks and preventing unjustified tariff claims.

Legal Reasoning

The Commission meticulously dissected PGCIL's claims, cross-referencing them with the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014. Key aspects of the legal reasoning included:

• Capital Cost and De-capitalization: The Commission enforced the principle that assets replaced after completing their useful life cannot have their capital costs retained unless explicitly allowed by regulations or approved by the Regional Power Committee (RPC).
• Interest During Construction (IDC) and Incidental Expenditure: Claims were allowed based on the accuracy of submitted data, subject to rectifications and true-up processes. Discrepancies led to partial disallowances.
• Initial Spares: Capitalization of initial spares was permitted within regulatory ceilings, ensuring that only prudent and necessary spares were accounted for.
• Return on Equity (ROE): Calculation adheres to the regulations, including adjustments for Minimum Alternate Tax (MAT), ensuring investors receive a fair return without overcompensation.
• Interest on Working Capital (IWC): Calculated based on receivables and operating expenses, with rates determined by SBI base rates plus fixed points, aligning with regulatory mandates.
• Time Over-run: Delays attributable to controllable factors like contractor delays were not condoned, reinforcing accountability on project timelines.

Impact

This judgment sets a vital precedent for future tariff determinations, particularly concerning:

• Capitalization Practices: Firms must strictly adhere to approved costs and avoid capitalizing on assets not in active use unless explicitly permitted.
• Regulatory Compliance: Emphasizes the necessity for meticulous documentation and adherence to CERC regulations to support tariff claims.
• Financial Integrity: By disallowing discrepancies in IDC and IEDC claims, the judgment promotes transparency and financial prudence within transmission licensees.
• Project Management: Organizations are incentivized to manage project timelines effectively to avoid non-condonable delays impacting financial claims.

Overall, this decision reinforces the framework within which transmission licensees operate, ensuring that tariffs are determined based on fair, regulated, and transparent financial practices.

Complex Concepts Simplified

De-capitalization

De-capitalization refers to the process of reducing the capital cost of an asset when it is replaced or retired. In this context, when PGCIL replaced older transformers with newer ones, the older ones could not retain their capital costs in tariff calculations unless specifically allowed by regulations.

Return on Equity (ROE)

ROE represents the profitability for equity investors. It is calculated on the equity base and is essential for ensuring investors receive a fair return on their investment. Here, ROE was adjusted to account for the effective tax rate, ensuring compliance with regulatory standards.

Interest During Construction (IDC)

IDC is the interest expense incurred during the construction phase of a project. It is capitalized as part of the project cost and affects the tariff determination. Accurate calculation and documentation are crucial for these claims to be admissible.

Initial Spares

Initial spares are spare parts procured at the commencement of a project to ensure operational reliability. The Capital cost inclusion of these spares is regulated to prevent excessive or unjustified claims.

Conclusion

The CERC’s judgment in Power Grid Corporation Of India Ltd. v. Kptcl underscores the critical importance of regulatory adherence, financial accuracy, and prudent project management in tariff determinations. By strictly enforcing existing regulations and set precedents, the Commission ensures that tariff approvals are grounded in fairness and transparency, safeguarding the interests of both transmission licensees and beneficiaries. This decision serves as a comprehensive roadmap for future tariff petitions, emphasizing rigorous compliance and substantiated financial claims.