Establishing Precedent for Transmission Tariff Truing Up: CERC's Decision in Power Grid v. Bihar State Power

Introduction

The case of Power Grid Corporation Of India Limited v. Bihar State Power (Holding) Company Ltd. And Others was adjudicated by the Central Electricity Regulatory Commission (CERC) on February 4, 2020. This pivotal judgment addresses the complex procedural and financial aspects surrounding the determination and truing up of transmission tariffs for the fiscal periods 2009-14 and 2014-19. The petitioner, Power Grid Corporation of India Ltd., seeks regulatory approval for adjusting transmission tariffs across multiple high-voltage transmission assets, ensuring cost recovery and fair pricing mechanisms within the framework of established CERC regulations.

Summary of the Judgment

Power Grid Corporation of India Ltd. filed a comprehensive petition requesting CERC to approve the truing up of transmission tariffs for the 2009-14 block and to determine the transmission tariffs for the 2014-19 block. The petition encompassed eight major transmission assets, detailing capital costs, interest on loans, return on equity (ROE), interest on working capital (IWC), and operation and maintenance (O&M) expenses. CERC meticulously reviewed the petitioner’s submissions, including Revised Cost Estimates (RCE), Auditor Certificates, and adherence to existing tariff regulations. The Commission approved the truing up of transmission tariffs, validated the additional capitalization claims, and permitted the recovery of various expenses, subject to compliance with regulatory norms and prudence checks.

Analysis

Precedents Cited

The judgment references several prior orders and regulations that have shaped the current decision. Notably, orders from petitions numbered 41/TT/2013, 248/TT/2013, 106/TT/2014, among others, were instrumental in determining the admissibility of costs and time overruns. Additionally, the judgment takes into account the Appellate Tribunal for Electricity (APTEL) rulings, particularly regarding the computation of Incidental Expenditure During Construction (IEDC), emphasizing the need for actual data and prudential checks in tariff calculations.

Legal Reasoning

CERC's legal reasoning was anchored in the strict adherence to the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2009 and 2014. The Commission undertook a detailed validation of the capital costs presented by the petitioner, ensuring that no cost overruns existed beyond the Revised Cost Estimates. Time overruns were scrutinized, and justifications provided by the petitioner were accepted where they fell within regulatory allowances. The Commission also applied the APTEL's precedent on IEDC computation, mandating that such expenditures be justified with actual data and subjected to a prudence check.

Impact

This judgment sets a significant precedent in the realm of transmission tariff determination, particularly in the flexible adjustment of tariffs based on actual capital outlay and adherence to regulatory frameworks. By approving the truing up and subsequent tariff determination, CERC reinforces the importance of accurate capital cost reporting, justified capitalization claims, and the necessity of maintaining financial prudence. Future cases involving tariff adjustments and cost recoveries will likely reference this decision, ensuring that transmission entities adhere strictly to regulatory norms while seeking financial adjustments.

Complex Concepts Simplified

Truing Up of Transmission Tariff

Truing up refers to the process of adjusting transmission tariffs to reflect the actual costs incurred by the transmission provider. It ensures that the tariffs charged to users are fair and representative of the true expenditure, covering capital costs, operational expenses, and justified profits.

Capital Cost and Additional Capitalization

Capital cost encompasses the total expenditure on acquiring assets essential for transmission operations. Additional capitalization refers to any extra funds a company injects into its assets beyond the initial capital to improve or expand operations.

Return on Equity (ROE)

ROE is the rate of return expected by the investors based on their equity investment in the company. In the context of transmission tariffs, it ensures that investors receive a fair return on their investment while maintaining the financial viability of the transmission company.

Interest on Working Capital (IWC)

IWC refers to the interest payable on the capital required to maintain daily operations. It ensures that the transmission company can cover its short-term expenses without financial strain.

Operation and Maintenance (O&M) Expenses

O&M expenses are the costs associated with the day-to-day functioning and upkeep of transmission assets. This includes labor, maintenance, and other operational costs necessary to ensure reliable transmission of electricity.

Conclusion

The CERC's decision in Power Grid Corporation Of India Limited v. Bihar State Power (Holding) Company Ltd. And Others underscores the regulatory body's commitment to ensuring fair and accurate transmission tariff determination. By approving the truing up of tariffs for the specified blocks and validating the additional capital claims, CERC has provided a clear framework for transmission entities to follow. This judgment not only facilitates financial transparency and accountability but also reinforces the importance of adhering to established regulatory norms. As the energy sector continues to evolve, such judgments will play a pivotal role in shaping the financial and operational landscapes of transmission entities.