Establishing Protocols for Transmission Tariff Truing-Up and Regulatory Compliance: Insights from Power Grid Corporation Of India Ltd. v. BSPHCL

Introduction

The case of Power Grid Corporation Of India Ltd. v. Bihar State Power (Holding) Company Ltd. And Others adjudicated by the Central Electricity Regulatory Commission (CERC) on January 27, 2021, marks a significant decision in the realm of electricity transmission tariffs in India. The petition filed by Power Grid Corporation of India Ltd. (the Petitioner) sought the truing-up of transmission tariffs for the 2014-19 period and the determination of tariffs for the ensuing 2019-24 period. Central to the case were specific assets under the transmission scheme across the Eastern, Northern, Southern, and Western regions, including transformers, reactors, and ICTs (Independent Converter Transformers) at various substations.

The respondents, primarily Bihar State Power Holding Company Limited (BSPHCL) and other power departments and distribution and transmission licensees, are key beneficiaries of the transmission services provided by the Petitioner. The crux of the dispute revolves around the financial adjustments in tariffs, encompassing aspects like additional capital expenditures, interest on loans, return on equity, and other operational expenses.

Summary of the Judgment

After meticulous consideration of the submissions by both parties, the CERC delivered its judgment addressing each of the Petitioner’s claims. The Commission approved the trued-up transmission tariffs for the 2014-19 period and determined the tariffs for the 2019-24 period, allowing certain financial components while disallowing others based on regulatory compliance and prudence checks. Notably, the Commission disallowed Operation & Maintenance (O&M) expenses for spare ICTs, aligning with precedents and regulatory guidelines. The judgment also elaborated on the treatment of initial spares, additional capital expenditures (ACE), interest on loans (IoL), and return on equity (RoE), ensuring that all calculations adhere to the prevailing tariff regulations of 2014 and 2019.

Analysis

Precedents Cited

The judgment extensively referenced prior rulings, notably the Appellate Tribunal for Electricity (APTEL) judgment dated September 14, 2019, in Appeal No. 74 of 2017. This precedent played a pivotal role in determining the treatment of initial spares, advocating for a project-wide consideration rather than an asset-wise restriction during prudence checks. Additionally, the Commission drew upon the APTEL’s judgment from April 27, 2011, in Appeal No. 72 of 2010, which delineated the entitlements related to Liquidated Damages (LDs) in cases of project delays attributable to various factors.

Legal Reasoning

The Commission’s legal reasoning was grounded in meticulous adherence to the CERC (Terms and Conditions of Tariff) Regulations, 2014 and 2019. Key elements of the reasoning included:

Capital Cost Calculation: The Commission verified the Petitioner’s claimed capital costs against approved expenditures, ensuring that additional capitalizations were justified and within regulatory limits.
Interest on Loan (IoL): IoL was calculated based on actual loan rates, with provisions for floating rates to be adjusted during tariffication revisions, adhering to Regulation 26 of the 2014 Tariff Regulations.
Return on Equity (RoE): RoE was grossed up using effective tax rates as per the Minimum Alternate Tax (MAT) provisions, ensuring compliance with fiscal regulations.
Operation & Maintenance Expenses: The Commission disallowed O&M expenses for spare ICTs, aligning with the principle that such expenses are not applicable to assets not in regular use.
Initial Spares: The Commission adopted APTEL’s stance on initial spares, allowing their truing-up based on overall project costs rather than individual assets, promoting financial prudence.

Impact

This judgment sets a robust framework for future tariff truing-up processes, emphasizing:

Regulatory Compliance: Reinforces the necessity for transmission licensees to adhere strictly to tariff regulations, ensuring transparency and fairness in cost recovery.
Financial Prudence: By aligning the treatment of initial spares and LDs with established precedents, the Commission promotes financial discipline among transmission entities.
Tax Adjustments: Clarifies the methodology for grossing up RoE based on effective tax rates under the MAT regime, providing clear guidelines for future adjustments.
Operational Clarity: The disallowance of O&M expenses for spare ICTs delineates the boundaries of cost recoverability, ensuring that only operationally active assets contribute to O&M charges.

Consequently, transmission entities can anticipate a more structured and regulation-aligned approach to tariff determinations, fostering a balanced financial ecosystem in the power transmission sector.

Complex Concepts Simplified

Truing-Up of Tariffs: This refers to the adjustment of previously determined tariffs to reconcile any discrepancies between estimated and actual costs incurred, ensuring that transmission licensees recover their rightful expenses.
Initial Spares: These are spare components (like ICTs) kept on hand to replace faulty or damaged parts. The judgment clarifies how the costs associated with these spares should be accounted for during tariff adjustments.
Return on Equity (RoE): A financial metric that determines the profitability of a company relative to shareholders' equity. In this context, it's adjusted based on applicable tax rates to ensure accurate tariff calculations.
Interest on Loan (IoL): The cost incurred by the transmission company on borrowed funds. This is calculated based on actual loan rates, with provisions to adjust for any floating rates during tariff revisions.
Operation & Maintenance (O&M) Expenses: These are costs related to the day-to-day functioning and upkeep of transmission assets. The judgment specifies that such expenses are not applicable to spare assets not in regular use.

Conclusion

The CERC’s judgment in Power Grid Corporation Of India Ltd. v. BSPHCL serves as a cornerstone for equitable and transparent tariff determination in the power transmission sector. By meticulously addressing each financial component—from capital expenditures to tax implications—the Commission ensures that transmission licensees can recover their legitimate costs without imposing undue financial burdens on beneficiaries. The alignment with established precedents and adherence to regulatory frameworks not only fortify the integrity of the tariff truing-up process but also foster a predictable and stable financial environment. As the power sector continues to evolve, such judgments will be instrumental in guiding best practices, ensuring that regulatory compliance and financial prudence remain at the forefront of tariff determinations.