Establishing Transmission Tariff Determination and Truing Up Methodology

Power Grid Corporation of India Limited v. Karnataka Power Transmission Corporation Limited And Others (S), Central Electricity Regulatory Commission, 2022

Introduction

The case of Power Grid Corporation of India Limited v. Karnataka Power Transmission Corporation Limited And Others (S) was adjudicated by the Central Electricity Regulatory Commission (CERC) on March 13, 2022. This litigation centered around the determination and truing up of transmission tariffs for the Tumkur (Pavagada) Pool-Hiriyur 400 kV double circuit (D/C) transmission line, part of the "Transmission System for Ultra Mega Solar Power Park at Tumkur (Pavagada), Karnataka-Phase-I" in the Southern Region. The petitioner, Power Grid Corporation of India Limited (PGCIL), a deemed transmission licensee, sought regulatory approval for truing up transmission tariffs from the date of commercial operation (COD) to March 31, 2019, and for determining tariffs from April 1, 2019, to March 31, 2024, under the respective CERC Tariff Regulations of 2014 and 2019.

Summary of the Judgment

The CERC reviewed PGCIL's extensive petition, which included multiple prayers related to transmission tariff approval, reimbursement of expenditures, and adjustments based on various financial and operational metrics. The Commission meticulously examined the capital costs, interest on loans, return on equity (RoE), and operation & maintenance (O&M) expenses associated with the transmission asset. Additionally, it considered the implications of Central Finance Assistance (CFA) and the proper treatment of grants received. The Commission approved the trued-up Annual Fixed Charges (AFC) for the 2014-2019 tariff period and determined the AFC for the subsequent 2019-2024 period, ensuring compliance with the regulatory frameworks established in the 2014 and 2019 Tariff Regulations. The petition also addressed issues related to sharing transmission charges, recovery mechanisms, and the applicability of Goods and Services Tax (GST) on transmission charges.

Analysis

Precedents Cited

The judgment references several key regulatory provisions and previous judgments, including directions from the Appellate Tribunal for Electricity (APTEL) and earlier CERC orders. Notably, the Commission aligned its reasoning with the CERC (Terms and Conditions of Tariff) Regulations of 2014 and 2019, ensuring consistency in the treatment of transmission tariffs, capital expenditures, and return on equity calculations. The decision also considered the APTEL's judgment in Appeal No. 74 of 2017 regarding the treatment of initial spares, reinforcing the approach towards capital cost adjustments and truing up processes.

Legal Reasoning

The Court's legal reasoning was grounded in a comprehensive interpretation of the CERC Tariff Regulations. Key considerations included:

• Capital Cost Calculation: The Commission evaluated the capital costs as per Regulation 9(3) of the 2014 Tariff Regulations, ensuring that additional capital expenditures (ACE) were within approved limits and accurately reflected in the capital structure.
• Interest on Loan (IoL): IoL was calculated based on the Weighted Average Rate of Interest on actual loan portfolios, adhering to Regulation 26 of the 2014 Tariff Regulations. Adjustments for floating rates were provisioned to maintain accuracy over the tariff period.
• Return on Equity (RoE): RoE was determined in compliance with Regulations 24 and 25 of the 2014 Tariff Regulations. The RoE was grossed up based on the Minimum Alternate Tax (MAT) rates, aligning with CERC’s guidelines on effective tax rate considerations.
• Operation & Maintenance (O&M) Expenses: O&M expenses were scrutinized as per Regulation 29(4)(a) of the 2014 Tariff Regulations and Regulation 35 of the 2019 Tariff Regulations. The Commission ensured that claimed expenses were within permissible norms and adjusted accordingly.
• Goods and Services Tax (GST): The Commission held that since GST was not levied on transmission services at the time of judgment, PGCIL's claims regarding future GST implications were deemed premature and thus not approved.

Impact

This judgment sets a precedent for the precise methodology in determining and truing up transmission tariffs, especially for large-scale solar power evacuation projects. It underscores the importance of adhering to regulatory frameworks, ensuring financial prudence, and maintaining transparency in cost calculations. Future cases involving transmission tariff determinations will likely reference this judgment to guide the calculation of capital costs, IoL, RoE, and O&M expenses. Moreover, the decision clarifies the treatment of grants and additional capital expenditures, providing a clear pathway for similar regulatory approvals.

Complex Concepts Simplified

Transmission Tariff Truing Up

Truing up refers to the process of adjusting transmission tariffs to reflect the actual costs incurred during a specific period. This ensures that transmission licensees like PGCIL recover the true costs of operating and maintaining the transmission system.

Capital Expenditure (CapEx) and Additional Capital Expenditure (ACE)

CapEx refers to the funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. ACE pertains to any additional investments made beyond the original scope of the project, ensuring the asset remains efficient and up-to-date.

Return on Equity (RoE)

RoE is a financial ratio that measures the ability of a company to generate profits from its shareholders' investments. In the context of tariff regulations, it ensures that transmission licensees earn a reasonable return on their invested capital.

Interest on Loan (IoL)

IoL represents the interest payable on the capital borrowed by the transmission licensee to finance its projects. Accurate calculation of IoL is crucial for setting fair transmission tariffs.

Conclusion

The CERC's decision in Power Grid Corporation of India Limited v. Karnataka Power Transmission Corporation Limited And Others (S) marks a significant development in the regulation of transmission tariffs for large-scale solar projects. By meticulously adhering to and interpreting the tariff regulations, the Commission has set a clear standard for future tariff determinations and truing up processes. This ensures financial integrity, promotes fair cost recovery, and fosters transparency in the electricity transmission sector. The judgment not only addresses the immediate concerns of PGCIL and the Respondents but also lays down a robust framework for handling similar cases, balancing the interests of transmission licensees and beneficiaries alike.