Establishment of Clear Guidelines for Transmission Tariff Determination: Power Grid Corp. v. BSPHCL

Introduction

The case of Power Grid Corporation of India Limited (PGCIL) v. Bihar State Power (Holding) Company Limited (BSPHCL) and Others was adjudicated by the Central Electricity Regulatory Commission (CERC) on January 1, 2022. This case revolves around the determination and approval of transmission tariffs for a specific transmission asset under the Eastern Region Strengthening Scheme-IX. The primary petitioner, PGCIL, a deemed transmission licensee, sought the determination of transmission tariffs for the period from Commercial Operation Date (COD) to March 31, 2024, for a 500 MVA Single Phase Unit at Ranchi (New) sub-station. The respondents included various state power distribution companies and other stakeholders benefiting from the transmission services provided by PGCIL.

The key issues at the heart of this case pertain to the approval of capital costs, handling time and cost overruns, interest calculations, and the admissibility of Operation and Maintenance (O&M) expenses for transmission assets designated as cold spares. Additionally, the case delves into the applicability of Goods and Services Tax (GST) on transmission charges and the reimbursement of petition filing and publication expenses incurred by PGCIL.

Summary of the Judgment

The CERC examined multiple facets of the petition, ultimately approving the transmission tariff for the specified asset for the 2019-24 period with certain conditions and disallowances. Key determinations include:

Approval of the capital cost incurred by PGCIL, ensuring it falls within the approved apportioned cost without any cost overrun.
Non-condonation of the 40-month time overrun in commissioning the transmission asset, as the delays were deemed controllable factors under Regulation 22 of the 2019 Tariff Regulations.
Allowance of Interest During Construction (IDC) based solely on disallowed and allowed amounts as per the regulations, without extending protections for delays not condoned.
Disallowance of Operation and Maintenance (O&M) expenses for the cold spare transmission asset, aligning with previous orders and the nature of the asset.
Approval of the reimbursement of petition filing fees and publication expenses, permitting PGCIL to recover these costs from beneficiaries on a pro-rata basis.
Rejection of the immediate adjustment for GST on transmission charges, citing it as premature.

The Commission's decision underscores the stringent adherence to regulatory provisions, emphasizing prudence and the necessity of justifying delays and cost escalations beyond controllable factors.

Analysis

Precedents Cited

The judgment references previous orders to maintain consistency in tariff determinations, notably:

Order dated 24.1.2021 in Petition No. 136/TT/2020: This order differentiated between transmission assets in regular use and those designated as spares, particularly regarding O&M expenses.
Order dated 6.1.2015 in Petition No. 113/TT/2012: Highlighted the disallowance of O&M expenses for spare transmission assets before the 2014-19 tariff period.
Order dated 26.2.2016 in Petition No. 191/TT/2015: Continued the precedent of not allowing O&M expenses for spare assets.

These precedents established a clear framework that spares, not being in regular operation, do not qualify for O&M expenses, ensuring beneficiaries are not unduly burdened.

Legal Reasoning

The Commission meticulously applied the provisions of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019 to evaluate the claims presented by PGCIL. The legal reasoning can be distilled as follows:

Capital Cost Determination: The Commission ensured that all claimed capital costs were within the approved apportioned limits, referencing Regulation 19 and verifying against Auditor's Certificates.
Time Overrun: Under Regulation 22, the Commission classified the delay as a controllable factor since it stemmed from contractor delays, which are within PGCIL's purview to manage. Consequently, the time overrun was not condoned.
IDC and IEDC: Only allowed IDC and IEDC as per the regulations, excluding amounts related to the non-condoned delays.
O&M Expenses: Based on previous orders and the nature of the asset as a cold spare, O&M expenses were disallowed, adhering to Regulation 35(3)(a).
Reimbursement of Expenses: Approved PGCIL’s claim for reimbursement of petition filing fees and publication expenses, aligning with Regulation 70(1).
GST on Transmission Charges: Deferred the consideration of GST adjustments, deeming it premature as GST was not currently applicable.

The reasoning showcases a balanced approach, ensuring regulatory compliance while addressing the petitioner’s concerns. The Commission prioritized fairness and regulatory adherence, especially in categorizing delays and justifying the non-adjacence of certain costs.

Impact

This judgment solidifies several critical aspects in the domain of transmission tariff determination:

Clarity on O&M Expenses for Spares: Reinforces the stance that O&M expenses are exclusive to assets in regular operation, preventing potential over-collection from beneficiaries.
Stringent Time Overrun Conditions: Establishes that delays attributable to contractors are considered controllable and not warranting condonation, highlighting the need for efficient project management.
Capital Cost Validation: Emphasizes meticulous verification of capital costs against approved estimates, ensuring financial prudence.
Reimbursement Protocols: Affirms PGCIL's right to recover petition-related expenses, promoting fairness in regulatory proceedings.
Deferred GST Adjustments: Signals that tariff adjustments related to GST will follow regulatory developments, maintaining flexibility in financial planning.

Future cases involving tariff determinations will likely reference this judgment for guidelines on handling spares, managing delays, and validating capital expenditures. Moreover, state power companies and transmission utilities may adopt more stringent project management practices to avoid similar disputes.

Complex Concepts Simplified

1. Transmission Tariff

Transmission tariff refers to the charges levied by transmission licensees (like PGCIL) for the transmission of electricity from generation sources to distribution networks. It encompasses various components such as depreciation, interest on loans, return on equity, and operational expenses.

2. Capital Cost and Additional Capitalisation (ACE)

Capital cost includes all expenditures incurred or projected for setting up the transmission asset. Additional Capitalisation (ACE) refers to extra costs beyond the initial capital expenditure, often due to project scope changes or unforeseen expenses.

3. Interest During Construction (IDC) and Incidental Expenditure During Construction (IEDC)

IDC represents the interest accrued on borrowed funds during the construction phase before the asset becomes operational. IEDC covers additional expenses related to the construction process.

4. Operation and Maintenance (O&M) Expenses

O&M expenses are the costs associated with the regular upkeep and functioning of transmission assets. These include routine maintenance, repairs, and operational costs necessary to ensure the asset operates efficiently.

5. Cold Spare

A cold spare refers to backup equipment that is kept inactive and not operational unless required during an emergency or failure of the primary asset.

6. Return on Equity (RoE)

RoE is the financial performance metric that calculates the profitability relative to shareholders' equity. In this context, it represents the expected return PGCIL offers to its equity investors.

Conclusion

The CERC's judgment in Power Grid Corporation of India Limited v. BSPHCL sets a pivotal precedent in the regulatory framework governing transmission tariffs. By meticulously applying the provisions of the 2019 Tariff Regulations, the Commission underscored the importance of adhering to approved capital costs, stringent project timelines, and clear distinctions between operational and spare assets. The decision reinforces the necessity for transmission licensees to maintain rigorous project management and financial prudence to ensure fair tariff determinations.

Additionally, the handling of O&M expenses for spare assets establishes a clear boundary, preventing unnecessary cost burdens on beneficiaries and promoting transparency in tariff calculations. The deferred consideration of GST adjustments indicates the Commission's readiness to adapt to evolving tax regulations while maintaining regulatory stability.

Overall, this judgment not only resolves the immediate dispute but also fortifies the regulatory landscape, offering clarity and consistency for future tariff determinations. Stakeholders within the power transmission sector can draw valuable insights from this order to navigate regulatory requirements effectively, ensuring equitable and transparent pricing mechanisms.