PGCIL v. BSPHCL: CERC Sets New Standards for Transmission Tariff Truing Up and Capital Expenditure Adjudication

Introduction

The case of Power Grid Corporation of India Ltd. v. Bihar State Power (Holding) Company Ltd. And Others (S) was adjudicated by the Central Electricity Regulatory Commission (CERC) on August 9, 2021. The petition was filed by Power Grid Corporation of India Ltd. (PGCIL), a deemed transmission licensee, seeking the approval of trued-up transmission tariffs for the periods 1.4.2014 to 31.3.2019 and the determination of tariffs for 1.4.2019 to 31.3.2024. The focus was on the transmission asset known as the Chukka Transmission System in the Eastern Region.

The respondents included various distribution licensees, power departments, and transmission licensees who are the primary beneficiaries of the transmission services provided by PGCIL. Key issues revolved around the approval of transmission tariffs, inclusion of capital costs, adjustment of the debt-equity ratio, treatment of additional capital expenditure (ACE), and the handling of various financial components such as depreciation, return on equity (RoE), and interest on loan (IoL).

Summary of the Judgment

The CERC meticulously reviewed the submissions from both PGCIL and BSPHCL, addressing each prayer in the petition. The Commission approved the trued-up transmission tariffs for the 2014-19 period with specific adjustments to depreciation, RoE, and IoL based on the regulations in place. For the 2019-24 tariff period, the Commission approved critical ACE claims related to the replacement of obsolete equipment essential for grid reliability but rejected non-critical ACE claims such as those pertaining to building and civil works. The debt-equity ratio was adjusted in compliance with the 2019 Tariff Regulations, particularly adhering to the limitations set for equity beyond 30% following the completion of the asset’s useful life.

Furthermore, the Commission denied separate Operation & Maintenance (O&M) expenses claims for the Power Line Communication Control (PLCC) system, aligning with previous determinations, and addressed issues related to Goods and Services Tax (GST), security expenses, and the reimbursement of filing fees.

Analysis

Precedents Cited

The judgment references several prior orders and regulations set forth by the CERC, including the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2014 and 2019. These regulations outline the framework for tariff determination, capital cost inclusion, depreciation methods, and the handling of additional capital expenditures. Specifically, precedents related to the determination and truing up of transmission tariffs for previous periods (e.g., Petition No. 60/TT/2015) were pivotal in shaping the current decision, ensuring consistency and adherence to established regulatory norms.

Legal Reasoning

The Commission's reasoning was grounded in a thorough interpretation of the 2014 and 2019 Tariff Regulations. It emphasized the necessity of prudent capital expenditure, especially for critical infrastructure components that ensure grid stability and reliability. The refusal to approve ACE claims for non-critical works like building and civil structures was based on the absence of prior approval and lack of necessity for transmission reliability. The adjustment of the debt-equity ratio was strictly in line with Regulation 18 of the 2019 Tariff Regulations, limiting equity to 30% post the asset's useful life completion to maintain financial prudence.

Additionally, the Commission addressed the petitioner’s request to recover taxes such as GST, deeming it premature since GST was not yet levied on transmission services. The decision to handle security expenses in a separate petition underscored the Commission's commitment to organized and regulated tariff determination processes.

Impact

This judgment reinforces the CERC's stringent adherence to regulatory frameworks, especially concerning financial prudence in tariff determination. By approving only critical ACE claims, the Commission ensures that transmission infrastructure remains reliable without unjustifiably burdening the beneficiaries with excessive costs. The strict enforcement of the debt-equity ratio limitation post the asset's useful life completion sets a precedent for financial structuring in future tariff determinations. Moreover, the decision clarifies the treatment of O&M expenses and the non-recognition of separate PLCC expenses, guiding future petitions and tariff evaluations.

The approach towards handling tax adjustments, particularly relating to RoE based on MAT rates, provides a clear pathway for transmission licensees in managing their financial obligations while aligning with regulatory expectations. This decision is likely to influence future tariff determinations, emphasizing the need for transparency, regulatory compliance, and financial prudence.

Complex Concepts Simplified

Transmission Tariff Truing Up

Truing up involves adjusting the initially approved tariffs to reflect actual costs incurred over a period. This ensures that transmission licensees recover their costs efficiently without overcharging or undercharging the beneficiaries.

Additional Capital Expenditure (ACE)

ACE refers to additional investments made beyond the original capital expenditure to maintain or improve the transmission infrastructure. ACE can include upgrading outdated equipment or expanding the transmission network to meet increasing demand.

Debt-Equity Ratio

The debt-equity ratio is a financial metric that compares the amount of capital contributed by creditors (debt) to the amount contributed by shareholders (equity). A regulated ratio ensures that the transmission licensee maintains a balanced and sustainable financial structure.

Return on Equity (RoE)

RoE represents the profitability ratio that measures the ability of a company to generate profits from its shareholders' equity. In the context of transmission tariffs, a regulated RoE ensures that the licensee earns a fair return without placing undue financial strain on consumers.

Interest on Loan (IoL)

IoL pertains to the interest payments on loans taken by the transmission licensee. Proper calculation of IoL is crucial for accurate tariff determination, ensuring that the licensee can cover its financial obligations while maintaining competitive tariffs.

Conclusion

The CERC's decision in PGCIL v. BSPHCL underscores the Commission's commitment to meticulous and regulatory-compliant tariff determination. By approving trued-up tariffs and selectively allowing ACE claims, the Commission ensures the financial sustainability of transmission services while safeguarding the interests of beneficiaries. The stringent enforcement of financial ratios and depreciation norms establishes a clear framework for future tariff evaluations, promoting fairness and transparency in the electricity transmission sector. This judgment not only resolves the immediate concerns of the parties involved but also sets a robust precedent for future regulatory decisions in the power transmission domain.