Power Grid Corporation v. Bihar State Power: Truing-Up of Tariffs Under CERC Regulations

Introduction

The case titled 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 February 4, 2021. The petitioner, Power Grid Corporation of India Limited (PGCIL), sought truing-up of tariffs and determination of future tariffs for specific transmission assets under the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2014 and 2019.

The primary focus of the petition was the adjustment and approval of various financial parameters such as Annual Fixed Charges (AFC), Return on Equity (RoE), Interest on Loan (IoL), and Operation & Maintenance (O&M) expenses for transmission projects in the Eastern Region, specifically the DVC and Maithon Right Bank Generation Projects.

Summary of the Judgment

CERC reviewed PGCIL's petitions concerning the truing-up of tariffs for the period from April 1, 2014, to March 31, 2019, and the determination of tariffs for the subsequent period up to March 31, 2024. The Commission meticulously examined the financial components presented by PGCIL, including depreciation, interest on loans, return on equity, and O&M expenses, ensuring compliance with the stipulated tariff regulations.

After a comprehensive evaluation of the submissions and in the absence of any objections from respondents or the general public, CERC approved the trued-up tariffs and endorsed the future tariff determinations as per the regulations. Specific allowances were made for capital expenditures, tax adjustments based on Minimum Alternate Tax (MAT) rates, and the computation methodologies for various financial parameters.

Analysis

Precedents Cited

The judgment references previous petitions such as Petition No. 297/TT/2015, Petition No. 100/2011, and Petition No. 317/2010, which laid the groundwork for tariff approvals and cost estimations. These precedents established the methodology for capital cost approval, depreciation rates, and return on equity calculations, serving as a benchmark for the current truing-up process.

Legal Reasoning

CERC's decision hinged on adherence to the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations of 2014 and 2019. The Commission ensured that PGCIL's claims were substantiated with accurate financial data and aligned with regulatory provisions. Key aspects considered included:

Depreciation: Calculated using the Weighted Average Rate of Depreciation (WAROD) as per regulations.
Return on Equity (RoE): Adjusted based on effective tax rates under the MAT regime, ensuring fair returns for the transmission licensee.
Interest on Loan (IoL): Determined using the weighted average rate of interest, accounting for actual loan portfolios.
Operation & Maintenance (O&M) Expenses: Approved based on normative rates specified in the tariff regulations.

The Commission also addressed PGCIL's requests for reimbursement of filing fees, publication expenses, and potential GST liabilities, approving where regulations permitted and deferring certain claims to separate petitions.

Impact

This judgment reinforces the procedural and methodological rigor required in tariff determination and truing-up processes. By approving the trued-up tariffs and future tariff structures, CERC ensures financial stability and predictability for PGCIL and its beneficiaries. The decision also clarifies the approach towards tax adjustments under MAT, depreciation calculations, and O&M expense norms, setting a clear precedent for similar future cases.

Furthermore, the judgment underscores the importance of timely and accurate financial reporting by transmission licensees, promoting transparency and accountability in tariff-related matters.

Complex Concepts Simplified

Truing-Up of Tariffs

Truing-up refers to the adjustment of previously determined tariffs to reflect actual costs incurred and revenues earned. This ensures that transmission licensees like PGCIL recover their operating expenses and earn a fair return on equity.

Return on Equity (RoE)

RoE represents the profit a company generates with the money invested by its shareholders. In this context, RoE is adjusted (trued-up) based on effective tax rates to ensure that PGCIL receives a fair return after accounting for taxes.

Minimum Alternate Tax (MAT)

MAT is a taxation mechanism to ensure that companies pay a minimum amount of tax irrespective of their profits. The judgment addresses how RoE should be adjusted based on MAT rates applicable to PGCIL.

Weighted Average Rate of Depreciation (WAROD)

WAROD is a method used to calculate depreciation based on the average rate applicable to the entirety of a company's assets. This ensures a uniform approach to depreciation for tariff calculations.

Conclusion

The CERC's judgment in the case of Power Grid Corporation of India Ltd. v. Bihar State Power (Holding) Company Ltd. sets a significant precedent in the determination and adjustment of transmission tariffs. By meticulously adhering to regulatory frameworks and ensuring fair financial adjustments, the Commission safeguards the interests of both the transmission licensee and its beneficiaries.

This decision not only provides clarity on the methodologies for truing-up tariffs but also emphasizes the importance of accurate financial management and regulatory compliance. Moving forward, similar cases will likely reference this judgment for guidance on tariff adjustments, tax considerations, and financial evaluations within the energy sector.