Tariff Approval for Doyang Hydroelectric Project: CERC Establishes New Precedents: Central Electricity Regulatory Commission

Introduction

The case of North Eastern Electric Power Corporation Limited (NEEPCO) v. Assam Power Distribution Company Limited And Others was adjudicated by the Central Electricity Regulatory Commission (CERC) on May 11, 2022. This petition sought the approval of tariffs for the Doyang Hydroelectric Project (3 × 25 MW), encompassing a comprehensive review of both capital and operational expenses for the tariff period spanning from 2019 to 2024.

NEEPCO, as the petitioner, aimed to obtain regulatory approval for its tariff structure in alignment with the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019. The respondent, Assam Power Distribution Company Limited (APDCL), filed a reply challenging aspects of the tariff proposals.

Key issues revolved around the approval of additional capital expenditures, de-capitalization of old assets, determination of debt-equity ratios, and the computation of return on equity (ROE). The judgment meticulously addressed these aspects, setting significant precedents for future tariff determinations.

Summary of the Judgment

CERC approved NEEPCO’s petition for the Doyang Hydroelectric Project tariffs for the 2019-2024 period. The commission scrutinized the proposed capital costs, additional capital expenditures, O&M expenses, and other financial components, ensuring adherence to the 2019 Tariff Regulations. Notably, the judgment allowed substantial additional capital expenditures post the cut-off date, provided they were within the original scope and justified under specific regulatory clauses.

The commission also set the Normative Annual Plant Availability Factor (NAPAF) at 70% and established a detailed framework for calculating de-capitalization of old assets, interest on working capital, and the return on equity. The decision emphasized prudence checks to maintain financial integrity and ensure fair tariffs for beneficiaries.

Analysis

Precedents Cited

The judgment extensively referenced the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019, particularly Regulations 18, 19, 25, 26, 30, 31, 32, and 33. These regulations govern the determination of tariffs, capital expenditures, depreciation, and financial structuring of power projects.

Previous orders, including those from Petition No. 43/GT/2015 and Petition No. 293/GT/2019, were pivotal in shaping the current decision. These precedents underscored the importance of adhering to regulatory frameworks while allowing flexibility for projects to accommodate necessary capital enhancements.

Legal Reasoning

The commission’s legal reasoning was anchored in strict compliance with the 2019 Tariff Regulations. It emphasized:

Regulatory Compliance: Ensuring all claims for capital and operational costs align with the specified regulations.
Prudence Check: Implementing a prudence check to validate the necessity and reasonableness of additional expenditures.
Scope of Work: Differentiating between additional expenditures within the original scope and those beyond, allowing only the former under specified conditions.
Assumed Deletions: Introducing the concept of assumed deletions for de-capitalization when actual de-capitalization is delayed, ensuring the capitalization of new assets is offset appropriately.
Debt-Equity Ratio: Revising the debt-equity ratio based on capital expenditures and de-capitalization, ensuring financial stability and compliance with Regulations 18 and 30.

The judgment meticulously allowed or disallowed claims based on these criteria, demonstrating a balanced approach between regulatory adherence and operational flexibility.

Impact

This judgment has profound implications for future tariff determinations, especially for hydroelectric projects. Key impacts include:

Capital Expenditure Approval: Establishing clear guidelines for the approval of additional capital expenditures within the original scope, thereby providing a framework for similar projects to follow.
Financial Structuring: Clarifying the treatment of debt-equity ratios and return on equity calculations ensures financial transparency and consistency across projects.
De-capitalization Methodology: Introducing assumed deletions streamlines the process of asset replacement, ensuring that new capital expenditures are balanced by the removal of outdated assets.
Prudence in O&M Expenses: Emphasizing the necessity of prudence checks reinforces the need for justified and necessary operational expenses, preventing undue financial burdens on beneficiaries.

Overall, the judgment fosters a regulatory environment that balances the need for infrastructure enhancement with financial discipline, benefiting both power operators and consumers.

Complex Concepts Simplified

Capital Cost:: The total investment required to build and equip a power project, including all physical assets.
Depreciation:: The gradual reduction in the value of the project's assets over time, accounting for wear and tear.
Normative Loan:: A theoretical loan used for regulatory purposes to calculate interest on loans, based on prescribed debt-equity ratios.
Prudence Check:: A regulatory review to ensure that proposed financial claims are reasonable, necessary, and compliant with established regulations.
Assumed Deletions:: A method to account for the de-capitalization of old assets when actual de-capitalization is delayed, ensuring that new capital expenditures are offset appropriately.
Debt-Equity Ratio:: A financial metric indicating the proportion of debt and equity used to finance the project's capital.
Return on Equity (ROE):: A measure of the profitability of a project relative to the equity invested.

Conclusion

The CERC's judgment in the North Eastern Electric Power Corporation Limited v. Assam Power Distribution Company Limited And Others case serves as a landmark decision in the regulatory oversight of hydroelectric projects in India. By meticulously applying the 2019 Tariff Regulations, the commission ensured that NEEPCO's tariff proposals were both fair and compliant, setting clear precedents for the approval of additional capital expenditures and the calculation of financial metrics like ROE and debt-equity ratios.

The introduction of concepts such as assumed deletions and the stringent prudence checks underscore CERC's commitment to financial integrity and operational efficiency. These measures not only safeguard the interests of beneficiaries by ensuring reasonable tariffs but also provide a structured framework for power operators to plan and execute capital enhancements.

In the broader legal context, this judgment reinforces the importance of regulatory adherence, transparency, and balanced financial structuring in the power sector, thereby contributing to the sustainable and efficient growth of India's energy infrastructure.

Tariff Approval for Doyang Hydroelectric Project: CERC Establishes New Precedents