CERC Clarifies Tariff Recovery, COD Norms and Prudence Checks for Regional Spare Transmission Assets

Introduction

In a recent regulatory order, the Central Electricity Regulatory Commission (CERC) has made significant clarifications regarding the tariff treatment of regional spare transmission assets, declaration of commercial operation and the level of prudence checks to be made on transmission projects. The order is based on the claim by Power grid corporation of India Limited (PGCIL) to grant approval to the transmission tariff of seven regional spare Inter-Connecting Transformers (ICTs) installed in the Northern Region.

The decision has implications to grid reliability, renewable energy integration, and capital-intensive transmission planning on a larger scale because, as India increases its inter-State transmission infrastructure to meet energy transition objectives, it faces the pressure of this particular ruling.

Explanation

The centre of the controversy was the PGCIL seeking the permission of the transmission tariff under the CERC (Terms and Conditions of Tariff) Regulations, 2019 on the spare ICTs that were installed as a backup measure but not used at the time. These transformers were to be used as cold spares in order to provide system resilience in case of equipment failure.

CERC reaffirmed the fact that regional spare transformers form part of inter-State transmission system. Although this type of assets might not be used in an active manner since the date of installation, it helps to maintain grid reliability and as such, its contribution to grid reliability must be recovered in terms of tariffs since the dates of commercial operation of the respective assets (COD). This observation supports the regulatory acceptance of redundancy and contingency infrastructure as valid and recoverable expense within the tariff structure.

The Commission took a pragmatic approach on the issue of COD declaration. It recognised CMD-level self-certification of declaration of COD of cold spares and recognised that neither RLDC nor CEA energisation certificates are required at the COD stage of assets that are not yet energised or even put into service. Nonetheless, CERC at the same time highlighted that the registration with the Indian Electricity grid code, 2023 was obligatory and required the petitioner to submit necessary documentation at the truing-up stage. It is an expression of flexibility in procedures and discipline in regulations.

Another action taken by the Commission involved prudence examination of the capital costs incurred by PGCIL, which included the price variation, Interest During Construction (IDC) and the Incidental Expenditure During Construction (IEDC). Although it is understood that the contracts were commanded by competitive bidding, CERC once again presented its views that competitive procurement does not necessarily provide complete cost pass through. Where the estimated completion cost was more than the approved Revised Cost Estimate (RCE), the Commission limited admissibility of capital costs and required additional justification when truing-up.

In terms of time overruns, CERC took into consideration the COVID-19 pandemic as a force majeure that affects project schedules as per previous policy consultations by the Ministry of Power. The Commission however took an asset-specific approach and demanded that long delays be justified in detail, indicating that the relief of force majeure is not a blanket exemption against regulatory investigations.

Conclusion

The order issued by the CERC contains useful regulatory support on how spare transmission assets should be treated and confirms grid resilience and contingency planning as some of the key components of the Indian transmission system and should be recoverable in terms of tariff. Meanwhile, the ruling highlights the fact that the Commission remains focused on prudence checks along with regulatory compliance and cost recovery discipline, despite competitive bidding and unparalleled circumstances like the pandemic.

To transmission licensees, developers and investors, the decision emphasizes the need to have good documentation, realistic cost estimation, and proactive compliance with the regulations and especially as the transmission network in India grows to satisfy the renewable energy development and long-term decarbonisation goals.