TRANSFORMER REPLACEMENTS ARE O&M, NOT CAPITAL WORKS: SUPREME COURT CLARIFIES CERC TARIFF REGULATIONS

BACKGROUND OF THE CASE

The Case of Powergrid Corporation of India Limited v. Central Electricity Regulatory Commission &Ors. (Civil Appeal no. 5857-5858 of 2011) arose from a dispute over the capitalization of costs incurred by Powergrid Corporation of India Limited (Powergrid), a public sector undertaking responsible for electricity transmission, following the emergency replacement of damaged Inter-connecting Transformers (ICTs). Between April 28 and May 9, 2006, three ICTs in Powergrid’s Rihand I transmission system failed due to internal faults, resulting in their burning and damage. Given the urgency of the situation, peak summer with high electricity demand in Delhi, Powergrid diverted transformers from other substations (Mainpuri and Kaithal) and one intended for Bahadurgarh to restore operations at Ballabgarh and Mandola substations. The diverted transformers were later replaced with new or repaired ones by early 2007.

Subsequently, Powergrid sought approval from the Central Electricity Regulatory Commission (CERC) for additional capitalization of the costs associated with these replacements and for a revision of transmission tariffs. CERC denied these claims in two separate orders dated February 3, 2009.

Powergrid Appealed  against these orders passed by CERC to the Appellate Tribunal for Electricity. The Tribunal dismissed the appeals on March 23, 2011, leading Powergrid to file civil appeals before the Hon’ble Supreme Court under Section 125 of the Electricity Act, 2003.

PROVISIONS INVOLVED

The key statutory framework governing this case includes:

• Electricity Act, 2003: This Act regulates the generation, transmission, distribution, and trading of electricity in India. It establishes bodies like the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal for Electricity, both of which played pivotal roles in this dispute.
• Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004: Specifically, Regulation 53 of these regulations governs additional capitalization for transmission systems. It outlines the conditions under which a transmission licensee like Powergrid can claim additional capital expenditure after the commercial operation date of a project.

Additionally, Powergrid’s self-insurance policy, adopted in 1994-1995, was central to the case. This policy covered losses from uninsured risks, including fire, for operational equipment like transformers.

POINTS OF DETERMINATION

The Supreme Court addressed three primary issues:

1. Eligibility for Additional Capitalization: Whether Powergrid was entitled to additional capitalization under Regulation 53 for the replacement of the damaged ICTs.
2. Coverage Under Self-Insurance Policy: Whether the cost of replacing the damaged ICTs was covered by Powergrid’s self-insurance policy.
3. Issuance of Revised Availability Certificate: Whether the Northern Regional Power Committee (NRPC) should have been directed to issue a revised availability certificate for the transmission assets during the period the ICTs were non-operational.

ARGUMENTS BY THE APPELLANT

• Additional Capitalization: Powergrid argued that the replacement of the damaged ICTs was essential for the efficient and successful operation of the transmission system, thus qualifying as “additional work/services” under Regulation 53(2)(iv) of the Tariff Regulations. They contended that denying capitalization would result in a non-cost reflective tariff, harming their financial interests.
• Self-Insurance Policy: Powergrid claimed that the damage to the ICTs was due to machinery breakdown, which subsequently caused the fire. They argued that since the proximate cause was machinery failure, not fire, the self-insurance policy which covered fire-related losses did not apply. They cited the Supreme Court’s decision in New India Assurance Company Limited v. Zuari Industries Limited (2009) to support their interpretation of “proximate cause.”
• Revised Availability Certificate: Powergrid, the Appellant, sought a direction for the NRPC to issue a revised availability certificate, excluding the period when the ICTs were non-operational, to accurately reflect the availability of the transmission system and enable them to claim full transmission charges and incentives.

ARGUMENTS BY THE RESPONDENTS (CERC)

• Additional Capitalization: The Respondents argued that the replacement of damaged ICTs was part of routine operation and maintenance, not qualifying as “additional work/services” under Regulation 53. They emphasized that the Appellant, Powergrid, as a central transmission utility, is obligated to maintain a healthy transmission system without passing such costs to beneficiaries through capitalization.
• Self-Insurance Policy: The Respondents contended that the self-insurance policy explicitly covered losses from fire, including those caused by internal faults like implosion or explosion. They argued that the fire was the proximate cause of the damage, making the policy applicable.
• Revised Availability Certificate: Since the claims for decapitalization and additional capitalization were denied, the Respondents maintained that there was no basis for revising the availability certificate.

DECISION OF THE COURT

The Supreme Court dismissed both Civil Appeals filed by Powergrid, upholding the decisions of the Appellate Tribunal and CERC. The Court ruled against Powergrid on all three issues.

Grounds for the Decision

• Additional Capitalization (Issue 1): The Court held that Regulation 53 does not cover the replacement of damaged equipment like ICTs, as such actions are part of routine maintenance rather than “additional work/services” necessary for efficient operation. The Court noted that the transmission systems were relatively new and not “old assets” requiring replacement under Note 2 of Regulation 53. Thus, Powergrid’s claim for additional capitalization was unjustified.
• Self-Insurance Policy (Issue 2): The Court determined that the self-insurance policy covered losses from fire, which was the proximate cause of the damage to the ICTs. Drawing on the principle from Zuari Industries Limited, the Court concluded that the fire, triggered by internal faults, was the efficient cause of the damage. Therefore, Powergrid was required to finance the replacement costs from its self-insurance reserves.
• Revised Availability Certificate (Issue 3): Since the Court denied the claims for decapitalization and additional capitalization, it found no grounds to direct the NRPC to issue a revised availability certificate.

CONCLUSION

Impact and significance of the court’s decision-

Tariff Jurisprudence: The Hon’ble Supreme Court clarified that under CERC’s Regulations, equipment replacements fall within Operation &Management costs, not capital works, unless part of an original techno‐economic plan.

Insurance Reserves: The court confirmed the broad interpretation of self‐insurance policies in the power sector, emphasizing “fire” cover even when machinery breakdown is the root cause.

Regulatory Consistency: The court reinforced the deference to CERC’s tariff‐making powers and the Appellate Tribunal’s prudence checks.

In conclusion, the Supreme Court’s ruling reinforces the strict interpretation of regulatory provisions governing additional capitalization and underscores the importance of adhering to self-insurance policies for covering operational risks in the electricity transmission sector.

Saharsh Singh

Intern

The Indian Lawyer & Allied Services

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