Supreme Court clarifies additional capitalization norms for power transmission: Powergrid vs. CERC (2025)

Introduction

Date of the Judgment: May 05, 2025

Citation: 2025 INSC 626

Judges: Abhay S. Oka, J., Ujjal Bhuyan, J.

When a critical transformer in a power transmission system fails, who bears the cost of its replacement? The Supreme Court of India addressed this vital question in the case of Powergrid Corporation of India Limited vs. Central Electricity Regulatory Commission & Ors., concerning the norms for additional capitalization in power transmission projects. The court examined whether the costs of replacing damaged Inter-connecting Transformers (ICTs) can be considered as additional capital expenditure, impacting the tariffs paid by beneficiaries. The bench, comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan, delivered the judgment.

Case Background

Powergrid Corporation of India Limited, a public sector undertaking, is responsible for power transmission across India. In 2006, three ICTs in the Rihand I transmission system failed due to internal faults during peak summer, necessitating immediate replacement. To avoid delays, Powergrid temporarily diverted transformers from Mainpuri and Kaithal sub-stations to Ballabgarh and Mandola. Later, it also diverted a transformer procured for the Bahadurgarh sub-station to Mandola.

Powergrid sought approval from the Central Electricity Regulatory Commission (CERC) for transmission charges related to these replacements, claiming de-capitalization for the diverted transformers and additional capitalization for the new installations. However, CERC rejected this claim, leading to appeals before the Appellate Tribunal for Electricity, which were also dismissed. This prompted Powergrid to approach the Supreme Court.

Timeline

Legal Framework

The case revolves around the interpretation and application of the Electricity Act, 2003, and the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004 (referred to as ‘the Tariff Regulations’ in the judgment). Key provisions include:

• Section 125 of the Electricity Act, 2003: This section provides for appeals to the Supreme Court against decisions or orders of the Appellate Tribunal on a substantial question of law.
• Section 178 of the Electricity Act: Grants CERC the power to make regulations.
• Regulation 2 of the Tariff Regulations: Defines the scope and extent of application of the Tariff Regulations, stating they apply where tariff is determined by CERC based on capital cost.
• Regulation 14(xviii) of the Tariff Regulations: Defines ‘Operation and Maintenance Expenses’ (O&M expenses) to include expenditure on repairs, spares, consumables, and insurance.
• Regulation 18 of the Tariff Regulations: Deals with additional capitalization for thermal power generating stations.
• Regulation 53 of the Tariff Regulations: Pertains to additional capitalization for inter-state transmission systems.

Regulation 53 is particularly relevant, outlining the conditions under which additional capital expenditure can be admitted by the CERC. It states that expenditure on replacement of old assets shall be considered after writing off the entire value of the original assets from the original capital cost.

Arguments

Arguments by Powergrid:

• Interpretation of Regulation 53(2)(iv) and Note 2: Powergrid argued that the Appellate Tribunal misinterpreted these regulations. They contended that any work required for successfully operating the transmission system, whether new or a replacement, should be permissible for capitalization.
• Denial of Decapitalization and Additional Capitalization: Powergrid asserted that the Appellate Tribunal was not justified in denying decapitalization and additional capitalization of the ICTs, as it was their responsibility to maintain the transmission system. They claimed this led to a non-cost-reflective tariff.
• Self-Insurance Policy: Powergrid argued that their self-insurance policy covers losses from fire, whether internal or external, even if due to machinery breakdown. They stated that the fire was a result of the machinery breakdown, not the direct cause of damage.

Arguments by Respondents (Beneficiaries):

• Obligation to Maintain Transmission System: The respondents argued that Powergrid is obligated to maintain a healthy transmission system, and beneficiaries should not pay extra for maintenance.
• Additional Benefit Premise: They contended that additional capitalization is based on the premise that beneficiaries receive additional benefits, which was not the case with the replacement of failed transformers.
• Cost of Installed Transformers: The respondents claimed Powergrid showed inflated costs for the installed transformers, which were not new.
• Regulation 53 Scope: They argued that additional capitalization can only be claimed for works within the original scope of the project or due to changes in law or court orders, none of which applied to the transformer replacements.
• Self-Insurance Reserve Policy: The respondents argued that Powergrid’s self-insurance reserve policy covers unsecured risks, including transformer failures, and Powergrid should not penalize beneficiaries for not securing that risk.

Issues Framed by the Supreme Court

1. Whether the Appellate Tribunal and respondent No.1 were justified in rejecting the claim made by the appellant of additional capitalization due to replacement of the damaged ICTs?
2. Whether the self-insurance policy of the appellant covered the cost of replacement of the damaged ICTs?
3. Whether the Member Secretary of NRPC should have been directed by the Appellate Tribunal to issue revised availability certificate for the transmission assets?

Treatment of the Issue by the Court

Authorities

• New India Assurance Company Limited Vs. Zuari Industries Limited, (2009) 9 SCC 70 (Supreme Court of India): Relied upon to analyze the expression ‘proximate cause’ in the context of the self-insurance policy.
• Gujarat Urja Vikas Nigam Limited Vs. Renew Wind Energy (Rajkot) Private Limited, 2023 SCC OnLine SC 411 (Supreme Court of India): Cited by Powergrid to contend that the Appellate Tribunal had virtually rubber-stamped the decision of CERC.
• Electricity Act, 2003: The primary legislation governing the electricity sector in India.
• Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004: Regulations framed under the Electricity Act, 2003, governing the determination of tariff.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• New India Assurance Company Limited Vs. Zuari Industries Limited, (2009) 9 SCC 70: The Supreme Court applied the principle of ‘proximate cause’ as analyzed in this case to determine that the fire, resulting from the implosion/explosion in the ICTs, was the direct cause of the damage. Therefore, the self-insurance policy covered the cost of replacement.
• Gujarat Urja Vikas Nigam Limited Vs. Renew Wind Energy (Rajkot) Private Limited, 2023 SCC OnLine SC 411: The Supreme Court distinguished this case, noting that in the present matter, the Appellate Tribunal had provided cogent and valid reasons for rejecting Powergrid’s appeals, unlike the “rubber stamping” observed in the cited case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the Tariff Regulations and the scope of the self-insurance policy. The court emphasized that Regulation 53 does not include the replacement of ICTs due to damage or failure as additional capital expenditure. Additionally, the court found that the self-insurance policy covered losses caused by fire, which was the proximate cause of the damage to the ICTs.

Logical Reasoning:

The court reasoned that as a central transmission utility, Powergrid had a responsibility to maintain a healthy transmission system, and the replacement of damaged equipment falls under operation and maintenance. The court quoted:

“…as a central transmission utility, it was the duty of the appellant to maintain a healthy transmission system; replacement of damaged equipment (s) is part of operation and maintenance.”

Key Takeaways

• Replacement costs of damaged ICTs in power transmission systems are generally not considered additional capital expenditure under existing regulations.
• Power transmission companies have a fundamental duty to maintain their systems, and replacement of damaged equipment is part of this responsibility.
• Self-insurance policies should be carefully reviewed to ensure they cover potential losses, including those resulting from machinery breakdown leading to fire.

Development of Law

The ratio decidendi of the case is that the replacement of damaged ICTs does not qualify for additional capitalization under Regulation 53 of the Tariff Regulations. The court also clarified that self-insurance policies should cover losses caused by fire, even if the fire is a result of machinery breakdown.

Conclusion

In summary, the Supreme Court dismissed Powergrid’s appeals, affirming that the replacement of damaged ICTs does not qualify for additional capitalization and that the costs should be covered by the company’s self-insurance policy. This judgment clarifies the financial responsibilities of power transmission companies and the interpretation of key regulatory provisions.

Category

• Electricity Act, 2003
  • Section 125, Electricity Act, 2003
  • Section 178, Electricity Act, 2003
• Central Electricity Regulatory Commission (CERC)
  • Tariff Regulations, 2004
  • Additional Capitalization
• Power Transmission
  • Inter-State Transmission Systems (ISTS)
  • Operation and Maintenance Expenses (O&M)

FAQ

1. Q: Can power transmission companies claim additional capitalization for replacing damaged transformers?
   
   A: Generally, no. The Supreme Court clarified that replacement costs are not considered additional capital expenditure under existing regulations.
2. Q: Who is responsible for covering the costs of replacing damaged equipment in power transmission systems?
   
   A: Power transmission companies are responsible for maintaining their systems, and the costs of replacing damaged equipment typically fall under operation and maintenance expenses.
3. Q: What should power transmission companies consider regarding their self-insurance policies?
   
   A: Companies should ensure their policies cover potential losses, including those resulting from machinery breakdown leading to fire, to avoid disputes over coverage.
4. Q: How does this judgment affect consumers of electricity?
   
   A: By clarifying that replacement costs are not additional capital expenditure, the judgment helps ensure that consumers are not charged extra for routine maintenance and replacements in power transmission systems.