Summary
Powergrid claimed de-capitalisation of three inter-connecting transformers in its Rihand I transmission system that burnt out in 2006 and additional capitalisation of the transformers diverted to replace them; the CERC and the Appellate Tribunal for Electricity rejected the claims and held the net cost had to be met from Powergrid's self-insurance reserve. The Supreme Court dismissed the appeals, holding that Regulation 53 of the CERC Tariff Regulations, 2004 does not cover replacement of damaged transformers (which is operation and maintenance, not additional works, and the assets were not old), that the loss was covered by the self-insurance policy because fire was the proximate cause of the damage, and that the question of a revised availability certificate therefore did not arise.
Issues
- Whether the Appellate Tribunal and the CERC were justified in rejecting the claim for additional capitalisation on replacement of the damaged inter-connecting transformers.
- Whether the appellant's self-insurance policy covered the cost of replacing the damaged transformers.
- Whether the Appellate Tribunal should have directed the Member Secretary of the Northern Regional Power Committee to issue a revised availability certificate for the transmission assets.
Provisions considered
- Regulation 53 (including Regulation 53(2)(iv) and Note 2), Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004Regulation 53 admits, subject to prudence check, additional capital expenditure up to the cut-off date on deferred liabilities and works, initial spares, arbitral awards or court orders and change in law, and after the cut-off date similar items plus additional works or services necessary for efficient operation but not in the original project cost; Note 2 allows expenditure on replacing old assets after writing off their original value. The Court held that the regulation does not cover replacement of transformers damaged by failure: diversion and replacement is operation and maintenance, not an additional work or service, and the fairly new Rihand systems were not old assets within Note 2. (¶¶ 18, 19, 27, 28, 29, 30, 31)
- Regulations 2, 14(xviii) and 18, Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004Regulation 2 defines the scope of the Tariff Regulations (tariff determined on capital cost). Regulation 14(xviii) defines operation and maintenance expenses as including expenditure on repairs, spares, consumables, insurance and overheads, and Regulation 18 is the corresponding additional-capitalisation provision for thermal generating stations; both were noticed as the backdrop for construing Regulation 53. (¶¶ 25, 26)
- Sections 125 and 178 (also Sections 38, 76(1) and 110), Electricity Act, 2003The appeals lay to the Supreme Court under Section 125 against the Appellate Tribunal's order on a substantial question of law; the Tariff Regulations were framed by the CERC under Section 178. The Appellate Tribunal, the CERC and a central transmission utility such as the appellant are all creatures of the Act. (¶¶ 2, 23, 24)
Held
- Regulation 53 provides for additional capital expenditure incurred after the commercial operation date in specified categories, and Regulation 53(2)(iv) covers additional works or services that have become necessary for efficient and successful operation of the project but were not in the original project cost. All that the appellant did was divert and replace transformers; that cannot be construed as additional work or service. As a central transmission utility it was the appellant's duty to maintain a healthy transmission system, and replacement of damaged equipment is part of operation and maintenance. (¶¶ 28, 29)
- Note 2 to Regulation 53, which allows expenditure on replacement of old assets after writing off the original value, does not apply: the Rihand I and II systems were in normal operational condition since commissioning and were fairly new, with nothing on record to show they were in bad shape or wearing out before the breakdown. The first question was answered against the appellant. (¶¶ 30, 31)
- The appellant's self-insurance reserve, created from 1994-95 at 0.1% of gross fixed assets to cover uninsured risks such as machinery breakdown and fire, covered losses caused by fire including lightning, explosion or implosion without any exclusion. The contention that the loss was caused by machinery breakdown leading to fire rather than by fire itself was contradictory; the loss was caused by fire, because of which the transformers were damaged beyond immediate repair. (¶¶ 33, 34, 35)
- Applying the proximate-cause principle from New India Assurance v. Zuari Industries, under which the proximate cause is not the cause nearest in time but the active and efficient cause that sets the chain of events in motion without intervention of an independent source, the proximate cause of the damage was the implosion or explosion in the transformers which caused the fire; the self-insurance policy covered the replacement cost, and the Appellate Tribunal was justified in directing the net cost to be financed from the self-insurance fund as part of operation and maintenance charges. (¶¶ 36, 37)
- Since de-capitalisation and additional capitalisation were not allowed, the third question concerning a direction to the NRPC Member Secretary to issue a revised availability certificate became redundant. (¶ 38)
- Gujarat Urja Vikas Nigam v. Renew Wind Energy, where the Appellate Tribunal had accepted a bare allegation of coercion without pleadings, has no application; here the Appellate Tribunal gave cogent and valid reasons and there was no ground to interfere. (¶ 39)
Result
Appeals dismissed; no costs.