No. L-1/36/2010. Case: In Re: Benchmark Capital Cost for Substation associated with Transmission system Vs. Central Electricity Regulatory Commission

Case NumberNo. L-1/36/2010
JudgesPramod Deo, Chairperson, S. Jayaraman, V.S. Verma and M. Deena Dayalan, Members
IssueElectricity Act, 2003 - Sections 3, 61, 62, 63, 79 and 178; Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2009 - Regulation 7
Judgement DateJune 16, 2010
CourtCentral Electricity Regulatory Commission



    1. The Tariff Policy notified by the Central Government on 6th January, 2006 under Section 3 of the Electricity Act, 2003 provides that when allowing the total capital cost of the project, the Appropriate Commission would ensure that these are reasonable and to achieve this objective, requisite benchmarks on capital costs should be evolved by the Regulatory Commissions.

    2. Taking cognizance of the above as per provisions of Section 61 of Electricity Act, 2003 and in exercise of the powers conferred under Section 178 of the Act and after previous publication, the Commission had notified the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2009, (hereinafter referred to as "the tariff regulations"). The Regulations provide for the terms and conditions and the procedure for determination of tariff of cases covered under Section 62 of the Act read with Section 79 thereof.

    3. As per first proviso to Clause (2) of Regulation 7 of the tariff Regulations, the benchmark norms in case of the thermal generating station and the transmission system to be specified by the Commission from time to time may be used for the purpose of prudence check of capital cost.

    4. In the background of the above stated regulatory framework, the Commission had initiated, in June 2008, the process of determining benchmark costs of 400/765 Kv transmission lines, associated substations with 400/765 Kv Transmission system and Thermal power units of 500/600/660/800 MW. Commission had engaged consortium of consultants (M/s Evonik Energy Services (India) Pvt. Ltd; M/s PRDC and M/s KPMG) with the objective of developing benchmark norms for capital cost of Substations associated with 400/765 Kv transmission system amongst others. The above objective was to be achieved by collecting reliably available data, analyzing the data, creating a data base, defining Disaggregated Packages of Hard Cost of a Project to be sufficient for benchmarking, recommending appropriate methodology through which a bench mark capital cost of a completed project would be arrived at for the purpose of prudence check and developing financial/pricing model with identified escalation factors assigning due weightage for various materials/factors etc. The financing cost, interest during construction, taxes and duties, right of way charges, cost of Rehabilitation & Resettlement etc. would be additional and were not to be factored in benchmark cost being developed. Model so developed was to be validated based on the historical data from the database.

    5. The Consortium developed a self validating pricing model with escalation formulas after collection of reliably available data, analysis and tested the same for accuracy.

    6. The pricing model along with explanatory memorandum was placed on the website of the Commission, through public notice dated 11.1.2010, for public scrutiny and comments.

    7. A public hearing was held on 30.3.2010. The list of participants in the public hearing is enclosed in Annexure -- I. Presentation in this regard was made by Power Grid Corporation of India Limited. Comments received from stakeholder(s) along with discussion, analysis and ruling of the Commission are given in the succeeding paragraphs.


    Applicability of Benchmarking as a tool for prudence check of capital cost of a Transmission Project.

    1. Powergrid corporation of India Ltd (hereinafter "the stakeholder") has raised a moot question viz. the applicability of benchmarking as a tool for prudence check of capital cost of transmission projects. According to the stakeholder, capital cost benchmarking for individual transmission projects on a post facto basis finds no parallel anywhere in the world. It has been stated that the exercise being contemplated brings in a certain level of apprehension as to the risks involved in investment in transmission sector which needs to be addressed.

    2. It has been contended that the hard cost of projects developed by Power Grid Corporation of India Limited, emerges consequent to a transparent competitive bidding process. Power Grid Corporation of India Limited, being a Central Public Sector Undertaking, is invariably bound by definite rules and is subjected to a host of mandatory checks and balances across the entire value chain which inter-alia includes the statutory agencies, funding agencies etc. Thus, the outcome of such bidding process is the best that the market could offer at a particular point of time depending on the prevailing market forces and, as such, comparison with a benchmark developed through a normative and subjective methodology is not rationally supported.

    3. We have carefully considered the views of the stakeholder, but are unable to accept the same for the reasons detailed hereinbelow.

    4. At the outset, it needs to be appreciated that benchmarking may broadly be defined as comparison of some measure of actual value/performance against a reference benchmark value/performance.

    5. Capital cost is the driving factor based on which the various elements of tariff are determined. Efficient and objective control over the same is therefore, of paramount importance. What the cost ought to be and not the cost claimed is the driving force. We are firmly of the view that the model created based on unit cost approach will help in drawing inference as to what the attainable cost level is possible albeit subject to additional regulatory checks as needed.

    6. The model developed for working out benchmark capital cost uses reliably available national data. Model will be used to identify outliers as possible cases for carrying out further/detailed prudence check. Based on the principle of Management by exception principle, this process will lead to saving of resource and time spent on conducting prudence check. We would also like to impress that the model created and tested is based on national data of transmission players including Power Grid Corporation of India Limited. Indexation used is industry acceptable standard as analyzed from data collected suitably modified as explained in explanatory memorandum for the subject under study. Model objectively covers standard variable/s affecting Substation cost.

    7. It also needs to be appreciated that unit cost approach is being relied upon by regulators, world wide, while examining regulatory practice of converting asset valuation into annual use of system charges. References exist wherein benchmark numbers have been used as a tool of regulatory prudence.

    8. Network expansion/augmentation in Indian context is to be carried out by Central Transmission Utility after identifying requirements in consonance with National Electricity Plan as notified by Central Government in consultation with all stakeholders. Execution is to be taken up after due regulatory approvals in cases where Bulk Power Transmission Agreement has not been signed. Cost aspect for the purpose of converting asset valuation into annual use of system charges is dealt by this Commission in both cases i.e. where execution is taken up with prior regulatory approval or where execution is taken up with signing of Bulk Power Transmission Agreement with stakeholders/beneficiaries.

    9. Importance of regulatory checks on admissible asset value hardly needs any emphasis under cost of service regulations. Cost as per books are not necessarily the input cost for regulatory purpose. At best they may serve as one of the tools for prudence. Every statutory agency looks at the process and data from its point of view as mandated by Law. Cost as claimed by Power Grid Corporation of India Limited for tariff, irrespective of the competitive process with host of mandatory internal and external checks used, does not fall under Section 63 of Electricity Act, 2003 and is necessarily to be dealt under Section 62 of Electricity Act, 2003.

    10. Even traditional methods of prudence check used at present are on post facto basis. Even today onus lies on the utility to provide details along with necessary proofs as and when called for by the Commission before any expenditure is admitted for the purpose of tariff. Apprehension of the stakeholder as regards post facto comparison with developed benchmark norms is not relevant as the benchmark will be used for prudence check and variance analysis to identify the factors along with underlying reasons causing deviations in the claimed cost.

    11. In view of the above, the apprehensions of the stakeholder about the appropriateness of process...

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