Normative 70:30 debt-equity ratio applies after determining prudence-based admissible capital cost.

Samalpatti Power Corporation Pvt. Ltd. (“SPCL”) established a 105.66 MW diesel-based generating station in Tamil Nadu for supply to the erstwhile Tamil Nadu Electricity Board (“TNEB”), pursuant to a MoU dated 18 February 1995 and a Power Purchase Agreement dated 22 May 1998.

The Central Electricity Authority (“CEA”) granted techno-economic clearance (“TEC”) and subsequently approved the firm financial package (“FFP”) for the project.

The generating station achieved commercial operation on 1 March 2001, and SPCL claimed completed capital expenditure of approximately Rs. 424.827 crore.

TANGEDCO filed proceedings before the Tamil Nadu Electricity Regulatory Commission (“TNERC”) seeking determination of the admissible capital cost. SPCL subsequently filed a connected petition seeking approval of its claimed completed capital cost.

TNERC approved capital cost of Rs. 419.05 crore against SPCL’s claim of Rs. 424.84 crore and disallowed or reduced several expenditure items after undertaking a prudence review.

SPCL filed Appeal No. 307 of 2017 challenging disallowances relating to establishment and construction supervision expenses, O&M mobilisation fee, development expenses, financial advisory fee, legal and stamping fee, management fee under equity-raising charges, and the consequential reduction of soft costs.

TANGEDCO filed Appeal No. 344 of 2017, challenging TNERC’s adoption of a normative 70:30 debt-equity ratio instead of treating SPCL’s entire actual debt of Rs. 304.05 crore as debt and the balance as equity.

1. Whether TNERC was justified in relying upon the CEA-approved TEC and FFP as reference benchmarks while determining the admissible completed capital cost and conducting a prudence check under the post-2003 regulatory framework?

2. Whether the disallowance of Rs. 1.152 crore towards establishment and construction supervision expenses was justified for want of supporting documents and proof of apportionment?

3. Whether expenditure claimed as O&M mobilisation fee could be allowed as pre-operative expenditure, at least to the extent of the Rs. 15 lakh provision under the TEC?

4. Whether the disallowance of development expenses, including promoter-company overheads and employee incentives, was justified?

5. Whether financial advisory charges were to be calculated at 0.5% of the approved debt component or of the sanctioned debt amount of Rs. 311.2 crore?

6. Whether the additional legal and stamping expenditure of Rs. 4.5 lakh over the FFP-approved lump sum of Rs. 37.5 lakh was admissible?

7. Whether the issue concerning management fees and other equity-raising charges required remand to TNERC for a fresh prudence review?

8. Whether IDC and financing charges attributable to disallowed capital expenditure could nevertheless be included in the capital cost?

9. Whether, for tariff purposes, SPCL’s entire actual debt of Rs. 304.05 crore had to be considered first, resulting in a debt-equity ratio of 72.56:27.44, or whether the normative 70:30 ratio applied to the finally approved capital cost?

The Tribunal applied Sections 61, 62, 86 and 181 of the Electricity Act, 2003, under which tariff determination and regulatory rule-making vest in the Appropriate Commission and must be exercised consistently with the Act.

It considered Regulations 18 and 21 of the TNERC Tariff Regulations, 2005, including the requirement of prudence scrutiny of capital cost and the normative 70:30 debt-equity ratio, subject to the ceiling on recognised equity and the treatment of actually lower equity.

The Tribunal relied on PTC India Ltd. v. CERC , (2010) 4 SCC 603, for the principle that statutory regulations prevail over inconsistent contractual stipulations.

It applied Section 185(2)(a) of the Electricity Act and Section 6 of the General Clauses Act, 1897, as explained in State of Punjab v. Mohar Singh , (1954) 2 SCC 483, to preserve the relevance of acts and approvals under the repealed Electricity (Supply) Act, 1948.

The CEA’s pre-2003 approvals were held not to be binding tariff determinations but valid evidentiary and normative benchmarks for prudence review, consistent with West Bengal Electricity Regulatory Commission v. CESC , (2002) 8 SCC 715.

The Tribunal further applied the principle that actual incurrence of expenditure does not, by itself, establish prudence or tariff admissibility; claimed costs must be supported by verifiable evidence and must relate to the admissible project cost.

The Tribunal held that, although post-2003 tariff and capital-cost determination fell exclusively within TNERC’s jurisdiction, the CEA’s pre-2003 TEC and FFP retained normative and evidentiary significance because the project had been conceived, appraised and approved under the earlier statutory regime.

Expenditure unsupported by vouchers, invoices, proof of payment, or a credible basis for apportionment could not withstand prudence scrutiny; accordingly, the disallowances of establishment/construction supervision expenses and development expenses were upheld.

O&M mobilisation activities were substantively pre-operative in character and could therefore be recognised within the Rs. 15 lakh pre-operative provision in the TEC, although the balance claim remained unsupported by the approved cost framework.

Financial advisory charges were linked to the quantum of debt mobilised and were therefore allowed at 0.5% of the sanctioned debt of Rs. 311.2 crore rather than merely the debt component included in the approved capital cost.

The additional legal and stamping expenditure was allowed because the higher sanctioned debt reasonably explained the higher transaction costs and the actual expenditure was not disputed.

Since TNERC had not separately examined all components of the equity-raising charges, the management-fee issue was remanded for a fresh prudence review.

IDC and financing charges were treated as costs intrinsically attributable to the underlying borrowings and project expenditure; costs referable to disallowed expenditure could not be indirectly recovered through soft costs.

On debt-equity, Regulation 21 did not prescribe a “debt-first” sequencing mechanism. The proper method was to determine the finally admissible capital cost and then apply the normative 70:30 ratio, unless the regulations specifically required consideration of lower actual equity.

Appeal No. 307 of 2017 filed by SPCL was partly allowed.

The disallowances of establishment and construction supervision expenses and development expenses were upheld; Rs. 15 lakh was allowed under pre-operative expenses towards O&M mobilisation; financial advisory charges were allowed at 0.5% of the sanctioned debt of Rs. 311.2 crore; and the Rs. 4.5 lakh disallowance towards legal and stamping fees was set aside.

The issue of management fees and other equity-raising charges was remanded to TNERC for prudence review.

The principle of proportionately excluding IDC and financing charges attributable to disallowed capital expenditure was upheld, with the final computation to follow the remand proceedings.

TNERC was directed to pass consequential orders, including applicable carrying cost, preferably within three months, and there was no order as to costs.