Price escalation in competitively awarded transmission contracts is permissible when authorized by contractual clauses.

Power Grid Corporation of India Ltd. (“PGCIL”) filed Petition No. 48/TT/2013 before the Central Electricity Regulatory Commission (“CERC”) seeking approval of transmission tariff for the Vallur TPS–Melakottaiyur 400 kV D/C transmission line from its commercial operation date until 31 March 2014 under the 2009–14 tariff block.

CERC approved the tariff by order dated 27 November 2015.

The apportioned approved feasibility-report cost was ₹4,638 lakh, whereas PGCIL claimed an estimated completion cost of ₹5,870.96 lakh, comprising hard cost, IDC, IEDC, additional capitalisation and other expenditure.

TANGEDCO challenged the order before the Appellate Tribunal, contending that the quantity increase was unsupported, price escalation was impermissible in competitively awarded contracts and inconsistent with IEEMA indices, IEDC was not allowable under the 2009 Tariff Regulations, and CERC’s order was unreasoned.

Whether CERC was justified in allowing the increase in capital cost attributable to variation in quantities, including changes in tower, foundation and associated works, notwithstanding the quantities stated in the feasibility report?

Whether price variation or escalation could legally be allowed in contracts awarded through competitive bidding, and whether the escalation claimed by PGCIL was properly computed and supported by the contractual mechanism and applicable indices?

Whether CERC could allow Incidental Expenses During Construction (“IEDC”) of ₹464.55 lakh when TANGEDCO contended that the 2009 Tariff Regulations contained no specific provision permitting such expenditure?

Whether CERC’s order was legally sustainable despite containing inadequate reasons for accepting the cost increase and rejecting TANGEDCO’s objections?

The Tribunal applied the prudence-check requirement under Regulations 7 and 9 of the CERC (Terms and Conditions of Tariff) Regulations, 2009, under which project-specific capital cost must be examined against actual expenditure and project requirements.

It held that feasibility-report or DPR quantities are estimates based on preliminary surveys and are not conclusive; however, increases must remain subject to prudence scrutiny.

The Tribunal further held that price-escalation clauses are not inherently invalid in competitively awarded contracts: their enforceability depends on the tender documents and the contractual formula governing escalation.

On reasoned orders, it relied on Raj Kishore Jha v. State of Bihar, (2003) 11 SCC 519, and Assistant Commissioner, Commercial Tax Department v. Shukla & Brothers, (2010) 4 SCC 785, for the rule that judicial and quasi-judicial authorities must give reasons sufficient to demonstrate application of mind and enable effective appellate review.

Exercising appellate jurisdiction under Section 111 of the Electricity Act, 2003, the Tribunal held that it could independently examine the legality and propriety of the impugned tariff order and decide the matter on the record rather than remand it.

The Tribunal found that the quantities in the feasibility report were preliminary estimates and could vary during execution because of actual site conditions, route alignment, technical requirements and design refinements; therefore, the increase in towers, foundations and related materials could not be rejected merely because it exceeded the original estimate.

Although CERC’s discussion was inadequately reasoned, its consideration of the parties’ submissions and PGCIL’s explanations indicated that a prudence check had been undertaken, and the Tribunal found no basis to disallow the quantity variation.

On price variation, the Tribunal relied on the supply contract dated 24 March 2011, which expressly contained price-adjustment provisions, and accepted that the escalation mechanism could operate from the contractual base date using the relevant indices.

As to IEDC, the Tribunal noted that CERC had allowed ₹464.55 lakh provisionally, within the 5% limit applied in comparable proceedings, subject to production of year-wise actual expenditure at truing-up; this safeguard justified allowing the amount at that stage.

The Tribunal nevertheless criticised CERC’s failure to provide adequate reasons, particularly because the impugned order merely stated that PGCIL’s explanation was “in order” without addressing TANGEDCO’s objections.

Remand was considered unnecessary because subsequent truing-up and tariff-determination proceedings had likely superseded the original determination and the complete record was before the Tribunal.

It held that price escalation was permissible because the relevant contract contained a price-adjustment mechanism, that feasibility-report quantities were not immutable, and that IEDC remained subject to verification at truing-up.

Although the Tribunal held that CERC’s order was insufficiently reasoned, it declined to remand the matter in view of the subsequent regulatory and truing-up proceedings and its power to decide the merits under Section 111 of the Electricity Act, 2003.

The appeal was accordingly disposed of, with an advisory to CERC to pass more detailed and reasoned orders, particularly in cases involving cost overruns.