The Hon’ble Appellate Tribunal Upholds Admissibility of Price and Quantity Variations in Transmission Capital Cost: Feasibility Report Estimates Are Indicative, Not Sacrosanct
The Hon’ble Appellate Tribunal for Electricity (“Appellate Tribunal”), by its judgment dated 9 September 2026 in TANGEDCO v. Central Electricity Regulatory Commission & Ors., Appeal No. 230 of 2016, has upheld the capital cost approved for the Vallur Thermal Power Station (“TPS”)–Melakottaiyur 400 kV Double Circuit (“D/C”) transmission line, forming part of the supplementary transmission system associated with Vallur TPS in the Southern Region. The judgment affirms the position consistently advanced by Power Grid Corporation of India Limited (“POWERGRID”) that the estimates contained in a Feasibility Report (“FR”) are indicative in nature and that variations in quantities and prices arising during execution are admissible in the capital cost, subject to a prudence check of the actual expenditure incurred.
The appeal arose from the order dated 27 November 2015 passed by the Central Electricity Regulatory Commission (“CERC”) in Petition No. 48/TT/2013, determining the tariff for the transmission line from its commercial operation date (“COD”) until 31 March 2014 under the CERC (Terms and Conditions of Tariff) Regulations, 2009. TANGEDCO challenged the approved completion cost of Rs.58.71 crore against the FR estimate of Rs.46.38 crore, representing an increase of approximately 26.58%. It also questioned the admissibility of Incidental Expenditure During Construction (“IEDC”) and contended that CERC had failed to provide adequate reasons for allowing the increase in capital cost.
POWERGRID’s Submissions Before Appellate Tribunal
1. Quantity Variations are an Inherent Feature of Transmission Projects
POWERGRID submitted that the quantities specified in the Feasibility Report (“FR”) are based on preliminary surveys and are indicative of the estimated project cost, with actual requirements ascertainable only after detailed surveys, route profiling and soil investigations. It further contended that Right of Way (“RoW”) constraints, particularly the approximately 46-metre RoW requirement for a 400 kV D/C transmission line under the CBIP Manual, may necessitate changes in alignment and additional towers, foundations, tower steel and insulators. Accordingly, the increase in quantities arising from actual site conditions could not be disallowed merely because it exceeded the preliminary estimates in the FR.
2. Price Variation Is Governed by Contractual Mechanisms and Actual Market Conditions
POWERGRID submitted that the increase in capital cost was attributable to fluctuations in the prices of key inputs, including steel, cement and aluminium, and was calculated in accordance with the price variation clauses incorporated in its supply contracts, using predetermined formulae and applicable indices, including those published by the Indian Electrical and Electronics Manufacturers’ Association (“IEEMA”). It placed the supporting indices and computation methodology before CERC through an affidavit dated 24.09.2015 and relied on Manchukonda Agrotech Pvt. Ltd. v. KERC, Appeal No. 259 of 2018, to support its contention that actual cost data, rather than preliminary estimates alone, must be considered while determining admissible expenditure.
3. Actual Capital Cost Is Admissible Subject to Prudence Check
POWERGRID submitted that Regulations 7 and 9 of the CERC (Terms and Conditions of Tariff) Regulations, 2009, require capital cost to be determined on the basis of actual expenditure, subject to prudence check, and that the increase over the FR estimate could not, by itself, justify disallowance of expenditure incurred for executing the project. It further contended that Incidental Expenditure During Construction (“IEDC”) is a recognised component of capital cost and is admissible in accordance with the applicable Tariff Regulations, the expenditure being duly supported by Auditor’s Certificates.
The Hon’ble Appellate Tribunal’s Findings and Observations
The Hon’ble Appellate Tribunal upheld the capital cost approved for the transmission asset and rejected TANGEDCO’s challenge, making the following key findings:
- The Hon’ble Appellate Tribunal held that the quantities indicated in a Detailed Project Report (“DPR”) or preliminary estimate cannot be treated as an absolute ceiling on capital cost under Section 62 of the Electricity Act, 2003. Any increase in quantities must be assessed on the basis of actual project requirements and is admissible subject to prudence check under the applicable Tariff Regulations.
- The Hon’ble Appellate Tribunal recognised the enforceability of contractually agreed price variation mechanisms. In the present case, POWERGRID relied on the Supply Contract Agreement dated 24.03.2011, which provided for price adjustment. After considering the applicable indices and calculations placed before CERC, the Hon’ble Appellate Tribunal rejected TANGEDCO’s objection to the application of price variation for the period from the first quarter of 2010 to October 2012.
- The Hon’ble Appellate Tribunal upheld the determination of capital cost on the basis of actual expenditure, subject to regulatory scrutiny. It noted that CERC had considered TANGEDCO’s objections and POWERGRID’s explanations before accepting that the increase in cost arose from actual execution requirements and prevailing market conditions. However, the expenditure must be adequately substantiated and satisfy the prescribed prudence check.
- The Hon’ble Appellate Tribunal held that the Comptroller and Auditor General’s Performance Audit Report No. 18 of 2014 could not, by itself, constitute sufficient grounds for disallowing an otherwise admissible increase in capital cost. The expenditure must instead be examined on the basis of project-specific circumstances, supporting evidence, contractual provisions and the applicable regulatory framework.
- The Hon’ble Appellate Tribunal upheld the treatment of IEDC, which CERC had provisionally allowed at Rs. 464.55 lakh, within the stipulated limit of 5% of the hard cost, subject to furnishing year-wise actual expenditure at the time of true-up. The admissibility of IEDC remains subject to compliance with the applicable Tariff Regulations and verification of actual expenditure.
- While upholding the capital cost, the Hon’ble Appellate Tribunal observed that CERC should have provided more detailed reasons, particularly while dealing with substantial cost overruns. However, noting that tariff determination is a continuing process and that the asset had subsequently undergone tariff determination and true-up for later periods, the Hon’ble Appellate Tribunal exercised its appellate jurisdiction under Section 111 of the Electricity Act, 2003, to decide the dispute on merits rather than remand the matter for reconsideration.
The judgment affirms POWERGRID’s position that preliminary estimates in a Feasibility Report or Detailed Project Report cannot be treated as an inflexible ceiling on the capital cost of a transmission project. Variations in quantities arising from route realignment, Right of Way constraints, soil conditions and other site-specific requirements, as well as price variations permitted under contractual mechanisms, may legitimately contribute to an increase in the final project cost. However, such increases are not automatically admissible and must be supported by adequate evidence, comply with the contractual provisions and satisfy the prudence check prescribed under the applicable Tariff Regulations, thereby balancing the recovery of justified expenditure against the need to protect beneficiaries from imprudent or inadequately substantiated costs.
Further, by adjudicating the dispute on merits rather than remanding the tariff order dating back to 2015, the Hon’ble Appellate Tribunal has brought finality to the proceedings, notwithstanding the subsequent tariff determination and true-up of the asset. The judgment reinforces regulatory certainty for transmission licensees by recognising the practical realities of executing transmission projects while clarifying that the admissibility of capital cost must be determined on the basis of actual expenditure, its justification and regulatory prudence, rather than merely its deviation from preliminary estimates. It is, therefore, relevant to future tariff proceedings involving cost overruns attributable to genuine execution requirements and contractually permissible price variations.
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