Replacement of Damaged ICTs Does Not Qualify as Additional Capitalisation; Self‑insurance Reserve Covers Fire Losses, Supreme Court Holds

A bench of Justices Abhay S. Oka and Ujjal Bhuyan heard appeals by Powergrid Corporation of India Limited challenging an order of the Appellate Tribunal for Electricity which had upheld two Central Electricity Regulatory Commission (CERC) orders refusing additional capitalisation for replacement of three burnt Inter‑Connecting Transformers (ICTs) and directing financing from Powergrid’s self‑insurance reserve. The appeals arose under Section 125 of the Electricity Act, 2003 from Appellate Tribunal’s common order dated 23.03.2011 in Appeal Nos. 91‑92 of 2009.

The Court dismissed both civil appeals and refused to interfere with the Appellate Tribunal and CERC. The Supreme Court held that Regulation 53 of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004 did not entitle a transmission licensee to claim additional capitalisation simply for replacement of damaged ICTs, because such replacement formed part of routine operation and maintenance. The Court further held that Powergrid’s self‑insurance reserve covered losses caused by fire and therefore the net cost of replacement could properly be met from that reserve. The Court noted that “replacement of damaged equipment(s) is part of operation and maintenance” and declined to direct the Northern Regional Power Committee to issue revised availability certificates. The Court, in its reasoning, observed: “From a perusal of the above, it is seen that Regulation 53 provides for additional capital expenditure incurred after the commercial operation date. It says that additional capital expenditure incurred after the commercial operation date and upto the cut-off-date may be admitted by the CERC if such expenditure relates to deferred liabilities, deferred works, procurement of initial spares (within specified norms), compliance with arbitral award or court order or change in law subject to submission of necessary documents and a prudent check. Post cut-off date, additional capitalization may still be allowed for similar liabilities and more importantly essential new works or services necessary for efficient project operation but minor assets like furniture, computers or appliances are excluded. It also provides that expenditure on replacement of old assets shall be considered after the full value of the old asset is written off and the impact of additional capitalization on tariff can be considered by the CERC twice in a tariff period, including revision of tariff after the cut off date.”

Background Powergrid owned and operated two interstate transmission systems (Rihand I and Rihand II) in the northern region. Between 28.04.2006 and 09.05.2006 three ICTs in Rihand I (one at Ballabgarh and two at Mandola) burnt due to internal faults and became unserviceable. To restore supplies during peak summer demand, Powergrid temporarily diverted ICTs from its Mainpuri and Kaithal substations and installed a transformer procured for Bahadurgarh at Mandola/Ballabgarh. Powergrid petitioned CERC for decapitalisation of the damaged ICTs and additional capitalisation for the replacements under the Tariff Regulations (Petition Nos. 68 and 80 of 2008). CERC rejected the claims by order dated 03.02.2009, holding that replacement of such assets did not qualify as additional capitalisation and that the net cost must be met from Powergrid’s internal self‑insurance reserve. Powergrid appealed to the Appellate Tribunal which dismissed both appeals on 23.03.2011; the matter proceeded to the Supreme Court.

The Supreme Court analysed Regulation 53 (additional capitalisation for inter‑state transmission) and observed that additional capitalisation post cut‑off was limited to deferred liabilities, awards/court decrees, change in law and works/services that became necessary for efficient and successful operation but were not part of the original project cost. The Court held that diversion and replacement of ICTs did not amount to “additional works/services” and were part of routine O&M obligations of a central transmission utility. On the self‑insurance issue, the Court examined the reserve policy (created in 1994‑95) which covered losses from fire and machinery breakdown and applied the proximate‑cause principles from precedent, concluding that the fire following internal failure was the proximate cause of loss and therefore within the scope of the insurance reserve. The appeals were accordingly dismissed as devoid of merit; no directions for revised availability certificates were required and no costs were awarded.

Case Details: Case No.: Civil Appeal Nos. 5857‑5858 of 2011 (2025 INSC 626) Case Title: Powergrid Corporation of India Limited v. Central Electricity Regulatory Commission & Ors. Appearances: For the Petitioner(s): Counsel not indicated in judgment text For the Respondent(s): Counsel not indicated in judgment text