APTEL Sets Aside PSERC’s O&M Baseline for Malana-II Hydro Project, Faults Mechanical WPI Escalation
APTEL allows both appeals by Everest Power, remanding O&M baseline determination and setting aside capital expenditure disallowances totalling over Rs. 2.5 crores for the 100 MW Malana-II project.
The Appellate Tribunal for Electricity (APTEL) has allowed two appeals filed by M/s Everest Power Private Limited (EPPL), the developer of the 100 MW Malana-II Hydro Electric Project in Kullu district, Himachal Pradesh, against orders of the Punjab State Electricity Regulatory Commission (PSERC). The Tribunal found that PSERC had violated its own Multi-Year Tariff Regulations by determining Operation and Maintenance expense baselines through a single-factor WPI escalation of past approved figures, ignoring the multi-factor analysis that Regulation 8.1(b) of the PSERC MYT Regulations, 2014 expressly mandates. On four separate capital expenditure disallowances, the Tribunal set aside each one, directing PSERC to conduct proper prudence checks and pass speaking orders. The Commission has been given three months to complete the fresh determination.
The Dispute Before the Tribunal
EPPL challenged two PSERC orders: the Generation Tariff Order dated 3 September 2019 passed in Petition No. 23 of 2017 (Impugned Order 1), which determined the Annual Fixed Cost (AFC) for the MYT Control Period FY 2017-18 to FY 2019-20; and the order dated 9 March 2021 passed in Petition No. 16 of 2020 (Impugned Order 2), which dealt with true-up for FY 2017-18 and FY 2018-19, revised estimates for FY 2019-20, and the second MYT Control Period FY 2020-21 to FY 2022-23.
The 2nd Respondent, M/s Punjab State Power Corporation Limited (PSPCL), purchases power from EPPL through a back-to-back arrangement involving PTC India Limited (3rd Respondent), a trading licensee under the Electricity Act, 2003. A Power Purchase Agreement was executed between EPPL and PTC on 25 July 2005, followed by a Power Sale Agreement between PTC and PSPCL on 23 March 2006.
Five issues were framed: disallowances on O&M expenditure; and four sub-issues under capital expenditure — construction of project colony and staff rest rooms, miscellaneous equipment purchases of Rs. 0.54 crores, escalation on balance infrastructure works of Rs. 1.12 crores, and construction of a store at the project site of Rs. 0.61 crores.
Admission of Additional Documents
Before addressing the merits, APTEL dealt with EPPL’s application (I.A. No. 1855 of 2025) to place on record EPC contracts and contractor correspondence from 2005 onwards, relied upon to establish the contractual basis of escalation claims. PSPCL opposed the application, arguing the documents were within EPPL’s knowledge throughout the proceedings and had not been produced despite multiple data calls by PSERC.
The Tribunal held that Section 120 of the Electricity Act, 2003 frees it from the Code of Civil Procedure, 1908, though the substantive principles underlying Order XLI Rule 27 — finality and orderly adjudication — cannot be entirely disregarded. The Tribunal drew a distinction between adversarial civil litigation and inquisitorial regulatory tariff proceedings, observing that a generating company filing a tariff petition cannot be expected to anticipate and pre-emptively produce every document that may become relevant. Tariff determination, the Tribunal said, is akin to a cost audit exercise where documents are requisitioned at various stages. The application was allowed in the interest of enabling full and fair adjudication.
O&M Baseline: The Central Issue
EPPL’s core grievance on O&M was that PSERC, in Impugned Order 1, determined baseline values for FY 2017-18 exclusively by taking the approved O&M figure for FY 2016-17 (Rs. 18.36 crores) and escalating it by the Wholesale Price Index. EPPL argued this approach violated Regulation 8.1(b) of the PSERC MYT Regulations, 2014, which uses the word “shall” and lists multiple mandatory factors: figures approved in the past, latest audited accounts, estimates for the relevant year, industry benchmarks and norms, and other factors the Commission considers appropriate.
EPPL placed comparative data before the Commission showing that its claimed O&M cost per MW (approximately Rs. 0.34 crore per MW) was far below the per-MW O&M approved by CERC for comparable NHPC-regulated hydro projects, which ranged from Rs. 0.58 crore to Rs. 1.19 crore per MW. PSERC had allowed only Rs. 19.02 crores for FY 2017-18, equivalent to approximately Rs. 0.19 crore per MW.
EPPL also challenged PSERC’s comparison of Malana-II with the Shanan Hydro Electricity Project of PSPCL (110 MW, O&M cost Rs. 10.91 crores for FY 2017-18). EPPL detailed the structural differences: Shanan sits at 1,200–1,300 metres with surface components and PWD-maintained roads, while Malana-II is at 2,400–2,500 metres with all major components underground, a 5-km head race tunnel in fragile geology, 14 km of project-maintained roads prone to landslides, and a dam site cut off for four to five months annually due to heavy snow.
PSPCL defended the Commission’s approach, contending that EPPL had accepted the FY 2016-17 true-up and could not object to that figure being used as the base for FY 2017-18. PSPCL also argued that CERC Regulations have no application, citing an earlier APTEL judgment in Appeal Nos. 30 and 35 of 2014 between the same parties.
How the Tribunal Reasoned on O&M
APTEL held that the language of Regulation 8.1(b) is unambiguous. The word “shall” imposes a mandatory obligation. The phrase “inter-alia based on” enumerates a non-exhaustive list, meaning the Commission must at minimum consider all enumerated factors. Confining the inquiry to a single factor — past approved figures — is precluded by the very structure of the provision.
The Tribunal found that the MYT framework was designed to move away from year-to-year mechanical extrapolation. Baseline determination at the start of each Control Period was conceived as a fresh, comprehensive exercise. By limiting the inquiry to WPI escalation of the previous year’s figure, PSERC had “negated the very purpose of the MYT regime it created under its own regulations.”
On the Shanan comparison, APTEL held it was fundamentally flawed. Comparing two projects of broadly similar installed capacity without any adjustment for structural, geographical, geological, and operational differences constitutes an arbitrary exercise contrary to Regulation 8.1(b) and the tariff principles in Section 61 of the Electricity Act, 2003.
PSPCL’s argument that EPPL had accepted the FY 2016-17 true-up was rejected. Acceptance of a figure for a particular year does not amount to a concession that the figure is a legally sufficient basis for baseline determination under a separate normative exercise. The Tribunal also cited the Supreme Court’s decision in Uttar Pradesh Power Corporation Limited v. National Thermal Power Corporation [(2009) 6 SCC 235] for the settled principle that res judicata does not apply to tariff proceedings.
On PSPCL’s reliance on the earlier APTEL judgment rejecting application of CERC Regulations, the Tribunal held this was a misleading argument. EPPL was not seeking substitution of CERC Regulations; it was using CERC-approved figures for comparable NHPC projects purely as industry benchmarks, which Regulation 8.1(b) itself mandates. The two propositions are entirely different.
Issue No. 1 was decided in favour of EPPL. The O&M baseline determination in Impugned Order 1 was set aside to the extent of methodology, and the matter was remanded for fresh determination considering all factors under Regulation 8.1(b), including the industry benchmark data and the unique operational parameters of Malana-II HEP.
Capital Expenditure Disallowances
Project Colony and Staff Rest Rooms. PSERC had disallowed Rs. 0.24 crores (differential between Rs. 2.14 crores incurred and Rs. 1.90 crores normatively approved) for project colony construction in FY 2017-18, and Rs. 0.28 crores (differential between Rs. 1.01 crores incurred and Rs. 0.73 crores normatively approved) for staff rest rooms at the dam complex in FY 2018-19.
APTEL pointed to Section 2(30) of the Electricity Act, 2003, which defines “generating station” to include any building used for housing the operating staff. For a project in remote Himalayan terrain with no habitation nearby, staff accommodation is an operational necessity. The Tribunal also found that PSERC’s own Capital Investment Plan Order dated 30 July 2018 had acknowledged the works, noted the delays caused by local agitation and seasonal unavailability of skilled labour, and deferred final determination to the true-up stage upon submission of actual audited accounts. When EPPL submitted actual audited expenditure in Petition No. 16 of 2020, PSERC was obligated to conduct a prudence check. Instead, it disallowed the excess without identifying any imprudence. Relying on BSES Rajdhani Power Limited v. Delhi Electricity Regulatory Commission [(2023) 4 SCC 788] and the Tribunal’s own judgment in GIFT Power Company Limited v. GERC (Appeal No. 285 of 2021), APTEL held that the true-up stage is not an occasion to revisit the fundamental basis of earlier determinations. The disallowances were set aside.
Miscellaneous Expenditure (Rs. 0.54 crores). PSERC had disallowed expenditure on office equipment, plant and machinery, computers, and furniture by applying the proviso to Regulation 18.2(e) of the PSERC MYT Regulations, which bars minor items incurred as a result of natural calamity. EPPL argued the claim fell under Regulation 18.2(d), which permits additional capitalisation of works necessary for efficient and successful project operation, and that the proviso to Regulation 18.2(e) has no application to Regulation 18.2(d). APTEL agreed, holding the Commission’s application of the proviso to be an error of law. The disallowance was set aside.
Escalation on Balance Infrastructure Works (Rs. 1.12 crores). APTEL found the Commission’s order on this head to be a non-speaking order. The disallowance was set aside and the Commission directed to conduct a fresh, reasoned prudence check considering the audited accounts and supporting data.
Construction of Store at Project Site (Rs. 0.61 crores). PSERC had reasoned that a plant of Malana-II’s size would obviously need a store and therefore the expenditure could not be an after-cut-off-date claim. APTEL found this reasoning to contain a logical fallacy: the fact that a store is obviously necessary does not mean the existing store was of adequate size. The question was whether the additional expenditure on an upgraded store was justified. Given the project’s remote alpine location, the need to stock OEM-supplied spares for 600-metre-head machinery, and the susceptibility of electronic components to moisture, the Tribunal held the expenditure falls within Regulation 18.2(d). The disallowance was set aside, with directions to conduct a prudence check and pass a speaking order.
Order
Both Appeal No. 430 of 2019 and Appeal No. 416 of 2022 were allowed. APTEL issued the following directions:
On O&M baseline values: the methodology in Impugned Order 1 is set aside; PSERC is directed to re-determine baseline O&M values for FY 2017-18 to FY 2019-20 in strict accordance with Regulation 8.1(b), pass a detailed speaking order, and complete the exercise within three months. Impugned Order 2 shall stand modified to adopt the revised baseline values, with carrying cost at the applicable rate.
On project colony and staff rest rooms: disallowances of Rs. 0.24 crores and Rs. 0.28 crores are set aside; PSERC is directed to allow actual audited expenditure of Rs. 2.14 crores (FY 2017-18) and Rs. 1.01 crores (FY 2018-19) subject to prudence check, with applicable interest and carrying cost.
On miscellaneous expenditure: disallowance of Rs. 0.54 crores is set aside; PSERC is directed to allow expenditure under Regulation 18.2(d) with prudence check, with carrying cost.
On escalation on balance infrastructure works: disallowance of Rs. 1.12 crores is set aside; PSERC is directed to conduct a fresh reasoned prudence check and allow prudent escalation costs with carrying cost.
On construction of store: disallowance of Rs. 0.61 crores is set aside; PSERC is directed to conduct a prudence check under Regulation 18.2(d) and pass a speaking order, with carrying cost.
PSERC is required to provide the parties a reasonable opportunity of hearing during the fresh determination and to ensure the re-determined AFC is reflected in the billing cycle with appropriate carrying cost adjustments. The entire exercise is to be completed within three months from 4 May 2026.