A) ABSTRACT / HEADNOTE

This analysis examines Powergrid Corporation of India Limited v. Central Electricity Regulatory Commission & Ors., as reported in [2025] 6 S.C.R. 123 : 2025 INSC 626, focusing on the legal treatment of claims for additional capitalisation arising from replacement of damaged Inter-connecting Transformers (ICTs), the scope of a transmission licensee’s self-insurance reserve for losses from fire and machinery breakdown, and the consequence of denial of decapitalisation/capitalisation on availability certificates issued by the Northern Regional Power Committee (NRPC).

The Supreme Court considered whether the Appellate Tribunal for Electricity and the Central Electricity Regulatory Commission (CERC) erred in law by rejecting Powergrid’s claim that replacements constituted admissible additional capital expenditure under Regulation 53 of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004 and whether the appellant’s internal self-insurance reserve covered replacement costs of the ICTs that were burnt due to internal faults.

The Court analysed the text and scheme of Regulation 53, the Notes appended thereto (in particular Note 2), the regulatory distinction between operation & maintenance and additional capitalisation, and established precedent on proximate cause in insurance law—most notably New India Assurance Co. Ltd. v. Zuari Industries Ltd. The Court affirmed the view that replacement of damaged ICTs due to failure and fire must ordinarily be treated as part of operation and maintenance and, where a self-insurance reserve exists covering fire and machinery breakdown risks, the net cost ought to be met from that reserve; consequently claims under Regulation 53 for additional capitalisation were not tenable and directions for revised availability certificates were unnecessary.

The analysis below follows the judgment’s reasoning closely and situates it within statutory and precedential contours.

Keywords: additional capitalisation; Regulation 53; self-insurance reserve; operation & maintenance expenses; proximate cause; inter-connecting transformers; decapitalisation; Northern Regional Power Committee; CERC Tariff Regulations, 2004; New India Assurance v. Zuari.

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

This matter arises from two connected appeals by Powergrid Corporation of India Limited, a central transmission utility, challenging CERC orders (and the Appellate Tribunal’s affirmation thereof) which denied capitalisation claims for replacement of three burnt ICTs in the Rihand I transmission system and held that the net cost of replacement should be borne from Powergrid’s internal self-insurance reserve rather than admitted as additional capitalisation under the Tariff Regulations.

Between 28 April and 9 May 2006, three ICTs at Mandola and Ballabgarh were damaged by internal faults leading to burning, and immediate restoration was necessary given high summer demand in the National Capital Region; Powergrid temporarily diverted transformers from Rihand II (Mainpuri and Kaithal) and installed a transformer procured for Bahadurgarh at Mandola, then later restored the removed Rihand II transformers with new or repaired units by early 2007.

Powergrid petitioned CERC (Petition Nos. 68/2008 and 80/2008) seeking decapitalisation of the removed transformers and additional capitalisation of the replacements; CERC disallowed these claims, reasoning that Regulation 53 did not encompass replacement due to damage/failure and that the appellant’s internal self-insurance reserve, funded by beneficiary contributions via O&M payments, was the appropriate source for net replacement costs.

Powergrid appealed to the Appellate Tribunal which dismissed the appeals; Powergrid thereafter appealed to the Supreme Court under Section 125 of the Electricity Act, 2003, contending erroneous interpretation of Regulation 53(2)(iv) and Note 2, and challenging the conclusion that the self-insurance fund covered the loss on account of fire when the proximate cause was machinery breakdown.

The Supreme Court framed three questions:

(i) whether additional capitalisation claims for transformer replacement were rightly rejected;

(ii) whether the appellant’s self-insurance policy covered replacement cost;

(iii) whether NRPC should have been directed to issue revised availability certificates for the transmission assets.

The Court examined the regulatory text, Notes to Regulation 53, the role and obligations of a central transmission utility with respect to maintenance, and precedent on proximate cause in insurance law foremost New India Assurance v. Zuari Industries Ltd. before concluding that replacement of damaged ICTs constituted operational maintenance and that the self-insurance reserve, which expressly covered fire including explosion/implosion, legitimately funded the net cost; consequently, decapitalisation/capitalisation claims failed and no direction to NRPC was required.

D) FACTS OF THE CASE

Between 28 April 2006 and 9 May 2006, three ICTs in Rihand I (one at Ballabgarh and two at Mandola) were burnt and rendered unserviceable due to internal faults; these transformer failures occurred during peak summer demand necessitating immediate remedial steps to preserve supply to the National Capital Territory.

Anticipating protracted procurement timelines for new transformers, Powergrid diverted two transformers from Rihand II (from Mainpuri and Kaithal) and reallocated a transformer originally procured for Bahadurgarh to Mandola so as to restore immediate system operation between 29 May and 19 June 2006; the Rihand II units taken out were subsequently restored by new or repaired transformers in January–February 2007.

Post restoration, Powergrid filed petitions before the Central Electricity Regulatory Commission: Petition No. 68 of 2008 claiming decapitalisation of the Rihand II transformers removed and additional capitalisation for the new/repaired transformers installed at Rihand I; and Petition No. 80 of 2008 seeking tariff revision reflecting net additional capitalisation and a direction for NRPC to issue revised availability certificates excluding the decapitalised period.

CERC by order dated 03.02.2009 denied both petitions, reasoning that Regulation 53 of the Tariff Regulations, 2004 does not cover replacement of assets damaged through failure and that the net cost should be met from Powergrid’s internal self-insurance reserve, which was funded at 0.1% of gross value of fixed assets and expressly covered losses from fire including explosion/implosion, bush fire and related perils, save for certain exclusions (e.g., HVDC valve halls).

Powergrid appealed to the Appellate Tribunal which dismissed the appeals on 23.03.2011; the appellant then took the matter to the Supreme Court, asserting that replacement constituted additional works/services under Regulation 53(2)(iv) and that since the proximate cause of damage was machinery breakdown rather than fire, the self-insurance reserve should not be applied.

Respondent beneficiaries argued that as a central transmission utility, Powergrid bore operational duty to maintain the transmission system and replacements were ordinary operation & maintenance expenses that beneficiaries should not be charged as additional capitalisation; they further contended that the self-insurance fund’s purpose was to meet such uninsured risks and thus applying the reserve was appropriate and consistent with CERC’s guidelines.

The Supreme Court accepted the CERC/Appellate Tribunal reasoning: replacement did not amount to additional work/services permitting capitalisation; Note 2 to Regulation 53 contemplated replacement only after writing off original asset value and the assets were not “old”; and the proximate cause doctrine as articulated in New India Assurance v. Zuari Industries led to the conclusion that fire (implosion/explosion) was the operative proximate cause and thereby fell within the self-insurance reserve coverage.

E) LEGAL ISSUES RAISED

This section frames the issues in question form as adjudicated by the Court and litigated by the parties:

1. Whether Regulation 53 of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004 permits admission of additional capitalisation for replacement of assets (ICTs/transformers) damaged by internal faults and subsequently replaced or diverted between systems; in other words, can replacement of failed transformers be characterised as additional works/services necessary for efficient and successful operation so as to attract capitalisation under Regulation 53(2)(iv) and related Notes?

2. Whether the appellant’s self-insurance reserve—constituted under its internal policy funded at 0.1% of gross fixed assets and covering fire, explosion/implosion and machinery breakdown risks—covers the net cost of replacement of the damaged ICTs, thereby disentitling the appellant to claim such costs as additional capitalisation from beneficiaries through revised tariff?

3. Whether, if decapitalisation and additional capitalisation were disallowed, the Appellate Tribunal should nonetheless have directed the Member-Secretary, Northern Regional Power Committee (NRPC) to issue revised availability certificates in favour of the appellant to reflect periods of decapitalisation/non-availability of the replaced ICTs, thereby affecting entitlement to incentives and transmission charges?

F) PETITIONER / APPELLANT’S ARGUMENTS

The appellant advanced a set of interrelated contentions grounded in regulatory interpretation, accounting practice and insurance causation principles.

First, Powergrid urged a purposive and expansive construction of Regulation 53(2)(iv) and Note 2, contending that any expenditure incurred to ensure the efficient and successful operation of the transmission system whether it arises from new works or replacements falls within the ambit of allowable additional capitalisation; the appellant argued that replacement of the three burnt ICTs constituted necessary works/services to restore the system to its intended capacity and reliability and therefore should be admitted as additional capital expenditure for tariff determination.

Second, Powergrid stressed accepted accounting practice regarding decapitalisation and recapitalisation where assets taken out were to be written down and replacements accounted for, arguing that denial of capitalisation produced a non-cost-reflective tariff and penalised the licensee for exigencies outside its control; the appellant contended that the Appellate Tribunal’s narrow reading rendered Note 2 meaningless and frustrated the regulatory objective of equitable cost allocation.

Third, on the insurance point, Powergrid submitted that the proximate cause of the damage was machinery breakdown (internal faults causing failure) and not fire per se; accordingly, the self-insurance reserve could not be applied to meet replacement costs where the proximate cause was internal equipment failure rather than an insured peril of fire, and reliance on New India Assurance v. Zuari Industries (2009) was defensive because that case treated proximate cause holistically, whereas here the operative cause was asserted to be mechanical failure thus displacing the chain-of-causation analysis relied upon by CERC.

Finally, the appellant argued that directing NRPC to issue revised availability certificates was necessary to avoid loss of tariff/incentive entitlements during the period of decapitalisation and that the Appellate Tribunal erred in refusing that discrete relief even if it answered the capitalisation question against the appellant. These contentions, the appellant submitted, warranted interference with both CERC and the Appellate Tribunal decisions.

G) RESPONDENT’S ARGUMENTS

The beneficiaries and CERC defended the impugned orders on statutory, regulatory and policy grounds. Their principal contention was that under the statutory and regulatory scheme a transmission licensee such as Powergrid has an inherent obligation to maintain a healthy transmission system; ordinary replacements arising from wear, failure or accidents are part of operation & maintenance expenses and cannot be converted into additional capitalisation simply by reason of replacement being capitalised in accounting records.

The respondents argued that Regulation 53 expressly delineates categories of admissible additional capitalisation — deferred liabilities, works deferred for execution, initial spares within norms, liabilities on account of awards/court decrees, change in law and, post cut-off, additional works/services necessary for operation — and that the replacement here did not amount to additional work or an augmentation of capacity or life-extension beyond the original scope.

They emphasised Note 2’s clear prescription that replacement of old assets is permissible only after writing off the entire original asset value and that the Rihand systems were not “old” or worn out. On insurance, respondents submitted that Powergrid’s internal self-insurance reserve was deliberately created to meet uninsured risks such as machinery breakdown and fire, funded through O&M payments by beneficiaries, and that the policy language covered fire including explosion and implosion without exclusions; accordingly, the net replacement cost rightly fell to that fund.

Finally, they argued that NRPC’s issuance of revised availability certificates was consequential on decapitalisation/recapitalisation being allowed; since the substantive relief failed, the prayer for directions to NRPC was moot. The respondents therefore urged dismissal of the appeals.

H) RELATED LEGAL PROVISIONS 

1. Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004 — Regulation 53 (Additional capitalisation for Inter-State Transmission) including Notes 1–4 and Note 2 addressing replacement of old assets and requirement to write off original asset value prior to recognising new expenditure.

2. Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004 — Regulation 18 (Additional capitalisation — reproduced in Chapter 2 for generating stations) used for textual comparison and interpretive guidance.

3. Electricity Act, 2003 — statutory framework enabling CERC rulemaking (Section 178), CERC functions (Section 76), Central Transmission Utility notification (Section 38), and appellate jurisdiction to this Court (Section 125).

4. Electricity Regulatory Commission Act, 1998 — historical enabling statute under which CERC originally functioned prior to repeal and replacement by the Electricity Act, 2003.

5. Precedent on proximate cause in insurance law: New India Assurance Co. Ltd. v. Zuari Industries Ltd., (2009) 9 SCC 70 — principles on proximate cause and analysis of chain of causation.

I) JUDGEMENT 

The Supreme Court dismissed the appeals, upholding the decisions of CERC and the Appellate Tribunal. The Court grounded its conclusion primarily in textual interpretation of Regulation 53 and its Notes, and in the insurance proximate-cause jurisprudence.

Analysing Regulation 53, the Court observed that the provision permits admission of additional capital expenditure within the original scope where the expenditure relates to deferred liabilities, works deferred for execution, procurement of initial spares within specified ceilings, liabilities arising from awards or court decrees, and change in law; post cut-off date, it permits deferred liabilities and additional works/services necessary for efficient and successful operation but not included in the original project cost.

The Court emphasised that the appellants’ actions were limited to diversion and replacement of ICTs and did not constitute additional works/services in the sense contemplated by the regulation. The Court refused the appellant’s invitation to read Regulation 53(2)(iv) expansively to include ordinary replacements, holding that such a reading would render the distinction between operational maintenance and capitalisation meaningless and would defeat the normative regulatory design whereby capitalisation is reserved for new works or enhancements beyond routine maintenance.

With respect to Note 2, the Court noted the requirement for writing off the entire value of original assets before considering replacement capitalisation; on facts, the transmission systems were relatively new and there was no evidence of wear or prior deterioration that could render replacement a life-extension or renovation falling within the Note. On the insurance point, the Court traced the origin of Powergrid’s self-insurance reserve to a 1994–95 policy decision to set aside 0.1% of gross fixed assets to meet future uninsured losses including machinery breakdown and fire; the reserve’s terms expressly covered losses by fire including explosion/implosion and the Court rejected the appellant’s attempt to characterise the proximate cause as machinery breakdown excluding fire.

Applying the proximate cause principle as articulated in New India Assurance v. Zuari Industries, the Court held that the implosion/explosion (fire) was the active and efficient cause setting in motion the chain of events that rendered ICTs irreparable; as such the loss was within the ambit of the self-insurance reserve. The Court further observed that the beneficiaries had been contributing to the reserve via O&M charges, strengthening the conclusion that the reserve was the appropriate source for net replacement cost.

Having answered the capitalisation and insurance questions against the appellant, the Court found the prayer for directions to NRPC for revised availability certificates redundant. The Court rejected appellant’s contention that Appellate Tribunal had merely rubber-stamped CERC, concluding the Tribunal provided cogent reasoning aligned with the regulatory scheme. Accordingly, both appeals were dismissed.

a. RATIO DECIDENDI

The operative ratio rests on two pillars: statutory/regulatory construction and insurance proximate-cause analysis.

First, under Regulation 53 (and read with Note 2), additional capitalisation is available for deferred liabilities, deferred works, initial spares within ceilings, awards/court liabilities, and for additional works/services necessary for efficient operation but not for routine replacement of failed assets which are part of operation & maintenance. The Court reasoned that replacement of burnt ICTs was routine maintenance/operational restoration — the diversion and replacement did not introduce a new work or materially alter the scope or capacity of the transmission project — and therefore did not meet the textual threshold for admission as additional capital expenditure.

Second, on the self-insurance issue, the Court applied the proximate cause doctrine from New India Assurance v. Zuari Industries, holding that where fire (implosion/explosion) sets in motion the chain causing ultimate loss, fire is the efficient proximate cause and falls within an insurance cover that expressly includes fire; since Powergrid’s internal reserve covered fire and machinery breakdown per its terms, the reserve was properly applied to meet the net replacement cost. Taken together, these legal determinations established that the appellant could not recharacterise the replacement as capitalisation chargeable to beneficiaries and that the internal fund was the proper financing source.

b. OBITER DICTA

The judgment contains observations with persuasive, though not strictly dispositive, value:

(i) the Court emphasised the policy rationale that a central transmission utility must maintain system health and that regulatory frameworks draw a line between operational maintenance (borne through O&M and reserves) and genuine capital additions which expand or materially change the project;

(ii) the Court noted that Regulation 53 is not exhaustive but that its illustrative list and Notes provide guidance against expansive readings that would render maintenance costs capitalisable;

(iii) the Court contrasted the present facts with Gujarat Urja Vikas Nigam Ltd. v. Renew Wind Energy (Rajkot) Pvt. Ltd. where the Appellate Tribunal’s rubber-stamp approach was criticized, explaining that such criticism did not apply where the Tribunal had engaged with the legal and factual matrix;

(iv) the Court implicitly endorsed transparency in regulatory accounting by approving the use of an expressly constituted self-insurance reserve funded via beneficiary contributions for precisely such uninsured contingencies.

These observations function as instructive markers for future disputes on the threshold between maintenance and capitalisation and on how regulators should treat internal insurance mechanisms of public utilities.

c. GUIDELINES 

1. Statutory/Regulatory construction principle: interpret Regulation 53 in light of its categorical divisions — do not conflate routine replacements with additional works/services intended to create new capacity or structural augmentation; read Note 2 literally to require writing off original asset value before admission of replacement expenditure as capitalisation.

2. Operational vs. capital distinction: transmission licensees are expected to bear the cost of routine maintenance and replacements through operation & maintenance streams (including internal reserves funded through beneficiary contributions) rather than by securing immediate tariff capitalisation claims.

3. Insurance/causation application: apply proximate cause jurisprudence (as in New India Assurance v. Zuari) when determining whether an insured peril (e.g., fire/explosion) or machinery failure is the operative cause; where the insured peril is the active efficient cause, the insurer or internal reserve covers resultant losses.

4. Regulatory prudence check: CERC should continue to exercise prudence checks when claims for additional capitalisation are filed, ensuring documentary evidence on original scope, asset age/condition, and that the expenditure truly falls outside normal maintenance.

5. Documentation and accounting discipline: licensees seeking exceptional treatment must produce contemporaneous evidence showing that replacements were necessary due to system re-engineering, life extension, or scope enhancement and not ordinary equipment failure; absence of such evidence will disfavor capitalisation claims.

J) CONCLUSION & COMMENTS

This decision reinforces a principled regulatory boundary between operation & maintenance and additional capitalisation under the CERC Tariff Regulations, 2004, preventing routine or exigent replacements from being converted into tariff-bearing capital additions absent clear statutory warrant or demonstrable scope enlargement.

It validates the prudential use of internal self-insurance mechanisms where explicitly constituted and funded, and applies settled proximate-cause insurance doctrine to determine coverages. Practically, the ruling preserves tariff predictability for beneficiaries by preventing retrospective capitalisation claims for repairs and underscores a licensee’s duty to maintain infrastructure and to carry appropriate internal reserves.

For regulators and licensees it signals the need for clear ex ante accounting, precise documentation when claiming capitalisation, and transparent design of internal risk reserves. The case will serve as precedent for disputes on decapitalisation/recapitalisation, allocation of repair costs, and the interplay between regulatory tariff principles and internal insurance arrangements in the energy sector.

REFERENCES 

1. Powergrid Corporation of India Ltd. v. Central Electricity Regulatory Commission & Ors., Civil Appeal Nos. 5857–5858 of 2011, Supreme Court of India, Judgment dated May 5, 2025, [2025] 6 S.C.R. 123 : 2025 INSC 626.

2. New India Assurance Co. Ltd. v. Zuari Industries Ltd., (2009) 9 SCC 70.

3. Gujarat Urja Vikas Nigam Ltd. v. Renew Wind Energy (Rajkot) Pvt. Ltd., 2023 SCC OnLine SC 411.

4. Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2004, (Regulation 53 and related Notes; Regulation 18 excerpted for comparison).

5. Electricity Act, 2003.

6. Electricity Regulatory Commission Act, 1998.

7. Case file / judgment document: Powergrid Corporation of India Limited v. Central Electricity Regulatory Commission & Ors., Supreme Court Report extract (attached PDF).