Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
ORIGINAL/CIVIL APPELLATE JURISDICTION
2025 INSC 937
WRIT PETITION (C) 104 OF 2014
BSES RAJDHANI POWER LTD. & ANR. ...PETITIONER(S)
VERSUS
UNION OF INDIA AND ORS. …RESPONDENT(S)
WITH
WRIT PETITION (C) 105 OF 2014
WITH
CIVIL APPEAL No. 4010 OF 2014
WITH
CIVIL APPEAL No. 4013 OF 2014
WITH
WRIT PETITION (C) 1005 OF 2021
J U D G M E N T
Table of Contents
1. Introduction. .......................................................................................... 4
2. Concept of a Regulatory Asset. ............................................................... 7
3. Facts. ..................................................................................................... 9
Signature Not Verified
Digitally signed by
KAPIL TANDON
Date: 2025.08.06
19:12:21 IST
Reason:
4. Submissions of Parties. ........................................................................ 11
5. Impleadment of the State Commissions and Governments. ................... 20
1
5 (i). Affidavits by State Commissions. ...................................................... 21
5 (ii). Affidavits by State Governments. ...................................................... 25
6. Law Governing the Electricity Sector Prior to 2003. .............................. 26
7. Electricity Act, 2003. ............................................................................ 28
8. Provisions of the Electricity Act relating to determination of Tariff. ....... 31
9. Provisions of Act, Policies, Rules, Regulations, and Orders having a bearing
on creation of a Regulatory Asset. ............................................................. 35
9 (i). National Electricity Policy, 2005. ....................................................... 35
9 (ii). National Tariff Policy, 2006. ............................................................. 36
9 (iii). DERC Tariff Determination Regulations, 2007. ............................... 37
9 (iv). DERC Statutory Advice dated 15.12.2010. ...................................... 38
9 (v). Ministry of Power’s Letter to the APTEL. ........................................... 40
9 (vi). APTEL’s Order dated 11.11.2011. ................................................... 40
9 (vii). DERC Tariff Determination Regulations, 2011. .............................. 41
9 (viii). DERC’s Tariff Order dated 26.08.2011 (FY 2011-12). .................... 42
9 (ix). DERC’s MYT Order dated 13.07.2012 (FY 2012-15). ....................... 43
9 (x). DERC’s Statutory Advice dated 01.02.2013. .................................... 43
9 (xi). DERC’s Tariff Order dated 31.07.2013 (FY 2013-14). ...................... 44
9 (xii). APTEL’s Order dated 14.11.2013. .................................................. 45
9 (xiii). APTEL’s Order dated 11.03.2014. ................................................. 46
9 (xiv). National Tariff Policy, 2016. .......................................................... 47
2
9 (xv). DERC Tariff Determination Regulations, 2017. .............................. 48
9 (xvi). Ministry of Power’s Affidavit dated 10.08.2022. ............................. 49
9 (xvii). Ministry of Power’s Affidavit dated 12.12.2022. ............................ 51
9 (xviii). Electricity (Amendment) Rules, 2024 introducing Rule 23. .......... 52
9 (xix). DERC’s Order dated 19.07.2024 (true-up till FY 2020-21). ............ 53
10. Analysis. ............................................................................................ 53
10 (i). Electricity is a public good and is regulated under the Act. ............. 54
10 (ii). Tariff determination is governed by the Act, which entrusts this
function to independent Regulatory Commissions. .................................... 54
10 (iii). Collaborative effort of the Regulatory Commissions to balance social
justice obligations with efficiency. ............................................................. 57
10 (iv). Tariff fixation takes into account multiple variables and requires
flexibility. Regulatory asset is a measure adopted during tariff fixation that
recognises right of recovery. ...................................................................... 58
10 (v). Factors leading to an unmanageable regulatory asset, and consequent
‘regulatory failure’. .................................................................................... 59
10 (vi). Law that governs creation, continuation and liquidation of regulatory
asset.. ....................................................................................................... 62
10 (vii). Accountability of the Regulatory Commissions. ............................ 67
10 (viii). Powers of the APTEL. .................................................................. 69
11. Conclusions. ....................................................................................... 77
12. Directions. ......................................................................................... 80
3
1. Introduction.
1 2
1. We are entertaining these writ petitions and civil appeals
only for examining a limited question as to the law that governs
the creation of a “regulatory asset” during the process of tariff
determination by the Electricity Regulatory Commissions, its
impact on the rights and liabilities of the stakeholders, the limits
within which it can be operated, and finally the regulatory duties
that it invokes for the Regulatory Commissions. We also clarify
that through these proceedings, we are not determining the rights
and liabilities of the parties, which will anyways be considered in
the pending civil appeals against the orders of the Appellate
3
Tribunal of Electricity .
2. In these writ petitions and civil appeals, the three distribution
companies that supply electricity to consumers in the National
4 5
Capital Territory of Delhi , namely BSES Rajdhani Power Ltd. ,
6
BSES Yamuna Power Ltd. , and Tata Power Delhi Distribution
7
Limited , have challenged the manner in which the Delhi
1
W.P. (C) No. 104/2014, W.P. (C) No. 105/2014 and W.P. (C) No. 1005/2021 under Article
32 of the Constitution.
2
C.A. No. 4010/2014 and C.A. No. 4013/2014 against the order dated 11.03.2014 passed
by the Appellate Tribunal for Electricity in I.A Nos. 364-365/2013 in Appeal Nos. 265-
266/2013.
3
Hereinafter “APTEL”.
4
Hereinafter “NCT of Delhi”.
5
Hereinafter “BRPL”.
6
Hereinafter “BYPL”.
7
Hereinafter “TPDDL”.
4
8
Electricity Regulatory Commission has determined the tariff for
retail supply of electricity over the years, leading to the creation
and continuation of a “regulatory asset”. The prayers in W.P. (C)
9
Nos. 104 and 105/2014 by BRPL and BYPL are similar, which we
may formulate as follows:
i. To hold and declare that the petitioners are entitled to
prudently incurred cost and allowances in terms of
10
Sections 61 and 62 of the Electricity Act, 2003 and Multi
Year Tariff Regulations;
ii. To direct the DERC to give effect to the deferred cost
creating a regulatory asset in accordance with Para 8.2.2
of the National Tariff Policy;
iii. To direct the respondent-generating companies to not
disconnect or discontinue power supply or take any other
coercive steps till this Court determines an appropriate
mechanism for adjustment of dues owed by the
distribution companies from the amounts due and owed to
them; and
iv. To protect their investment and assured return from the
licensed business.
3. TPDDL has also filed W.P. (C) No. 1005/2021, where it has
prayed for the following reliefs:
8
Hereinafter “DERC”.
9
Hereinafter collectively referred to as “BSES Discoms”.
10
Hereinafter “the Electricity Act”.
5
i. To direct DERC to recognise its regulatory asset and
formulate and implement a clear roadmap for the
liquidation of the regulatory asset in a time-bound manner
of 3 years;
ii. In the alternative, to direct DERC to increase the Deficit
Recovery Surcharge to 20% to amortise the regulatory
asset as per the National Tariff Policy;
iii. To direct DERC to implement various judgments of the
APTEL in appeals against tariff orders by the DERC.
4. In order to consider these prayers as well as the
maintainability of the writ petitions, which has been contested by
the respondents, we will have to examine the concept of a
‘regulatory asset’ and its creation and continuation in the context
of the law that may govern it. Further, we will also examine
whether the law creates any statutory duties and whether failure
to fulfil the same gives rise to an enforceable legal right. For this
purpose, we will commence with examining the Electricity Act, and
the rules, regulations, and policies framed thereunder as well as
judicial precedents and necessary practices for good governance of
the electricity sector.
6
2. Concept of a Regulatory Asset.
5. A “regulatory asset” in the context of tariff determination for
electricity utilities is an intangible asset that is created by the
Regulatory Commissions in recognition of an uncovered revenue
gap or revenue shortfall when a distribution licensee could not
fully recover the costs reasonably incurred by it through revenue
11
from tariff. This portion of the revenue requirement is not
included while determining the tariff for the particular year.
Rather, the distribution company is entitled to receive or recover
such revenue in the future, over a period of time.
6. There are several situations and factors leading to the
creation of such a regulatory asset. It is generally created when the
projected revenue based on the determined tariff is significantly
lower than the revenue required by the distribution company to
recover reasonably-incurred costs as well as for return on
investment. When it is not feasible to recover this gap either by
increasing tariffs or through other means such as government
subsidy during that year, a regulatory asset equivalent to the
uncovered expenses is created. Another situation requiring the
11
Tamil Nadu Electricity Consumers’ Association v. Tamil Nadu Electricity Board
See , Appeal
Nos. 192 and 206 of 2010, APTEL order dated 28.07.2011.
7
creation of a regulatory asset is at the time of truing up, if the
actual revenue realisation from tariffs is much lesser than the
12
Annual Revenue Requirement .
7. This revenue gap can be recovered through government
subsidies or by increasing the tariff. However, the latter may lead
to a tariff shock to consumers in a given year. Hence, to protect
consumer interests, the Regulatory Commission may choose to
direct recovery of only some portion of the gap while creating a
regulatory asset for the remaining portion, which can be recovered
in the subsequent years. At the same time, the financial health
and commercial viability of the distribution company must be
ensured by the Regulatory Commission. Hence, the Regulatory
Commission must ensure that if a regulatory asset is created, the
same is recovered in a time-bound manner.
8. The creation and continuation of a regulatory asset is neither
a statutory concept nor a power granted under the Electricity Act.
Rather, it is a measure adopted by the Regulatory Commissions,
which are statutory bodies, in exercise of their powers and
functions under the Act. It is hence guided by the legal regime of
the Electricity Act and the rules, regulations, and policies framed
12
Hereinafter “ARR”.
8
thereunder, along with their interpretation in various judicial
precedents.
3. Facts.
9. Initially, the Delhi Vidyut Board was responsible for
generation, transmission and distribution of electricity in NCT of
Delhi. With the Delhi Electricity Reform Act, 2000 and the Delhi
Electricity Reform (Transfer Scheme) Rules, 2001, these functions
were unbundled and different entities were made responsible for
13
each function. Until 2007, the Delhi Transco Limited was solely
responsible for bulk procurement and bulk supply of power in
Delhi, and all distribution companies were required to purchase
power from it. After 31.03.2007, the responsibility for power
purchase in Delhi was transferred to the distribution companies.
14
10. DERC adopted the Multi Year Tariff framework in
generation, transmission, and distribution businesses so as to
bring certainty regarding tariff and its annual basis during each
control period.
13
Hereinafter “DTL”.
14
Hereinafter “MYT”.
9
11. A regulatory asset was first created by the DERC in the tariff
15
order dated 09.06.2004 for North Delhi Power Limited and orders
dated 11.06.2004 for BRPL and BYPL. In these orders, the DERC
introduced the regulatory asset as a mechanism to bridge the
revenue gap in the tariff order for FY 2004-05, and it amounted to
a total of Rs. 696 crores across BRPL, BYPL, NDPL and DTL.
12. Over the years, various orders of the DERC determining ARR
for each year, MYT orders, and truing-up orders demonstrate an
increase in the quantum of the regulatory asset across all three
distribution companies before us. The DERC also provided for
carrying costs on the regulatory asset to each distribution
company, which further contributed to its ballooning. We are
informed that as on 31.03.2024, the regulatory asset including
carrying costs is Rs. 12,993.53 crores for BRPL, Rs. 8419.14 crores
for BYPL, and Rs. 5,787.70 crores for TPDDL, totally amounting to
Rs. 27,200.37 crores across all three distribution companies.
During this time, the DERC has taken note of this increase and
introduced various measures like increasing tariffs, Deficit
16
Recovery Surcharge , fuel price adjustment charge and Power
15
Hereinafter “NDPL”, which is now TPDDL.
16
Hereinafter “DRS”.
10
17
Purchase Adjustment Charge . These measures are byproducts of
the regulatory asset and are intended for its liquidation.
13. After setting out the submissions of the parties as well as
views of various State Commissions and State Governments, we
will examine framework within which the regulatory asset is
created, continued, and liquidated. We will refer to the relevant
provisions of the Electricity Act, National Tariff Policies, the
Electricity Rules, DERC’s Tariff Determination Regulations, and
introduction of various measures by the DERC, either as mitigative
or alleviative to deal with the problem. Following this, we will
determine the status of the regulatory asset and the consequential
directions that may be passed in these writ petitions and civil
appeals.
4. Submissions of Parties.
14. We have heard Mr. Kapil Sibal and Dr. Abhishek Manu
Singhvi, learned senior counsels and Mr. Amit Kapur, learned
counsel for the three distribution companies, who are the
petitioners and appellants. On behalf of the respondents, we have
heard Mr. Nikhil Nayyar, learned senior counsel for the DERC,
17
Hereinafter “PPAC”.
11
Mr. R. Venkataramani, learned Attorney General of India for
certain generating and transmission companies, Mr. K.M. Nataraj,
learned ASG for the Ministry of Power, Union of India, and Mr.
Siddharth Dave and Mr. Shadan Farasat, learned senior counsels
for the Government of NCT of Delhi.
15. Mr. Sibal made the following submissions:
i. Referring to the Statement of Objects and Reasons of the
Electricity Act, he submitted that the statute intends to
distance the government from tariff regulation and
determination by establishing independent regulators, and
it aims to encourage private sector participation in the
electricity sector.
ii. Mr. Sibal then referred us to various provisions of the
Electricity Act, including factors guiding tariff
determination under Section 61, tariff determination for
retail supply of electricity under Sections 62 and 64, and
advance payment of government subsidies under Section
65. He also took us through the mandatory and advisory
functions of the State Commission under Section 86,
emphasising that the Commission must be guided by the
policies and plans formulated under the Act in discharge
of its functions.
iii. He then referred us to the relevant portions of the statutory
advice issued by the DERC to the Government of NCT of
Delhi by letters dated 15.12.2010 and 01.02.2013, which
we will deal with in more detail at a later stage.
12
iv. Referring to Clause 8.2.2 of the National Tariff Policy,
2006, he submitted that a regulatory asset must be
created only in exceptional circumstances that are clearly
defined in the regulations and that only include natural
causes or force majeure conditions. Further, that the
regulatory asset must be recovered in a time-bound
manner in 3 years, and preferably within the control
period. These conditions are also incorporated in
Regulation 5.42 of the DERC (Terms and Conditions for
Determination of Wheeling Tariff and Retail Supply Tariff)
18
Regulations, 2007 and Regulation 5.40 of the DERC
(Terms and Conditions for Determination of Wheeling
19
Tariff and Retail Supply Tariff) Regulations, 2011 , which
we will deal with at a later stage. Mr. Sibal submitted that
these conditions for creation of a regulatory asset have not
been complied with by the DERC.
v. He then referred us to the Electricity (Amendment) Rules,
2024 (notified on 10.01.2024) that inserts Rule 23 in the
Electricity Rules, 2005, which stipulates various
conditions for creation, continuation, and recovery of a
revenue gap or regulatory asset.
vi. To conclude, Mr. Sibal submitted that the creation,
continuation, and expansion of the regulatory asset over
the years can be attributed to the following causes: (i)
assumed power purchase cost for tariff determination is
lower than the actual cost; (ii) assumption of inflated
18
Hereinafter “Tariff Determination Regulations, 2007”.
19
Hereinafter “Tariff Determination Regulations, 2011”.
13
revenue; (iii) tariffs determined by the DERC are not cost-
reflective; (iv) the orders of the APTEL and this Court
regarding tariff fixation are not implemented; (v) the state
government has not paid the subsidy amount in advance
as per Section 65; (vi) payment of Late Payment
20
Surcharge @ 18% on late payments to the generating
companies; and (vii) the truing-up exercise is not carried
out properly.
16. Mr. Amit Kapur, for the BSES Discoms has submitted that
currently, the regulatory asset is about Rs. 26,000 crores
(including the carrying cost payable to date). The continuation of
the revenue gap, without liquidating it in a time-bound manner
undermines the very purpose of the Electricity Act to promote
private sector participation and to provide for cost-reflective tariffs.
He submits that there is a creeping acquisition of private
distribution companies due to this.
17. Dr. Singhvi appearing for TPDDL then addressed us and
made the following submissions:
i. To liquidate the regulatory asset, certain measures may be
taken such as increasing the DRS, increasing tariffs
payable by consumers, and through government support.
Further, there must be a fixed timeline for liquidation as
20
Hereinafter “LPS”.
14
the quantum of the regulatory asset only increases with
the passage of time due to accumulation of carrying costs.
ii. While the DERC’s roadmap for liquidation submitted
before this Court estimated recovery of the entire
regulatory asset by 2022, this has not fructified. In this
context, he submitted that DRS of 8% is wholly inadequate
as it is insufficient to even meet the carrying cost on the
regulatory asset.
18. Mr. Nikhil Nayyar, learned senior counsel appearing on
behalf of the DERC then addressed us. He took us through the
scheme of the Electricity Act and its provisions, and also traced
the history of the creation and continuation of a regulatory asset
by the DERC. While doing so, he made the following submissions:
i. The DERC’s tariff order dated 11.06.2004 shows that the
BSES Discoms themselves suggested the creation of a
regulatory asset to enable recovery of the revenue gap over
a period of time through gradual increase in tariffs.
ii. Over the years, the DERC introduced various measures to
liquidate the regulatory asset, including tariff hikes, 8%
DRS, carrying cost, fuel purchase adjustment charge, and
PPAC. Currently, TPDDL, BRPL, and BYPL levy 29.13%,
27.08%, and 31.60% PPAC respectively and between FY
2018-19 to FY 2022-23, they have earned Rs. 3,230.48
crores, Rs. 4,399.48 crores, and Rs. 2,210 crores through
PPAC. The DERC also increased the tariff by 50% between
15
FY 2011-15 as follows - 22% by order dated 26.08.2011),
23% by order dated 13.07.2012, 5% by order dated
31.07.2013, and 8.32% by order dated 23.07.2014.
iii. However, these measures were not sufficient as between
2007 and 2012, the power purchase cost, which
constitutes 80% of the ARR, increased by more than 80%
from Rs. 2.86 to Rs. 5.16 per unit. The regulatory asset
ballooned during this period due to this unprecedented
increase in power purchase costs, which is attributable to
the increase in coal and gas prices. Further, the
introduction of CERC (Unscheduled Interchange charges
and related matters) (Amendment) Regulations, 2010
prevented the use of UI mechanism for sale of surplus
power at profitable rates.
iv. While the roadmap submitted by the DERC before this
Court estimated that the regulatory asset would be
liquidated by 2022, this did not materialise for several
reasons such as the distribution companies not achieving
the estimated 15% growth rate and carrying cost on the
regulatory asset being a compound interest that itself
amounts to Rs. 8,692 crores across BRPL, BYPL, and
TPDDL from FY 2012-13 to FY 2019-20, while DRS @ 8%
led to a collection Rs. 11,073 crores.
v. He submitted that the regulatory asset could not be
liquidated as planned as the amount does not remain
static. With each tariff order, some portion is recovered
while other factors lead to an increase in the regulatory
16
asset. Further, considering that the roadmap for
liquidation was prepared in 2014, it needs to be revised.
vi. Mr. Nayyar also disputed the maintainability of these writ
petitions as there is a statutory mechanism under the
Electricity Act for tariff determination, which is a quasi-
judicial exercise by an expert body and the scope of judicial
review is limited. Further, the Act also provides for
appealing the DERC’s decision before the APTEL under
Section 111. Finally, there is no allegation regarding
violation of any fundamental right for this Court to exercise
writ jurisdiction.
vii. Finally, Mr. Nayyar averred to tariff determination and
regulatory assets created by other State Commissions. He
submitted that 15 states have implemented an automatic
pass-through for fuel costs, which means that the
distribution companies in these states can pass on the rise
in power purchase costs to the consumers. He also
submitted that other than Delhi, regulatory assets have
been created in Tamil Nadu, Rajasthan, Kerala, and
Maharashtra.
19. We then heard the learned Attorney General for the
generating and transmission companies namely Indraprastha
21
Power Generation Company Limited , Pragati Power Corporation
22
Limited , and DTL. He submitted that while the DERC has
21
Hereinafter “IPGCL”.
22
Hereinafter “PPCL”.
17
recognised a revenue gap for all three distribution companies,
BRPL and BYPL are not making regular payments to IGPCL, PPCL
and DTL, despite making regular payments to other power utilities.
He also submitted that TPDDL has been regularly paying the bill
amounts. With regard to non-payment by BRPL and BYPL, he
submitted that these dues cannot be set-off/netted-off/squared off
against the unrecovered tariff, which must be realised by the
distribution companies from consumers in accordance with DERC
orders. He also submitted that the adjustment of any payments
against past dues is in accordance with the provisions of their
power purchase agreements and Rule 4 of the Electricity (Late
Payment Surcharge) Rules, 2022.
20. We then heard Mr. K.M. Nataraj, learned ASG appearing for
the Ministry of Power, Union of India. He submitted that a
regulatory asset is created when State Commission determines
tariffs while ignoring the principles laid down in Section 61 of the
Electricity Act, specifically in sub-sections (b), (c), and (d). In such
situations, the approved tariff and revenue generated from it is
lower than the actual ARR of the distribution company. Further,
the regulatory asset is created without following the conditions
specified in Clause 8.2.2 of the National Tariff Policy, 2006 and
18
without a specific time period for liquidation. In order to recover
this amount, he submits that the tariffs may be increased, the
state government may provide additional subsidies to reduce the
burden on the consumers due to increased tariffs, and through
financial support by the state government. He also submitted that
liquidation must be in accordance with Rule 23 of the Electricity
(Amendment) Rules, 2024.
21. Finally, Mr. Shadan Farasat and Mr. Siddharth Dave, learned
senior counsels for the Government of NCT of Delhi addressed us.
They submitted that the regulatory asset is not attributable to the
subsidies granted by the Government and its payments under
Section 65 of the Electricity Act.
22. By order dated 23.10.2024, this Court directed the
Government of NCT of Delhi to respond to the subsisting
regulatory asset. When the matters were listed on 20.11.2024, Mr.
Shadan Farasat, learned senior counsel appeared for the
Government and expressed that the Government has not yet taken
its decision regarding subsidies and creation of the regulatory
asset, the reasons for which we directed be placed in an affidavit
before us. An affidavit dated 06.01.2025 was filed by the
Government of NCT of Delhi indicating that the Department of
19
Power had prepared a cabinet note for circulation on 29.10.2024,
which was circulated for comments. The same received
concurrence from the Law Department on 01.11.2024 but the
comments of the Finance and Planning Departments are awaited.
It was also stated that the Government of NCT of Delhi is releasing
the subsidy amounts without default, and there is no relation
between the grant of electricity subsidy and accumulation of the
revenue gap. The amounts payable to the BSES Discoms are
directly released to IPGCL, PPCL, and DTL for adjustment against
outstanding dues, in accordance with interim orders of this Court
in these writ petitions and civil appeals.
5. Impleadment of the State Commissions and Governments.
23. After hearing the learned counsels for the parties, by this
Court’s order dated 23.10.2024 we directed the impleadment of
State Governments and State Electricity Regulatory Commissions
to gather their views in light of the large-scale and nation-wide
implications of creation and continuation of regulatory assets on
the electricity sector. Subsequently, by order dated 20.11.2024, we
directed the State Governments and State Commissions to express
their views through affidavits. Upon perusing these affidavits, the
20
position of each state vis-à-vis regulatory assets can be captured
as follows:
5 (i). Affidavits by State Commissions.
24. Following is the gist of the affidavits filed by various
Commissions.
i. The State Commissions of Andhra Pradesh, Assam, Haryana,
Himachal Pradesh, Jharkhand, Madhya Pradesh, Odisha,
Punjab, Sikkim, Telangana, and Uttar Pradesh have
submitted that they have not created any regulatory asset at
any point in time.
ii. The Maharashtra Electricity Regulation Commission submits
that in compliance with Clause 8.2.2 of the National Tariff
Policy, 2016 and Rule 23 of the Electricity (Amendment)
Rules, 2024, it has not created a regulatory asset since March
2020 in respect of any distribution licensee in the state.
iii. The Joint Electricity Regulatory Commission for UT of
Jammu and Kashmir and UT of Ladakh also submits that it
has not created any regulatory asset since FY 2019-2020 and
tariff determination is such that the ARR of the distribution
companies is met from the revenue from consumers and
grant-in-aid from the UT Government.
iv. The Chhattisgarh State Electricity Regulatory Commission
submits that there was a revenue gap of Rs. 343 crores in FY
2011-12, even after tariff increase by 14%, but the same was
fully apportioned in FY 2012-13 with carrying cost. In FY
2012-13, there was a cumulative deficit of Rs. 1752 crores
21
that was partially apportioned by a 17% tariff increase and
the remaining revenue gap of Rs. 828 crores was carried
forward as a regulatory asset, which was subsequently
apportioned in FY 2013-14 with carrying costs. There was no
regulatory asset between FY 2013-14 and FY 2015-16. Then
in FY 2016-17, the State Commission had to allow Rs.
1130.80 crores over and above the ARR to comply with an
APTEL order. To prevent a tariff shock, it allowed recovery of
Rs. 370 crores in that year, and created a regulatory asset for
Rs. 760.80 crores that was recovered in FY 2017-18. There
was no regulatory asset created or carried forward between
FY 2017-18 to FY 2019-20. In FY 2020-21, considering the
COVID-19 pandemic and to avoid increasing tariffs, the
Commission created a regulatory asset of Rs. 213 crores that
was recovered in FY 2021-22. Post-COVID, the Commission
increased tariff by 6.19% and 2.31%, with no regulatory
assets. However, as of FY 2023-24, there was a cumulative
revenue deficit of Rs. 2924.53 crores as the tariff hikes were
insufficient to meet expenditure. The Commission
implemented various rationalisation measures to reduce the
regulatory asset to Rs. 2528 crores, which would be recovered
with carrying cost during the true-up for FY 2023-24 and
tariff determination of FY 2025-26. It also submitted that no
further regulatory asset has been crated in the tariff order
dated 01.06.2024 for ARR of FY 2024-25.
v. Kerala State Electricity Regulatory Commission has
submitted that till FY 2022-23, the regulatory asset is Rs.
7123 crores as per the Commission’s order dated 25.06.2022.
22
Against this, the average GPF balance estimated by the
Kerala State Electricity Board at the end of FY 2026-27 is
about Rs. 3500 crores, and the average surplus security
deposit at the end of FY 2026-27 is Rs. 285 crores.
Considering these funds available with the Kerala State
Electricity Board, the Commission decided to amortise the
balance gap of about Rs. 3350 crores during the control
period while avoiding tariff shock and financial burden to the
consumers, in the following manner: Rs. 850 crores each year
from FY 2022-23 to FY 2024-25, Rs. 500 crores in FY 2025-
26, and Rs. 300 crores in FY 2026-27.
vi. The Rajasthan Electricity Regulatory Commission has
submitted that as per its orders dated 31.03.2023 and
26.07.2024, the regulatory asset across the three distribution
companies in the state is Rs. 47,578 crores upto FY 2023-24
and Rs. 47,114 crores upto FY 2024-25. Various measures
have been taken for recovery of the accumulated regulatory
assets including financial support from the state government
and introduction of monthly fuel surcharge to account for
increasing power purchase costs. The Commission also noted
that decision regarding regulatory surcharge, tariff increase,
and adjustment of regulatory asset against revenue surplus
will be taken in the successive years. It has also submitted
that under the Draft RERC (Terms and Conditions for
Determination of Tariff) Regulations, 2025, Regulation 91
provides for the creation of a regulatory asset only in
exceptional circumstances under natural calamity
conditions. Even then, it shall not be more than 3% of the
23
approved ARR and it shall be liquidated with carrying costs
in maximum 3 equal yearly instalments. Existing regulatory
asset, along with the carrying costs, shall be liquidated in a
maximum of 7 equal yearly instalments. In case there is
surplus in any financial year, it shall be adjusted first against
regulatory assets. This is exactly what is prescribed in Rule
23 of the Electricity Rules made by the Central Government,
which we will refer to in further detail at a later stage.
vii. The Tamil Nadu Electricity Regulatory Commission submits
that the regulatory asset in the State of Tamil Nadu till FY
2021-22, including carrying cost, is estimated at Rs.
89,375.09 crores. The Commission submits that this is more
than 100% of the ARR, and hence a tariff-based liquidation
would not be feasible as it would excessively burden
consumers. Rather, the same must be recovered by
upgrading transmission infrastructure, reducing aggregate
technical and commercial (AT&C) losses, and sourcing low-
cost renewable energy sources. Essentially, the cost of
procurement must be lowered such that the revenue
requirement of the distribution company is on par with the
consumers’ paying capacity. It further submits that in the
true-up order for FY 2022-23, the Commission directed the
Tamil Nadu Generation and Distribution Corporation to seek
approval from the Government of Tamil Nadu to liquidate the
revenue gap till FY 2021-22 of Rs. 83,000 crores through
government resources. Based on the Government’s decision,
the Commission submits that it will finalise the strategy for
amortisation of the regulatory asset. It also submits that it
24
has endeavoured to not create any new regulatory asset from
FY 2022-23 by proposing a tariff increase in a socially
balanced manner.
5 (ii). Affidavits by State Governments.
25. Following is the gist of the affidavits filed by various State
Governments.
i. The State of Nagaland has filed an affidavit stating that it is
a bulk power customer and is allotted power by the
Government of India from generating stations within and
outside the state. The tariff for the same is determined by the
Central Electricity Regulatory Commission.
ii. The State of Odisha submitted that as per its communication
with the Odisha Electricity Regulatory Commission, the
Commission has never created a regulatory asset.
iii. The Government of Madhya Pradesh also filed its affidavit
through the Madhya Pradesh Power Management Co. Ltd.,
which has submitted that the State Commission has always
followed a cost-reflective tariff and has not created any
regulatory asset.
26. We would have expected the State Governments to take a
clear stand on the social justice obligations of the State in the
context of the power of the Regulatory Commissions to determine
tariff. The Regulatory Commissions are required to balance the
interplay of the obligations of the State to ensure access to
25
electricity on the one hand, and the right of the utilities to recover
cost-based expenses on the other. We are aware of the autonomy
that the Regulatory Commissions exercise in the context of tariff
determination, as well as of applicability of the National Tariff
Policy and Rules formulated by the Central Government on
regulatory asset. We were conscious of this aspect and the same is
reflected in our consideration.
6. Law Governing the Electricity Sector Prior to 2003.
27. The supply and use of electricity was originally governed
under the Indian Electricity Act, 1910, which provided the legal
framework for laying cables and other works. With independence
and industrialisation, the need for electricity in urban as well as
rural areas increased, leading to enactment of the Electricity
(Supply) Act, 1948 that mandated State Governments to constitute
separate State Electricity Boards that would be responsible for
arranging supply of electricity in each state and administering the
23
grid system. It also provided for a Central Electricity Authority
24
for planning and development of the national power system.
23
Hereinafter “CEA”.
24
Tata Power Co. Ltd. v. Reliance Energy Ltd. , (2009) 16 SCC 659, paras 67-71; BSES
Rajdhani Power Ltd. v. Delhi Electricity Regulatory Commission
, (2023) 4 SCC 788, paras 11-
13.
26
These were the regulators, but the governments exercised
substantial control on policy as well as management of the sector.
28. Over time it was noticed that these State Electricity Boards
were unable to respond to the rapidly growing demand of electricity
due to financial losses, low tariffs, lack of budgetary support from
25
the governments, or investments. Further, various problems
plagued the power sector, namely the lack of rational retail tariffs,
high level of cross-subsidies, poor planning and operation,
inadequate capacity, neglect of consumer interest, limited
involvement of the private sector’s skills and resources, and the
26
absence of an independent regulatory authority. This led to the
enactment of the Electricity Regulatory Commissions Act, 1998
with the objective of reforming the electricity sector by establishing
Central and State Electricity Regulatory Commissions,
rationalising electricity tariffs, transparent policies regarding
subsidies, and promoting efficient and environmentally benign
27
policies.
25
Statement of Objects and Reasons, Electricity Regulatory Commissions Act, 1998.
26
ibid.
27
The Preamble of this Act reads:
“ An Act to provide for the establishment of a Central Electricity Regulatory
Commission and State Electricity Regulatory Commissions, rationalization of
electricity tariff, transparent policies regarding subsidies, promotion of efficient and
environmentally benign policies and matters connected therewith or incidental
thereto . “
27
29. In the NCT of Delhi, the Delhi Electricity Reforms Act, 2000
was enacted to restructure the electricity industry by unbundling
generation, transmission and distribution, to increase avenues for
private sector participation, and to take measures conducive to the
development and management of the electricity industry in an
28
efficient, commercial, economic, and competitive manner.
7. Electricity Act, 2003.
30. The Electricity Act, 2003 was enacted by the Parliament as a
complete and comprehensive law for regulating the generation,
transmission, distribution, and use of electricity in India. The
Preamble of the Act reads:
“ An Act to consolidate the laws relating to generation,
transmission, distribution, trading and use of electricity and
generally for taking measures conducive to development of
electricity industry, promoting competition therein,
protecting interest of consumers and supply of electricity to
all areas, rationalization of electricity tariff, ensuring
transparent policies regarding subsidies, promotion of
efficient and environmentally benign policies, constitution of
Central Electricity Authority, Regulatory Commissions and
establishment of Appellate Tribunal and for matters
connected therewith or incidental thereto .”
28
BSES Rajdhani Power Ltd (supra), para 15. The Preamble of the Delhi Electricity Reform
Act, 2000 reads:
“ An Act to provide for the constitution of an Electricity Regulatory Commission,
restructuring of the electricity industry (rationalisation of generation, transmission,
distribution and supply of electricity), increasing avenues for participation of private
sector in the electricity industry and generally for taking measures conducive to the
development and management of the electricity industry in an efficient, commercial,
economic and competitive manner in the National Capital Territory of Delhi and for
matters connected therewith or incidental thereto .”
28
31. Further, the purpose of the enactment is explained in detail
in its Statement of Objects and Reasons, the relevant portions of
which are extracted hereinbelow:
“3. With the policy of encouraging private sector
participation in generation, transmission and distribution
and the objective of distancing the regulatory
responsibilities from the Government to the Regulatory
Commissions, the need for harmonising and rationalising
the provisions in the Indian Electricity Act, 1910, the
Electricity (Supply) Act, 1948 and the Electricity Regulatory
Commissions Act, 1998 in a new self-contained
comprehensive legislation arose. Accordingly it became
necessary to enact a new legislation for regulating the
electricity supply industry in the country which would
replace the existing laws, preserve its core features other
than those relating to the mandatory existence of the State
Electricity Board and the responsibilities of the State
Government and the State Electricity Board with respect to
regulating licensees. There is also need to provide for newer
concepts like power trading and open access. There is also
need to obviate the requirement of each State Government
to pass its own Reforms Act. The Bill has progressive
features and endeavours to strike the right balance given
the current realities of the power sector in India. It gives the
State enough flexibility to develop their power sector in the
manner they consider appropriate. The Electricity Bill, 2001
has been finalised after extensive discussions and
consultations with the States and all other stake holders
and experts.”
32. Through reading the Statement of Objects and Reasons as
well as the Preamble, the salient features of the Act are:
i. The Act is a comprehensive code to regulate the generation,
transmission, distribution, trading and use of electricity and
replaces the erstwhile 1910 Act, 1948 Act, and 1998 Act that
29
governed electricity supply and use;
29
Tata Power Co Ltd (supra), para 76.
29
ii. The State Electricity Boards are unbundled into separate
utilities for electricity generation, transmission, and
30
distribution, and private sector participation is encouraged
31
in these activities;
iii. The Act provides for development of the electricity sector
through coordinated efforts of the Central Government, State
Governments, and various statutory authorities and
regulators by institutionalising electricity policies and plans;
iv. While generation has been delicensed, the transmission,
32
distribution, and trading of electricity are licensed activities;
v. The Act provides for a price discovery mechanism through
tariff fixation;
vi. The Act entrusts the performance of regulatory and
adjudicatory functions, including licensing and tariff fixation,
to permanent, independent Regulatory Commissions that act
33
as expert and specialised bodies. It also enables dispute
resolution through arbitration in specified cases;
vii. The Act established the APTEL as a specialised appellate
34
forum;
viii. The Act provides for offences as well as their penalties.
30
PTC India Ltd. v. Central Electricity Regulatory Commission , (2010) 4 SCC 603, para 17.
31
Tata Power Co Ltd (supra), para 80; Hindustan Zinc Ltd. v. Rajasthan Electricity Regulatory
Commission , (2015) 12 SCC 611, para 29.
32
Tata Power Co. Ltd. (supra).
33
Tata Power Co Ltd (supra), para 78; PTC India Ltd (supra), para 17.
34
West Bengal Electricity Regulatory Commission v. CESC Ltd.
See , (2002) 8 SCC 715, para
102.
30
8. Provisions of the Electricity Act relating to determination
of Tariff.
33. Section 3 of the Electricity Act provides for the preparation,
publication, review, and revision of the National Electricity Policy
and tariff policy by the Central Government in consultation with
the State Governments and the CEA for development of the power
sector through optimal utilisation of resources. Sub-section (4)
also provides for the CEA to prepare a National Electricity Plan as
per the National Electricity Policy.
34. A distribution licensee is defined under Section 2(17) as a
licensee operating and maintaining a distribution system for
supplying electricity to consumers in its area of supply. Electricity
distribution is a licensed activity as per Section 12, and the license
is granted by the Regulatory Commission under Section 14. Part
VI of the Act deals with distribution of electricity – Sections 42
and 43 set out of the duties of a distribution licensee and open
access, Sections 45 and 46 provide for the power to recover charges
and expenditure for supply of electricity, Section 47 provides for
the power to require security, and Sections 48 and 49 empower the
distribution licensee to impose restrictions and enter into
agreements for supply of electricity.
31
35. The Electricity Act also lays down a regulatory mechanism as
follows: Section 2(4) defines “Appropriate Commission” as meaning
the Central, State, or Joint Electricity Regulatory Commission, as
the case may be. The Central Commission is constituted under
Section 76, its functions are stipulated under Section 79, and its
regulation-making powers are provided under Section 178.
Sections 80 and 81 deal with the Central Advisory Committee and
its objects.
35.1 Similarly, the State Commissions are constituted under
Section 82 and their functions are provided in Section 86, which
include both mandatory and advisory functions. The relevant
mandatory function for our purpose is under sub-section (1)(a),
which provides for tariff determination for retail supply of
electricity within the State. Sub-section (4) provides that the State
Commission shall be guided by the National Electricity Policy, tariff
policy, and National Electricity Plan formulated under Section 3.
The State Commission can also make regulations in exercise of its
powers under Section 181, including on the terms and conditions
for determination of tariff under Section 61 (sub-section (2)(zd)),
methodologies and procedures for calculating expected revenue
from tariff and charges under Section 62(5) (sub-section (2)(zf)), the
32
manner of making an application and fee payable under Section
64 (sub-section (2)(zg)), and modifications or conditions under
Section 64(3) (sub-section (zh)). Sections 87 and 88 deal with State
Advisory Committees and their objects.
35.2 The Joint Regulatory Commission is constituted under
Section 83, and its functions and powers are under sub-sections
(4) and (5).
35.3 Lastly, it is important to note that Section 142 empowers the
Commissions to punish for non-compliance of their directions, or
any provision of the Act or rules or regulations made thereunder.
36. The Central and State Governments are also given the power
to make rules under the Act, under Sections 176 and 180
respectively. Beyond rule-making, the Central and State
Governments can issue policy directions to the Central and State
Commissions respectively in matters involving public interest
under Sections 107 and 108. These directions “shall guide” the
35
Regulatory Commissions, but shall not be binding on them.
37. In exercise of their powers and functions, the Central and
State Commissions are required to determine tariff as per Part VII
of the Electricity Act. Section 61 lays down the guiding principles
35
Kerala State Electricity Board Ltd. v. Jhabua Power Ltd ., 2024 SCC OnLine SC 2819.
33
for the Commissions to specify the terms and conditions of tariff
determination, of which the following are relevant:
“ The Appropriate
Section 61. (Tariff regulations):
Commission shall, subject to the provisions of this Act,
specify the terms and conditions for the determination of
tariff, and in doing so, shall be guided by the following,
namely:-
*
(b) the generation, transmission, distribution and supply of
electricity are conducted on commercial principles;
(c) the factors which would encourage competition,
efficiency, economical use of the resources, good
performance and optimum investments;
(d) safeguarding of consumers' interest and at the same
time, recovery of the cost of electricity in a reasonable
manner;
(e) the principles rewarding efficiency in performance;
(f) multi year tariff principles;
(g) that the tariff progressively reflects the cost of supply of
electricity and also, reduces cross-subsidies in the manner
specified by the Appropriate Commission;
*
(i) the National Electricity Policy and tariff policy… ”
38. While these principles have a bearing on making the
regulations for tariff determination, tariff is fixed under Section 62,
inter alia, for retail supply of electricity. Sub-section (5) also
provides for compliance with procedures specified for calculating
expected revenues from tariff and charges that can be recovered.
Section 63 deals with tariff determination through bidding, and
Section 64 provides the procedure for application for tariff
determination. Section 65 mandates that if the State Government
requires the grant of subsidy to any class of consumers in tariff, it
34
shall pay the amount of such subsidy in advance to compensate
the person affected by the grant of subsidy.
9. Provisions of Act, Policies, Rules, Regulations, and Orders
having a bearing on creation of a Regulatory Asset.
9 (i). National Electricity Policy, 2005.
39. The Central Government notified the National Electricity
Policy under Section 3 of the Electricity Act on 12.02.2005, which
laid down guidelines for development of the power sector, providing
electricity supply to all areas, and protecting consumer and other
stakeholders’ interests keeping in view availability of energy
resources, technology, and energy security issues.
40. On 01.01.2006, the DERC issued a Public Awareness
Bulletin setting out the major components of ARR for Delhi’s
distribution companies as well as the approximate ratio of each
component in the tariff. Power purchase costs are 80% of the tariff,
operations and maintenance expenses are 9-10% of the tariff,
depreciation is 3-4%, return on capital employed is 6-7%, and
income tax is 0.5-1%.
35
9 (ii). National Tariff Policy, 2006 .
41. On 06.01.2006, the Central Government notified the National
Tariff Policy, 2006 under Section 3 of the Act. Clause 8.2.2 of the
Policy provides for the creation of a regulatory asset, as well as
certain restrictions on time-period and circumstances. It reads:
“ 8.2.2. The facility of a regulatory asset has been adopted by some
Regulatory Commissions in the past to limit tariff impact in a
particular year. This should be done only as exception, and subject to
the following guidelines:
a. The circumstances should be clearly defined through regulations,
and should only include natural causes or force majeure conditions.
Under business as usual conditions, the opening balances of
uncovered gap must be covered through transition financing
arrangement or capital restructuring;
b. Carrying cost of Regulatory Asset should be allowed to the utilities;
c. Recovery of Regulatory Asset should be time-bound and within a
period not exceeding three years at the most and preferably within
control period;
d. The use of the facility of Regulatory Asset should not be repetitive.
e. In cases where regulatory asset is proposed to be adopted, it
should be ensured that the return on equity should not become
unreasonably low in any year so that the capability of the licensee to
borrow is not adversely affected. ”
(emphasis supplied)
41.1 As stated above, Section 86(4) provides that the State
Commission shall be guided by the National Tariff Policy in
discharging its functions, and the Policy is also a guiding principle
for tariff determination as per Section 61(1)(i). This Court has held
that while the Policy does not bind the State Commission, it is a
36
material consideration that must guide tariff determination.
36
Tata Power Co. Ltd. v. Maharashtra Electricity Regulatory Commission
, (2023) 11 SCC 1,
para 122.
36
41.2 Nothing can be clearer than the mandate under Clause 8.2.2
of the National Tariff Policy, 2006. The real issue is to examine the
circumstances and the compelling reasons for the creation and
undue extension of the regulatory asset over a period of time,
which we will undertake in our Analysis.
9 (iii). DERC Tariff Determination Regulations, 2007 .
42. On 30.05.2007, the DERC framed the Tariff Determination
Regulations, 2007 for the first control period (FY 2007-2011),
under which Regulation 5.42 deals with regulatory asset. It
stipulates that at the time of truing up, if variations on account of
uncontrollable items like energy sales and power purchase costs
are large and it is not feasible to recover them in one year, the
Commission can create a regulatory asset as per Clause 8.2.2 of
the National Tariff Policy, 2006. Regulation 5.42 in fact
incorporates the National Tariff Policy and makes it a part of the
enforceable regime. The relevant portion is extracted below for
ready reference:
“ 5.42 Variations on account of uncontrollable items like energy sales
and power purchase cost shall be trued up. Truing-up shall be carried
out for each year based on the actual/audited information and
prudence check by the Commission;
Provided that if such variations are large, and it is not feasible to
recover in one year alone, the Commission may take a view to create
a regulatory asset, as per the guidelines provided in clause 8.2.2 of
the National Tariff Policy. ”
(emphasis supplied)
37
9 (iv). DERC Statutory Advice dated 15.12.2010 .
43. On 15.12.2010, the DERC issued a statutory advice to the
Government of NCT of Delhi regarding the financial position of
BRPL and BYPL and whether they are able to meet expenses from
tariff revenue and return on equity. In this letter, the DERC stated
that the tariffs for FY 2008-09 to FY 2010-11 are not cost-reflective
and they do not account for the increase in power purchase costs
during this period, which constituted more than 80% of the tariff.
While generating companies recover the increase in cost from the
distribution companies, the latter are unable to recover the same
from consumers under the present tariff. Distribution licensees
resorted to extensive borrowing to sustain operations, resulting in
substantial interest costs and a precarious financial position. The
DERC noted that this is against consumer interests as these costs
must ultimately be recovered from consumers with carrying cost,
and would burden future consumers with previously incurred
costs. The relevant portions of the DERC’s letter are extracted
below:
“ 16. The Commission has analysed the ability of the
distribution licensees to meet their expenses and has
considered the revenue from retail sale of electricity at the
tariffs determined by the Commission. These have been
compared with various heads of expenditure i.e. power
purchase cost, operating expenses including interest and
38
depreciation, to determine the extent of surplus available
towards the return on equity allowed by the Commission.
18. Power purchase cost should not be exceeding 80%
which was in the range of 73-80% in the year 2008-09, 77-
98% in the year 2009-10 and 113-135% in the first six
months of 2010-11.
20. Power purchase and revenue recovered from sale of
energy are not within the control of the distribution
licensees. Power purchase cost is mostly dependent upon
the fuel cost which is market driven. The generating
company recovers the increase in the fuel cost and other
variable expenses every month from the distribution
licensees, who in turn are not able to recover timely from the
consumers under the present dispensation. Thus, the
operations of the distribution companies are dependent on
borrowings over a period of 18-24 months which entails
substantial interest cost. This, in any case, is detrimental to
consumer Interest as all power purchase costs whether
short term or long term are passed through to the consumers
(and recovered from the consumers along with the carrying
cost).
*
Conclusion
The Commission is of the view that the tariff during previous
years has not been cost effective. The distribution licensees
have had to resort to extensive borrowing to sustain their
operations.
*
(3) Accumulation of Revenue gaps beyond sustainable
levels
Analysis of the Audited Accounts of the distribution
licensees in Tables 1-3 would indicate that there is shortfall
in the years 2009-10 and 2010-11 beyond sustainable
levels. Thus, it would be quite obvious that in the absence
of tariff revision there is a growing revenue gap which is to
be funded out of borrowings which are increasing from year
to year.
*
(5) Power purchase cost/quantum
Analysis carried out for the years 2008-09 and 2009-10 in
Tables 1-4 would indicate that there has been a steep
increase in the power purchase cost. These issues would
get addressed while taking the ground realities into
consideration and estimating the quantum and the cost
based upon the current data based upon the latest bills
available from the generating companies, power purchase
rates in the Power Exchange, Ul and bilateral contracts.
”
39
9 (v). Ministry of Power’s Letter to the APTEL.
44. On 21.01.2011, the Minister of Power issued a letter to the
APTEL to take suo motu cognisance and issue necessary directions
under Section 121 of the Electricity Act regarding periodical tariff
revisions for improving the long-term financial health and viability
of the electricity sector.
9 (vi). APTEL’s Order dated 11.11.2011 .
45. Pursuant to this letter, the APTEL passed an order dated
37
11.11.2011 wherein it issued various directions to Regulatory
Commissions regarding timely tariff determination, truing up, and
creation, continuation, and recovery of the regulatory asset. The
directions issued by the APTEL are as follows:
“ 65. In view of the analysis and discussion made above, we deem it
fit to issue the following directions to the State Commissions:
(i) Every State Commission has to ensure that Annual
Performance Review, true-up of past expenses and Annual
Revenue Requirement and tariff determination is conducted
year to year basis as per the time schedule specified in the
Regulations.
(ii) It should be the endeavour of every State Commission to ensure
that the tariff for the financial year is decided before 1st April
of the tariff year. For example, the ARR & tariff for the financial
year 2011- 12 should be decided before 1st April, 2011. The
State Commission could consider making the tariff applicable
only till the end of the financial year so that the licensees
remain vigilant to follow the time schedule for filing of the
application for determination of ARR/tariff.
(iii) In the event of delay in filing of the ARR, truingup and Annual
Performance Review, one month beyond the scheduled date of
37
In O.P. No. 1/2011, order dated 11.11.2011.
40
submission of the petition, the State Commission must initiate
suo-moto proceedings for tariff determination in accordance
with Section 64 of the Act read with clause 8.1 (7) of the Tariff
Policy.
(iv) In determination of ARR/tariff, the revenue gaps ought not to
be left and Regulatory Asset should not be created as a matter
of course except where it is justifiable, in accordance with the
Tariff Policy and the Regulations. The recovery of the
Regulatory Asset should be time bound and within a period not
exceeding three years at the most and preferably within
Control Period. Carrying cost of the Regulatory Asset should be
allowed to the utilities in the ARR of the year in which the
Regulatory Assets are created to avoid problem of cash flow to
the distribution licensee.
(v) Truing up should be carried out regularly and preferably every
year. For example, truing up for the financial year 2009-10
should be carried out along with the ARR and tariff
determination for the financial year 2011-12.
(vi) Fuel and Power Purchase cost is a major expense of the
distribution Company which is uncontrollable. Every State
Commission must have in place a mechanism for Fuel and
Power Purchase cost in terms of Section 62 (4) of the Act. The
Fuel and Power Purchase cost adjustment should preferably be
on monthly basis on the lines of the Central Commission’s
Regulations for the generating companies but in no case
exceeding a quarter. Any State Commission which does not
already have such formula/mechanism in place must within 6
months of the date of this order must put in place such formula/
mechanism.
66. We direct all the State Commissions to follow these directions
scrupulously, and send the periodical reports by 1st June of the
relevant financial year about the compliance of these directions to the
Secretary, Forum of Regulators, who in turn will send the status
report to this Tribunal and also place it on its website .”
9 (vii). DERC Tariff Determination Regulations, 2011.
46. The DERC then issued the Tariff Determination Regulations,
2011 for the second control period (FY 2012-2015, later extended
till 31.03.2017), under which Regulation 5.40 is relevant and deals
with regulatory asset. Similar to Regulation 5.42 of the Tariff
41
Determination Regulations, 2007, it provides for creation of a
regulatory asset when the variations at the truing up stage are
large and cannot be recovered in one year. Further, the regulatory
asset must be created as per the guidelines in Clause 8.2.2 of the
National Tariff Policy, 2006. The Regulation reads:
“ 5.40 Truing-up shall be carried out in accordance with
Regulation 4.21, for each year based on the actual/audited
information and prudence check by the Commission;
Provided that if such variations are large, and it is not
feasible to recover in one year alone, the Commission may
take a view to create a regulatory asset, as per the
guidelines provided in clause 8.2.2 of the National Tariff
Policy.
Provided further that under business as usual conditions,
the Commission, to ensure tariff stability, may include the
opening balances of uncovered gap / trued-up costs in the
subsequent Control Period’s ARR instead of including in the
year succeeding the relevant year of the control period after
providing for transition financing arrangement or capital
restructuring. ”
9 (viii). DERC’s Tariff Order dated 26.08.2011 (FY 2011-12) .
47. The DERC also passed an order dated 26.08.2011 wherein it
determined the ARR for FY 2011-12 and the true-up for FY 2008-
2010. In this order, it increased the tariff by 22% across the board
for all consumer categories and also introduced a fuel price
adjustment charge.
42
9 (ix). DERC’s MYT Order dated 13.07.2012 (FY 2012-15) .
48. In its subsequent MYT order dated 13.07.2012 determining
ARR for FY 2012-2015 and true-up for FY 2010-11, the DERC
approved tariff increase of 23%, introduced the DRS @ 8%, and the
PPAC. The fuel price adjustment charge was absorbed into these.
9 (x). DERC’s Statutory Advice dated 01.02.2013.
49. On 01.02.2013, the DERC issued another statutory advice to
the Government of NCT of Delhi, wherein it noted that the revenue
gap was Rs. 19,505.04 crores, including carrying costs, across
BRPL, BYPL, and TPDDL since FY 2009-10. The DERC also
specified various measures taken to recover the revenue gap,
including the 23% tariff hike w.e.f. 01.07.2012 and the DRS of 8%,
but that these were insufficient. In this light, the DERC
recommended that the Government of NCT of Delhi may take steps
to ensure that benefits of Central Government sponsored schemes,
direct subsidies from state governments, and additional budgetary
support are extended to the distribution licensees. The relevant
recommendations of the DERC to the Government of NCT are
extracted below:
“14. Recommendations:-
*
43
i) …The Commission recommends that Govt. of NCT of Delhi
may take urgent steps so that the benefits of various Central
Government sponsored schemes are extended to the Delhi
distribution utilities and, in tum, to the electricity consumers
in Delhi. Unless this is done, tariffs in Delhi could become
unsustainable, especially when compared to other States in
the country where State owned utilities not only avail the
benefits of the centrally sponsored schemes but also avail
direct subsidies from the State Governments as well as
additional budgetary support for lower tariff levels.
ii) In case of APDRP, R-APDRP and JNNURM schemes of the
Central Govt., the view of the Govt. been that privately
managed distribution entities should not be allowed to avail
the benefits of these programmes. The Commission is of the
view that denial of the benefits of these programmes to the
distribution entities of Delhi does not affect the
managements of these distribution companies but, in fact,
denies the benefit of the schemes to the consumers of
electricity of Delhi who are as a result required to pay higher
tariffs than are paid by the electricity consumers in other
States which avail of the benefits of these schemes. Thus,
the Govt. of NCT of Delhi may take up with the Ministry of
Power that these schemes are availed of by the Delhi
distribution utilities for the benefit of the consumers in the
NCT of Delhi.
iii) The financial bailout package introduced by the Central
Govt. for financial restructuring of State distribution entities
with certain conditions including support from the State
Govt. is also being denied to the distribution entities in
Delhi. Here again, this view does not impact the private
managements of these companies but has a direct impact
on their revenue requirements and consequently, the tariff
required to be paid by electricity consumers in the city. The
Govt. of NCT of Delhi may take up with the Ministry of Power
to sanction the bail-out package for the DISCOMs of Delhi.
This would be the single most important measure for
deferring the incidence of high levels of past revenue gaps
on the tariff determination process. ”
9 (xi). DERC’s Tariff Order dated 31.07.2013 (FY 2013-14).
50. In the next tariff order dated 31.07.2013 to determine ARR
for FY 2013-14 and true-up for FY 2011-12, the DERC increased
44
the tariff by 5% and continued the existing DRS @ 8% over and
above the revised tariff. It also allowed carrying cost on the
regulatory asset to all distribution companies. At this stage, the
regulatory asset amounted to Rs. 8060 crores across the BSES
Discoms and Rs. 3370 crores for TPDDL.
9 (xii). APTEL’s Order dated 14.11.2013.
38
51. The APTEL also passed the order dated 14.11.2013 ,
wherein it reiterated its direction to the DERC to provide for
recovery of the regulatory asset in 3 years as per its order dated
11.11.2011 and to implement the judgments of the APTEL. The
DERC has filed civil appeals against this order, which have been
dismissed by this Court’s order dated 01.12.2021 as there was no
39
substantial question of law. This Court also directed the DERC
to implement the issues decided by the APTEL, if not already
complied, within a period of 3 months and to file a compliance
40
report in 2 weeks thereafter. The relevant portion of the APTEL
order is as follows:
“ 37. As regards recovery of the Regulatory
assets/amortization schedule and fuel and power purchase
adjustment mechanism, this Tribunal in OP No.1 of 2011
38
In O.P. Nos. 1 and 2/2012, order dated 14.11.2013.
39
In C.A. No. 1854-1855/2014, order dated 01.12.2021.
40
ibid.
45
dated 11.2011 has given the following directions to the
State Commission…
38. In view of the above, we direct the State Commission to
take immediate steps for recovery of the admitted revenue
gap and decide amortization schedule and also ensure that
the Fuel and Power Purchase costs are passed on regularly
and effectively as per the above directions of this Tribunal
to avert the problems of cash flow experienced by the
Petitioners which may come in the way of smooth operation
of the distribution system and meeting the requirements of
electricity of the consumers in the national capital in a
reliable manner if not remedied in time.
39. In view of the categorical stand taken by the Delhi
Commission now, it is enough for us to direct the Delhi
Commission to implement the directions of this Tribunal
given in the decisions referred to above and pass an order
in terms of those directions in future .”
9 (xiii). APTEL’s Order dated 11.03.2014 .
52. The above-referred tariff order dated 31.07.2013 was
appealed before the APTEL by BRPL in Appeal No. 266/2013 and
by BYPL in Appeal No. 265/2013 on the ground that the tariff
order did not provide a roadmap for recovery of the regulatory
asset. In these appeals, BRPL and BYPL filed IA 365/2013 and
364/2013 respectively for an order to increase the DRS to meet
carrying costs upto 31.03.2014, to repay one-third of the principal
component of the regulatory asset, and to provide a plan for
completely recovery of the regulatory asset in 3 years as per the
National Tariff Policy, 2006.
53. The APTEL rejected the prayer for liquidating the regulatory
asset in 3 years by order dated 11.03.2014, which has been
46
appealed by BRPL and BYPL in the present civil appeals. However,
the APTEL directed the DERC to prepare a roadmap for liquidation
of the regulatory asset, both principal amount and carrying cost,
keeping in mind the interests of consumers and the distribution
licensees.
54. In the present civil appeals (C.A. No. 4010 and 4013/2014)
against the APTEL’s order dated 11.03.2014, as well as writ
petitions by BRPL and BYPL, this Court by order dated 26.03.2014
directed the DERC to submit a roadmap for liquidation of the
regulatory asset and also directed BRPL and BYPL to pay the
current dues to the generating and transmission companies. In
compliance with this order, the DERC submitted a liquidation
schedule on 01.05.2014 before this Court, in which it proposed to
liquidate the regulatory asset including carrying cost in 6-7 years
(by FY 2020-21) by taking the average growth rate of distribution
companies at 15%.
9 (xiv). National Tariff Policy, 2016 .
55. On 28.01.2016, a revised National Tariff Policy, 2016 was
notified by the Central Government, wherein Clause 8.2.2 deals
with regulatory asset. While the other conditions for creation of a
regulatory asset are similar to the National Tariff Policy, 2006, the
47
time-period for recovery was increased from 3 to 7 years. The
relevant portion is extracted below:
“ 8.2.2 The facility of a regulatory asset has been adopted
by some Regulatory Commissions in the past to limit tariff
impact in a particular year. This should be done only as a
very rare exception in case of natural calamity or force
majeure conditions and subject to the following:
a. Under business as usual conditions, no creation of
Regulatory Assets shall be allowed;
b. Recovery of outstanding Regulatory Assets along with
carrying cost of Regulatory Assets should be time bound
and within a period not exceeding seven years. The State
Commission may specify the trajectory for the same. ”
(emphasis supplied)
9 (xv). DERC Tariff Determination Regulations, 2017 .
56. The DERC then framed the DERC (Terms and Conditions for
Determination of Tariff) Regulations, 2017, which contains a
separate section on regulatory asset. Regulation 154 provides that
an accumulated revenue gap approved by the Commission in the
relevant tariff order shall be treated as a regulatory asset, and that
such revenue gap shall be computed on the basis of excess of ARR
over revenue approved after truing up for the relevant year.
Regulation 155 provides for carrying cost, and Regulation 156
deals with the how the regulatory asset must be shown in the
books of accounts. On a perusal of these regulations, it is clear
that Clause 8.2.2 of the National Tariff Policy, 2016 has not been
48
referred, nor are there any conditions on when a regulatory asset
can be created, its quantum, and the time-period for its recovery.
9 (xvi). Ministry of Power’s Affidavit dated 10.08.2022 .
57. On 10.08.2022, the Ministry of Power, Union of India
submitted an affidavit before this Court in the present writ
petitions. It submitted that while the DERC created the regulatory
asset as an exception, it is now being continued in a manner
inconsistent with the Electricity Act and its larger objective of a
healthy and economical electricity sector. The affidavit also relied
41
on the APTEL’s judgment dated 11.11.2011 where it was held
that the regulatory asset must be recovered in a time-bound
manner within 3 years, and preferably within the control period.
The Ministry of Power prayed that this Court direct DERC to devise
a roadmap or plan for amortisation of the regulatory asset in a
time-bound manner as per the National Tariff Policies, to direct the
State Commissions to determine cost-reflective tariffs, and that no
new regulatory asset be created except as per the National Tariff
Policy, 2016. The relevant portions of the affidavit are extracted
below:
41
In O.P. No. 1/2011 (supra).
49
“ 10. That creation of Regulatory Asset essentially requires
deferment of admitted cost due to a Distribution Company
to a future period in order to avoid tariff shock. This concept
was adopted by the Respondent No. 2 as an exception,
however, gradually the exercise of creation of Regulatory
Asset seems to have become a trend and is now being done
on year to year basis. Such an approach is not only
inconsistent with the Act but is also irreconcilable with the
larger objective to have a healthy and economical electricity
sector in the country.
11. That in order to address this situation, the Answering
Respondent in compliance with section 3 of the Act, notified
the National Tariff Policy ("NTP, 2006") on 06.01.2006,
wherein the Answering Respondent had directed that the
'Regulatory Asset' should not be created under usual
business condition and the recovery of Regulatory Asset
should be timebound, within a period of three years.
Following are the relevant extracts of the NTP, 2006…
12. That despite the above mandate, it was observed that
the SERCs have failed/or are reluctant to conduct the tariff
determination exercise in consistency with the Act. In this
respect, on 21.01.2011, the Answering Respondent issued
a Letter to the Appellate Tribunal for Electricity ("Appellate
Tribunal"), inter alia, requesting the Appellate Tribunal to
issue necessary directions to the SERCs to revise the tariff
periodically for improving the financial health and long-term
viability of the electricity sector, particularly for distribution
utilities. Basis the letter issued by the Answering
Respondent, the Appellate Tribunal initiated a Suo- Moto
proceeding being O.P. No. 01 of 2011 wherein, various
issues with respect to power of SERCs to determine tariff
were discussed…
14. That the Answering Respondent on 28.01.2016 issued
the National Tariff Policy, 2016 ("NTP, 2016"). Clause 8.2.2
of NTP, 2016, provided that the SERCs cannot continue to
delay the liquidation of Regulatory Assets and the recovery
of outstanding Regulatory Assets along with the Carrying
Cost should be done in a time bound manner not exceeding
7 years…
15. That it is evident from the above that Answering
Respondent has taken steps and mandated that the SERCs
(including the Respondent No.2) cannot create Regulatory
Asset as a matter of routine and the Regulatory Asset and
directed the SERCs to recover the outstanding Regulatory
Assets in a time bound manner…
18. That in view of the above, it is submitted that the
creation of a Regulatory Asset' with no mechanism for
recovery is contrary to the Act's legislative intent, as it
amounts to artificially keeping the tariff low while
50
prejudicing the efficient recovery of the tariff. Answering
Respondent vide the statutory policies and various
communications have directed the Commissions to refrain
from creating Regulatory Asset and to amortise the
Regulatory Asset within a time bound manner. However, as
evident in the present case, the Respondent No. 2 has not
acted in the compliance of the Act, Statutory policies issued
by the Answering Respondent and the Judgments/Order of
the Appellate Tribunal and deferred the recovery of
recognised revenue gap for 17 years by creating the
Regulatory Asset.
19. That it is therefore submitted that this Hon'ble Court
may be pleased to direct the Respondent No. 2 to devise a
roadmap/plan to amortise the Regulatory Asset in a time-
bound manner as mandated under the Tariff Policies
notified by the Answering Respondent or any other
methodology as this Hon'ble Court may deem fit in the
present situation. Since such problem is also observed in
other State Commissions also, Hon'ble Court may also be
pleased to direct all State Commission for determination of
cost reflective tariff and no new regulatory assets be created
as stipulated in the Tariff Policy 2016. State Commission
may also be directed to devise a roadmap/plan to amortise
the Regulatory Asset in a time-bound manner as mandated
under the Tariff Policies notified by the Answering
Respondent. ”
9 (xvii). Ministry of Power’s Affidavit dated 12.12.2022.
58. In another affidavit dated 12.12.2022, the Ministry of Power
submitted that the LPS fixed by the State Commissions was 18%,
which is “usurious” as bank lending rates are 6-7%. This higher
LPS means that distribution companies bear a heavy burden in
case of delayed payments, which is subsequently passed on to
consumers. Hence, LPS must be linked to the Bank Lending Rate
to make it reasonable. Though this issue does not directly arise for
our consideration, we are aware that it has a bearing on the tariff,
51
if not for the present but in future. Eventually, the burden is
shifted on the consumer. The Ministry also submits that taking
into account these concerns, it has notified the Electricity (LPS)
Rules, 2022. The relevant portions of the affidavit are extracted
below:
“ In the absence of any Rules or directions with regard to the
specific rates for Late Payment Surcharge (LPS), the CERC
and SERCS notified their respective Tariff Regulations from
time to time wherein different rates of the LPS were
specified and which were exorbitant- as high as 18 percent-
whereas Banks are charging an interest of only 6 to 7
percent on their loans. The extortionate rate of LPS lead to
higher cost of electricity for the common man; and a heavy
burden on the distribution companies putting them virtually
into a debt trap. ”
9 (xviii). Electricity (Amendment) Rules, 2024 introducing
Rule 23.
59. On 10.01.2024, the Central Government notified the
Electricity (Amendment) Rules, 2024 by which it inserted Rule 23,
which deals with regulatory asset, in the Electricity Rules, 2005.
This was in exercise of its rule-making powers under Section 176
of the Electricity Act. Rule 23 prescribes as a first principle that
tariff shall be cost-reflective and that there shall not be any gap
between the ARR and the estimated revenue from approved tariff.
The only exception to this rule is natural calamity conditions. Four
conditions are formulated for the creation, management, and
52
liquidation of a regulatory asset under Rule 23: First, the
regulatory asset shall not be more than 3% of the ARR. Second,
the revenue gap shall be liquidated within 3 years. Third, the
existing regulatory assets shall be liquidated within 7 years.
Fourth, the regulatory asset will have carrying cost as prescribed
under the Rules. We will deal with Rule 23 in more detail at a later
stage.
9 (xix). DERC’s Order dated 19.07.2024 (true-up till FY 2020-
21) .
60. Finally, in its orders dated 19.07.2024 for truing-up till FY
2020-21, the DERC implemented various decisions of the APTEL
and this Court. Pursuant to this, the regulatory asset including
carrying costs is as follows: Rs. 12,993.53 crores for BRPL, Rs.
8419.14 crores for BYPL, and Rs. 5,787.70 crores for TPDDL. This
amounts to Rs. 27,200.37 crores across all three distribution
companies until the end of FY 2020-21.
10. Analysis.
61. We are considering the legal position and status of a
regulatory asset, the rights and liabilities of stakeholders,
consequences of regulatory failure to manage the regulatory asset
53
as a reasonable measure, and the appellate and review powers of
the APTEL and this Court to ensure accountability and restitution.
10 (i). Electricity is a public good and is regulated under the
Act.
62. Since electricity is a material resource, the State has a public
interest in ensuring that its ownership and control is so distributed
as best to subserve the common good. Therefore, the public policy
that governs purchase, sale and distribution of electricity is not
based on market forces of demand and supply but by regulation
through statute. The Electricity Act 2003, the policies and plan(s)
formulated under Section 3 of the Act, rules made by the Central
and State Governments, and more importantly, the regulations
formulated by the Regulatory Commissions, followed by the
precedents laid down by the APTEL and this Court form the legal
regime, by which tariff is determined, restructured, and reviewed
from time to time.
10 (ii). Tariff determination is governed by the Act, which
entrusts this function to independent Regulatory
Commissions.
63. The Electricity Act unbundled generation, distribution and
transmission of electricity, and at the same time, institutionalised
54
important functions such as grant of licenses and determination
of tariff through the establishment of Regulatory Commissions.
These Regulatory Commissions have autonomy as provided in the
statute, expertise through human resource, continuation through
seal and succession, plurality by composition, and accountability
by transparency. With the powers that they are granted, coupled
with autonomy that they enjoy, these Commissions are the
primary duty bearers to implement the provisions of the Act.
63.1 Tariff determination is the exclusive province of the
Regulatory Commissions. In performance of their functions, the
Central and State Electricity Regulatory Commissions determine
tariff for supply of electricity by generating companies to
distribution licensees, for transmission, wheeling, and also for
42
Section 61 provides the guiding
retail sale of electricity.
42
Section 62 of the Electricity Act, which reads:
“ Section 62. (Determination of tariff): ---
(1) The Appropriate Commission shall determine the tariff in accordance with the
provisions of this Act for –
(a) supply of electricity by a generating company to a distribution licensee:
Provided that the Appropriate Commission may, in case of shortage of
supply of electricity, fix the minimum and maximum ceiling of tariff for sale or
purchase of electricity in pursuance of an agreement, entered into between a
generating company and a licensee or between licensees, for a period not
exceeding one year to ensure reasonable prices of electricity;
(b) transmission of electricity;
(c) wheeling of electricity;
(d) retail sale of electricity:
Provided that in case of distribution of electricity in the same area by two or
more distribution licensees, the Appropriate Commission may, for promoting
competition among distribution licensees, fix only maximum ceiling of tariff for retail
sale of electricity .”
55
principles for good governance for development, sale, and
distribution of power and also emphasises the overarching
principle of subserving the interests of consumers. The journey as
well as the destination of tariff determination indicates that the
Commissions shall adopt commercial principles, encourage
competition, promote efficiency, use resources economically,
perform efficiently and optimise investments. The purpose of
adopting such measures is to “ safeguard and protect the interest of
the consumers ”. Section 61 also recognises the vulnerability of the
electricity sector to undue political posturing, and therefore
emphasises that the Commission shall ensure that “ the tariff
progressively reflects the cost of supply of electricity and also,
Sections 79 sets out the functions of the Central Commission. The relevant portion is as
follows:
“ Section 79. (Functions of Central Commission): ---
(1) The Central Commission shall discharge the following functions, namely:-
(a) to regulate the tariff of generating companies owned or controlled by the Central
Government;
(b) to regulate the tariff of generating companies other than those owned or
controlled by the Central Government specified in clause (a), if such generating
companies enter into or otherwise have a composite scheme for generation and sale
of electricity in more than one State;
*
(d) to determine tariff for inter-State transmission of electricity;… ”
Section 86 sets out the functions of the State Commission. The relevant portion is as follows:
“
Section 86. (Functions of State Commission): ---
(1) The State Commission shall discharge the following functions, namely:-
(a) determine the tariff for generation, supply, transmission and wheeling of
electricity, wholesale, bulk or retail, as the case may be, within the State:
(b) regulate electricity purchase and procurement process of distribution licensees
including the price at which electricity shall be procured from the generating
companies or licensees or from other sources through agreements for purchase of
power for distribution and supply within the State; …”
56
43
reduce cross-subsidies ”. In this endeavour the National
Electricity Policy and the National Tariff Policy shall also be guiding
44
factors.
10 (iii). Collaborative effort of the Regulatory Commissions
to balance social justice obligations with efficiency.
64. The Electricity Act contemplates multiple stakeholders, in
other words, a plurality of collaborators – the Central Government,
the State Governments, Regulatory Commissions, the Appellate
Tribunal, statutory policy makers, and the utilities. These
authorities collaborate to ensure that the purpose of the Act is
subserved and, in this endeavour, the Regulatory Commissions
share the social justice obligations of the State. Since electricity is
45
a public good, Regulatory Commissions must undertake joint
and collaborative efforts with the other authorities to enable access
46
to electricity across urban and rural areas and affordability
47
through rationalisation of tariffs . The statutory authorities must
work in cohesion towards a common goal of ensuring supply of
electricity across regions and terrains, and cheaper and affordable
43
Section 61(1)(g) of the Electricity Act.
44
Section 61(1)(i) of the Electricity Act.
45
See K.C. Ninan v. Kerala State Electricity Board , (2023) 14 SCC 431, para 93.
46
See Preamble of the Electricity Act; Section 6 of the Electricity Act that places the
responsibility of rural electrification jointly on the Central and State Governments.
47
See Preamble of the Electricity Act.
57
supply of electricity to those sections of society who cannot afford
48
it. At the same time the Regulatory Commissions maintain their
independence and autonomy and ensure that the final decision
with respect to fixation of tariff will be that of the Regulatory
Commissions alone.
10 (iv). Tariff fixation takes into account multiple variables
and requires flexibility. Regulatory asset is a measure
adopted during tariff fixation that recognises right of
recovery .
65. A regulatory asset is adopted as a measure by the Regulatory
Commissions when the gap between the revenue required by the
distribution company to meet its costs and expenditure and the
actual revenue realised through immediate tariff is so high that it
would not only prejudice the consumer but lead to what is called
a tariff shock. By adopting such a measure, the Commission
liquidates the revenue required by the utility through future tariff
48
Paul Craig, UK, EU and Global Administrative Law: Foundations and Challenges (Cambridge
University Press, 2015), 305-306. The relevant portion is extracted hereinbelow:
“ Regulation as an enterprise conceives regulators as governments in miniature, in
which efficiency and distributive goals are both legitimate regulatory concerns, and
anyway are inseparable'. The regulatory goals may include social cohesion, and
this function may be shared with government Regulatory independence is not
regarded as central, because regulation is conceived as a collaborative project
between agencies and other organs of government. Regulation in this mould is seen
as delegation by government of its inherent powers to act in the public interest. The
emphasis is on different actors working towards a common enterprise, with
accountability conceived primarily in terms of public law mechanisms such as
proceduralization, judicial review and parliamentary scrutiny. For Prosser this
model has the virtue of rendering it easier to understand in areas where regulation
has a social rationale, and is not driven by considerations of economic efficiency. ”
58
determinations. ‘Revenue assets’ are costs incurred by power
distribution companies that are recognised as recoverable from
consumers in future tariffs but are not immediately recovered in
the current bills.
65.1 The measure adopted by the Commissions in creating a
‘regulatory asset’ can also be seen as an accounting treatment.
Regulatory assets are treated as assets in the balance sheet and
are liquidated over a defined period of time through tariff
adjustments or government subsidies. The regulatory asset is a
cost incurred by the utility that the Regulatory Commission allows
to be deferred on the balance sheet instead of being immediately
expensed. It enables the distribution company to utilise the
‘recognition’ of a regulatory asset to obtain bridge funds from
bankers and the financial institutions as they have the
confirmation that the said amount will be recovered in the ensuing
financial years.
10 (v). Factors leading to an unmanageable regulatory asset,
and consequent ‘regulatory failure’ .
66. While determining tariff, Regulatory Commissions have to
deal with situations where there could be a sudden increase in the
fuel cost, infrastructure investments, or some extraordinary
59
expenditure. Further, lack of discipline followed by delays in filing
the ARR leads to uncertainties. Equally, not conducting quick and
effective truing up multiplies the problem of ascertaining the
actual cost incurred. The failure to file ARR in time and the
Regulatory Commissions not invoking their suo motu powers to
rectify the same are not addressed. There is a lack of accountability
here. Further, even though Section 65 provisions that State
Governments shall pay in advance the subsidy to subserve social
justice obligations, it is alleged that such payments are not made
in time. The decisions taken by the Regulatory Commissions,
which were considered in appeal by the APTEL and this Court, give
a clear impression that the Regulatory Commission is not able to
take firm decisions. Instead of taking strong decisions on the basis
of the statutory mandate, we see instances where the Regulatory
Commissions manage and manoeuvre to arrive at a tariff by
creating regulatory assets over and above all permissible limits.
This is where the problem lies. Though the Electricity Act envisages
49
functional autonomy for Regulatory Commissions and the
statutory scheme is complete in all respects, the decisions taken
by the Commissions, many a time, have not inspired confidence of
49
Transmission Corporation of Andhra Pradesh Ltd. v. Sai Renewable Power (P) Ltd.
See ,
(2011) 11 SCC 34, para 59; Kerala SEB Ltd. (supra), paras 16 and 17.
60
independence and autonomy. The reasons are not difficult to
conceive as there is an issue about the appointment process. The
assertion of independence, however, comes through individual
volition and that is where the mandate of transparency leads to
accountability. The decisions taken by the Commission, rather the
Regulatory Commissioners, are subject to scrutiny in the appellate
and the review jurisdiction of the APTEL and thereafter by the
Supreme Court. We have dealt with this issue in more detail while
considering accountability of the Regulatory Commissions and
powers of the APTEL. All these factors give rise to a situation where
the tariff for the subsequent years has to be substantially
increased to meet the ARR of the previous years.
66.1 A Regulatory Commission’s power to create a regulatory asset
is part of the tariff fixation process, as long as it is in reasonable
measure. However, in an egregious situation where the regulatory
asset has grown beyond proportion and is also extended from time-
to-time inefficiently, there is a compelling need to deal with it. In
this context, the Regulatory Commissions have twin obligations:
first , the Commission must enable an efficient and effective
recovery of the regulatory asset by the utility, and second , more
importantly, it must manage the regulatory asset in a manner that
61
does not transgress the principles that inform and govern tariff
determination. The regulatory asset cannot be permitted to balloon
into such proportions or continued for such periods, year after
year, that the governance of the sector is set in peril, affecting the
rights of the utilities and at the same time jeopardising the
consumer interest, who eventually end up bearing the burden.
Creation, management and dissolution of regulatory assets are
subject to law and regulation. In performance of these duties, the
orders of the Regulatory Commissions are subject to the orders,
instructions, and directions of the APTEL issued in exercise of its
statutory powers. When they fail to comply with these statutory
and other requirements, one can infer regulatory failure.
10 (vi). Law that governs creation, continuation and
liquidation of regulatory asset .
67. In the context of creation, management and liquidation of a
regulatory asset, the Regulatory Commissions are bound by the
mandate of the Electricity Act, the National Electricity Policy, the
National Tariff Policy, the Electricity Rules, the Tariff
Determination Regulations applicable at the relevant period, and
the precedents of the APTEL. We have already indicated that the
Central Government recently notified the Electricity (Amendment)
62
Rules, 2024 by which it inserted Rule 23 that deals with regulatory
asset. Prior to the notification, the Central Government elicited
comments from various statutory authorities, including the CEA,
the Central and State Commissions, the State Governments,
generating and distribution utilities, etc. The reason for
introduction of this rule is evident from the circulation of the Draft
Rules for stakeholder comments, wherein the Central Government
has expressed the need for a statutory rule on the conditions for
creation and management of a regulatory asset as follows:
“ 3. In order to remove difficulties/challenges faced by various entities
and to facilitate development of the power sector some more reforms
are proposed. The issues and the reforms proposed to resolve them
are mentioned below:
*
iii) To ensure financial sustainability of the power sector, it is
necessary that the tariff is cost reflective and all the prudent cost is
pass through. However, it has been observed that in many States
there is large gap in approved ARR and estimated revenue on
approved tariff. To discourage such practice there is need to make
statutory provisions to avoid such gap. It is also imperative that
liquidation of any such gaps in revenue required and estimated
approved tariff is done in a time bound manner. New rules are
proposed to ensure that revenue gap/regulatory assets is not created
except in extraordinary circumstances and to provide for time bound
liquidation of the same. ”
67.1 In furtherance of this object and purpose, Rule 23 provides
as follows:
“ Rule 23. Gap between approved Annual Revenue Requirement
and estimated annual revenue from approved tariff.– The tariff
shall be cost reflective and there shall not be any gap between
approved Annual Revenue Requirement and estimated annual
revenue from approved tariff except under natural calamity
conditions:
63
Provided that such gap, created if any, shall not be more than three
percent of the approved Annual Revenue Requirement:
Provided further that such gap along with the carrying costs at the
base rate of Late Payment Surcharge as specified in the Electricity
(Late Payment Surcharge and Related Matters) Rules, 2022, as
amended from time to time shall be liquidated in maximum three
numbers of equal yearly installments from the next financial year:
Provided also that any gap between approved Annual Revenue
Requirement and estimated annual revenue from approved tariff
existing on the date of notification of these rules, along with the
carrying costs at the base rate of Late Payment Surcharge as
specified in the Electricity (Late Payment Surcharge and Related
Matters) Rules, 2022, as amended from time to time shall be
liquidated in maximum seven numbers of equal yearly installments
starting from the next financial year. ”
67.2 The rule has come into existence after detailed consultation
with all the stakeholders. It subserves a salutary purpose and sets
a normative principle in motion. Rule 23 is issued in exercise of
powers under Section 176, which enables the Central Government
50
to make rules to carry out the provisions of the Act. Sub-section
(2)(z) of the Section 176 provides that without prejudice to the
generality of the rule-making power, the Central Government may
any other matter which is
also provide for, by way of a rule, “
required to be, or may be, prescribed ”. The expression “prescribed”
is defined in Section 2(52) to mean “ prescribed by rules made by
the Appropriate Government under this Act ”. It may sound
50
The relevant portion of Section 176 of the Electricity Act reads:
“ Section 176. (Power of Central Government to make rules): ---
(1) The Central Government may, by notification, make rules for carrying out the
provisions of this Act.
(2) In particular and without prejudice to the generality of the foregoing power, such
rules may provide for all or any of the following matters, namely: -
*
(z) any other matter which is required to be, or may be, prescribed .”
64
tautological, but the correct way to examine the legal position is to
look at the provisions with respect to which the Central
Government or the State Governments may make rules for
carrying out the provisions of the Act. The province or domain with
respect to which rules can be made is based on the functions that
have been assigned to the Government(s) and the Regulatory
Commissions. Tariff determination is provisioned in Sections 61
and 62 of the Act, and this must be read with the functions of the
Regulatory Commissions under Sections 79 and 86 and the power
of the Central and State Commissions to make regulations under
Sections 178 and 181.
67.3 The creation of a regulatory asset, being a measure
undertaken by the Regulatory Commissions as part of tariff
determination, such exercise is informed by Section 61 read with
Sections 79 and 86. It is also important to note that Rules made
by the Central Government under Section 176 are binding on the
Regulatory Commissions when they make regulations because
Sections 178 and 181 provide that the “ Commission may make
regulations consistent with the Act and the rules ”. In any event of
the matter, the principle that one must adopt is that the adverse
effect of an overbearing regulatory asset extended beyond
65
proportion is an anathema to good governance of the Electricity
Act. It affects every stakeholder, the worst of all being the
consumer who is burdened, rather over-burdened, from time to
time because of the lapses of the regulators or the manipulation of
the utilities or the indifference of the government. Therefore, the
principle formulated in Rule 23, consistent with Clause 8.2.2 of
the National Tariff Policy, 2016 and the scheme of the Act, must
be the normative principle which must invariably be followed.
Wherever Rule 23 is incorporated into the Tariff Determination
Regulations of the State Commission, it shall be complied with.
67.4 We have dealt with the legal regime in detail and have also
extracted the relevant provisions, rules, regulations, policies,
instructions and precedents. A combined effect of these can be
restated as follows: (i) As a first principle, tariff shall be cost-
reflective; (ii) The revenue gap between the approved ARR and the
estimated annual revenue from approved tariff must be only in
exceptional circumstances; (iii) The regulatory asset should not
exceed a reasonable percentage, which can be arrived on the basis
of Rule 23 of the Electricity Rules that prescribes 3% of the ARR
as the guiding principle; (iv) If a regulatory asset is created, it must
be liquidated within a period of 3 years from 01.04.2024, taking
66
Rule 23 as the guiding principle; (v) The existing regulatory asset
must be liquidated in a maximum of 7 years starting from
01.04.2024, taking Rule 23 as the guiding principle; and (vi)
Regulatory Commissions must provide the trajectory and roadmap
for liquidation of the regulatory asset, which will include a
provision for dealing with carrying costs. Regulatory Commissions
must also undertake strict and intensive audit of the
circumstances in which the distribution companies have
continued without recovery of the regulatory asset.
10 (vii). Accountability of the Regulatory Commissions .
68. A Regulatory Commission must perform its functions as per
the provisions of the Electricity Act, the National Electricity Policy,
the National Tariff Policy, the relevant rules and regulations made
51
under the Act, and the APTEL’s directions . In performance of its
functions, the Regulatory Commission’s decisions are subject to
52
appeal before the APTEL as well as the Supreme Court. The
APTEL has also issued directions under Section 121 from time to
time for timely determination of tariff, regular truing up, and
51
Section 121 of the Electricity Act.
52
Sections 111 and 125 of the Electricity Act.
67
53
management of a regulatory asset, as indicated hereinabove . The
Regulatory Commissions must abide by and implement the
directions of the APTEL. That is how accountability can be
ensured. The need for accountability and its dimensions have been
54
explained by this Court in Vijay Rajmohan v. CBI as follows:
“ 34. Accountability in itself is an essential principle of
administrative law. Judicial review of administrative action
will be effective and meaningful by ensuring accountability
of the officer or authority in charge.
35. The principle of accountability is considered as a
cornerstone of the human rights framework. It is a crucial
feature that must govern the relationship between “duty
bearers” in authority and “right holders” affected by their
actions. Accountability of institutions is also one of the
development goals adopted by the United Nations in 2015
and is also recognised as one of the six principles of the
Citizens Charter Movement.
36. Accountability has three essential constituent
dimensions: (i) responsibility, (ii) answerability, and
(iii) enforceability. Responsibility requires the identification
of duties and performance obligations of individuals in
authority and with authorities. Answerability requires
reasoned decision-making so that those affected by their
decisions, including the public, are aware of the
same. Enforceability requires appropriate corrective and
remedial action against lack of responsibility and
accountability to be taken. Accountability has a corrective
function, making it possible to address individual or
collective grievances. It enables action against officials or
institutions for dereliction of duty. It also has a preventive
function that helps to identify the procedure or policy which
has become non-functional and to improve upon it. ”
53
In O.P No. 1/2011 (supra) and O.P. Nos. 1 and 2/2012 (supra).
54
(2023) 1 SCC 329.
68
10 (viii). Powers of the APTEL .
69. Under Section 110 of the Act, the Central Government
establishes the Appellate Tribunal for Electricity to hear appeals
against orders of the Adjudicating Officer or the Appropriate
Commission. Section 111 is the statutory remedy for any person
aggrieved against an order made by the Adjudicating Officer or that
of the Appropriate Commission as it provides for the appellate
power of the Tribunal, which reads as follows:
“ Section 111. Appeal to Appellate Tribunal: --- (1) Any
person aggrieved by an order made by an adjudicating
officer under this Act (except under section 127) or an order
made by the Appropriate Commission under this Act may
prefer an appeal to the Appellate Tribunal for Electricity… ”
69.1 While exercising appellate jurisdiction, the APTEL routinely
interprets the Act and the rules and regulations framed
thereunder, by which process it systematically evolves legal
principles. These very principles are applied consistently for a
structural evolution of sectoral laws. This freedom to evolve and
interpret laws must belong to the APTEL to subserve the regulatory
regime for clarity and consistency. In a similar context, while
interpreting the scope of appellate jurisdiction of the Securities
69
Appellate Tribunal against orders of the regulator, the SEBI, this
55
Court in SEBI v. Mega Corporation held as under;
“ 20. … Being a permanent body, apart from acting as an
appellate Tribunal on fact, the Tribunal routinely interprets
the Act, Rules and Regulations made thereunder and
evolves a legal regime, systematically developed over a
period of time. The advantage and benefit of this process is
consistency and structural evolution of the sectorial laws.
21. … This freedom to evolve and interpret laws must belong
to the Tribunals to subserve the regulatory regime for clarity
and consistency and it is with this perspective that the
Supreme Court will consider appeals against judgment of
the Tribunals on questions of law arising from its orders .
*
23.2 … The Tribunal while exercising jurisdiction under
Section 15-T, apart from acting as an appellate authority on
fact, also interprets the Act, Rules and Regulations made
thereunder and systematically evolves a legal regime.
These very principles are applied consistently for structural
evolution of the sectorial laws…. ”
69.2 The power under Section 111 is that of an appeal and as
such the decision of the APTEL shall be after re-appreciation of
facts and by applying the law on the subject. The APTEL will also
examine the legality, propriety or correctness of the orders made
by the Regulatory Commissions, and it may also on its own motion
make such orders as are appropriate for adjudication and
determination of the case.
69.3 Apart from Section 111 under which the APTEL is granted
appellate jurisdiction, it is significant to note that the Parliament
has also empowered the APTEL with important jurisdiction and
55
(2023) 12 SCC 802.
70
powers under Section 121, which is reproduced hereinunder for
ready reference.
“
Section 121. (Power of Appellate Tribunal): ---
The Appellate Tribunal may, after hearing the Appropriate
Commission or other interested party, if any, from time to
time, issue such orders, instructions or directions as it may
deem fit, to any Appropriate Commission for the
performance of its statutory functions under this Act.”
69.4 We can explain the significance of Section 121 in the context
of the facts of these very writ petitions and civil appeals. The facts
relating to the performance of DERC present a classic case of
‘regulatory failure’. Typically, ‘regulatory failure’ does not come
under scrutiny when the APTEL considers appeals from orders of
the Regulatory Commissions as the focus at that time is on the
merits of the decision made by the Commission. The institutional
failures or the shortcomings of the regulatory bodies are often
ignored and an appellate forum or even constitutional courts
proceed to resolve the issue by addressing the merits of the case.
56
In Lifecare Innovations Pvt. Ltd. v. Union of India this Court had
an occasion to reflect on this problem and held as follows;
“21. Having considered the provisions of the Act and the
MSE Procurement Preference Policy, 2012, we are of the
opinion that there is no mandatory minimum procurement
‘right’ of an individual MSE. However, there is certainly a
statutory foundation for the Procurement Preference Policy,
2012, having force of law as it ‘encapsulates a mandate
56
2025 INSC 269.
71
57
and discloses a specific purpose’. Clause 3 of the policy
mandating procurement of 25 per cent of supply from MSEs
is simply the statutory duty of the bodies constituted under
the Act and the Policy. The significance of creation and
establishment of these statutory and administrative bodies
is not difficult to conceive. If these institutions and bodies
work effectively and efficiently, it is but natural that the
purpose and object of the legislation will be achieved in a
substantial measure. It is, therefore, necessary to ensure
that in the functioning of these bodies, there is efficiency in
administration, expertise through composition, integrity
through human resources, transparency and accountability,
and response-ability through regular review, audits and
assessments.
22. While exercising judicial review of administrative action
in the context of Statutes, laws, rules or policies establishing
statutory or administrative bodies to implement the
provisions of the Act or its policy, the first duty of
constitutional courts is to ensure that these bodies are in a
position to effectively and efficiently perform their
obligations. This approach towards judicial review has
multiple advantages. In the first place, while continually
operating in the field with domain experts, these bodies
acquire domain expertise, the consequence of which would
also be informed decision-making and consistency. Further,
the critical mass of institutional memory acquired by these
bodies will have a direct bearing on the systematic
development of the sector and this will also help handling
polycentric issues. Thirdly, while continuously being on the
field, and having acquired the capability of making real-time
assessments about the working of the policies, these bodies
will be in a position to visualize course correction for future
policymaking.”
69.5 In the above referred matter, this Court was considering the
duty to ensure institutional integrity and efficiency of the
57
Gulf Goans Hotels Co. Ltd v. Union of India, (2014) 10 SCC 673 “…a government policy
may acquire the ‘force of ‘law’ if it conforms to a certain form possessed by other laws in force
and encapsulates a mandate and discloses a specific purpose” ; Bennett Coleman & Co. v.
Union of India (1972) 2 SCC 788 “What is termed ‘policy’ can become justiciable when it
exhibits itself in the shape of even purported ‘law’. According to Article 13(3)(a) of the
Constitution, ‘law’ includes ‘any Ordinance, order, bye-law, rule, regulation, notification,
custom or usage having in the territory of India the force of law’. So long as policy remains in
the realm of even rules framed for the guidance of executive and administrative authorities it
may bind those authorities as declarations of what they are expected to do under it.”
72
regulators under the MSME Act. A similar approach was adopted
58
by this Court in T.N. Godavarman Thirumulpad for reviving and
effectuating the environment regulators, rather than taking over or
routinely reviewing their decision making.
69.6 ‘Regulatory failure’ occurs due to ineffective functioning of
the Regulatory Commissions, excessive governmental interference,
or ‘regulatory capture’. We cannot wish away these real and
imminent dangers that affect effective functioning of the
Regulatory Commissions. These issues could have the effect of
completely eclipsing regulatory functions, thereby losing the very
purpose and object of restructuring the electricity sector by
unbundling the functions of generation, distribution, and
transmission and more importantly, establishing independent
regulatory institutions and granting them the exclusive
jurisdiction over grant of licenses and tariff determination. Section
121 is intended to ensure that in the functioning of the Regulatory
Commissions, there is efficiency in administration, expertise
through human resource, integrity through transparency, and
accountability and responsibility through review audit and
assessment. For enforcing these values, Section 121 empowers the
58
In Re: T.N. Godavarman Thirumulpad v. Union of India , 2024 INSC 78, paras 27-30.
73
APTEL to issue such orders, instructions or directions as it deems
fit, to the Commission for performance of its statutory functions
under the Act.
69.7 The power of the APTEL to issue such orders and directions
takes within its sweep the power to enforce such orders, as
59
provided in Section 120(3) of the Act. The power under Section
121 is extremely important as it is intended by the Parliament that
the APTEL must be the guiding force to ensure that Regulatory
Commissions across the length and breadth of the nation perform
their statutory functions with efficiency and integrity.
69.8 This position is already recognized by the APTEL, as is
evident from its order in O.P. No. 1 of 2011, relevant portion of
which has already been reproduced in this judgment. It is
necessary to restate the directions issued by the Appellate
Tribunal in its orders dated 11.11.2011 and 14.11.2013, as it is
relevant for the present purpose:
i. The APTEL has the power and the duty to issue directions
to Regulatory Commissions when they fail to comply with
the Act, rules or regulations, fail to perform their
59
Section 120(3) of the Electricity Act reads:
“ Section 120. (Procedure and powers of Appellate Tribunal): ---
*
(3) An order made by the Appellate Tribunal under this Act shall be executable by
the Appellate Tribunal as a decree of civil court and, for this purpose, the Appellate
Tribunal shall have all the powers of a civil court .”
74
statutory functions and duties, or perform the same
60
negligently, improperly or poorly. Such directions are
intended to secure compliance with the letter and spirit
of the Electricity Act, and the APTEL can monitor the
same through periodical status reports and by setting
61
timelines for the Regulatory Commissions.
ii. Tariff determination is a statutory function entrusted to
the Regulatory Commissions, and it must be undertaken
62
on a regular, timely, and annual basis.
iii. Regulatory Commissions must undertake truing up on a
regular basis, immediately at the end of the financial year
so that any discrepancies between the ARR and the
revenue realised through tariffs is brought to notice and
63
can be rectified in a timely manner. This is necessary so
that the burden or benefit of present years is not carried
forward to future consumers, and delay in truing up
could lead to imposition of carrying costs and cash-flow
64
problems for the utility.
iv. The tariff determined by the Regulatory Commissions
must be cost-reflective as per Section 61 of the Electricity
65
Act.
v. Regulatory Commissions must not ordinarily leave
revenue gaps or create regulatory assets, and when it
does so in exceptional circumstances, it must comply
60
O.P. No. 1/2011 (supra), para 47-48; O.P. Nos. 1 and 2/2012 (supra), para 15.
61
O.P. No. 1/2011 (supra), para 66.
62
O.P. No. 1/2011 (supra), paras 59, 65(i) and (ii); O.P Nos. 1 and 2/2012 (supra), para 15.
63
O.P. No. 1/2011 (supra), para 65(i) and (iii).
64
ibid, para 57.
65
ibid, para 65(iv).
75
with the provisions of the Act, rules and regulations on
66
the issue;
vi. In case a Regulatory Commission creates a regulatory
asset, it must allow carrying costs to the distribution
utility, time-bound recovery and a liquidation schedule,
and ensure that neither the financial position and
liquidity of the distribution company nor consumer
67
interests are jeopardised.
69.9 We reiterate that the Regulatory Commissions must call for
ARR, ensure that tariffs are determined, and that truing up is
conducted in a timely manner, by exercising suo motu powers if
necessary. In case of non-compliance with these directions, the
APTEL has the power and duty to call for an explanation, ensure
accountability, and monitor compliance by the Regulatory
Commissions. Similarly, the APTEL must exercise its powers
under Section 121 to ensure that the legal principles on regulatory
asset laid down by us in paragraph 67.3 hereinabove are complied
with by the Regulatory Commissions, and it must monitor the
same. In case of non-compliance, the APTEL must issue such
orders, directions, or instructions to the Commissions as may be
necessary to hold them accountable.
66
ibid, paras 62, 65(iv).
67
ibid, para 62(iv); O.P. Nos. 1 and 2/2012, para 38.
76
11. Conclusions.
70. In the following ten sutras , we have examined the issue
relating to regulatory asset , its position in the regulatory regime for
determination of tariff, the duties and accountability of the
regulators - the Regulatory Commissions and then powers of the
Appellate Tribunal for Electricity to avert a regulatory failure.
I. Electricity is a public good. Its generation, transmission, and
distribution are statutorily regulated to ensure access to supply, on
a non-rival and non-exclusive basis.
II. Being a material resource within Article 39 of the Constitution
of India, Part-IV of the Constitution must inform the generation,
transmission, and distribution of electricity.
III. The statutory regulators, i.e. the Central and State Regulatory
Commissions alongwith Union and State Governments and other
stakeholders are equally bound by the mandate under Part-IV of the
Constitution for its equitable distribution. This duty is predicated on
the independent, efficient, objective functioning of the electricity
commissions. They must guard themselves against ‘regulatory
failure’ and in particular ‘regulatory capture’. The interpretation of
the powers and function of the Regulatory Commissions have to be
77
such that there is no regulatory vacuum, in that there is no
unallocated residue of power of regulation.
IV. Tariff determination is a regulatory function and it is the
exclusive province of the Regulatory Commissions. Tariff
determination involves multiple variables requiring the regulators to
act with expertise and also with certain amount of flexibility.
Creation of regulatory asset is a ‘measure’ that the Commission
adopts for good governance of tariff. It is also a recognition of
revenue recoverable by distribution companies, and as such, it is an
enforceable right, though only through tariff determination for later
years. This ‘measure’ gives rise to correlative obligations of the
Regulatory Commissions to manage it efficiently and allow easy
liquidation.
V. Disproportionate increase and long pending regulatory asset
depict a ‘regulatory failure’. It has serious consequences on all
stakeholders and the ultimate burden is only on the consumer.
VI. Laws encompassing the creation, continuation, and liquidation
of a ‘regulatory asset’ are located in the Act, National Tariff Plan and
Policy, Rules, and Regulations made under the Act, as interpreted
78
by the APTEL. The combined effect of this legal regime is the
statutory obligation on the regulator(s).
VII. Ineffective and inefficient functioning of the Regulatory
Commissions, coupled with acting under dictation can lead to
regulatory failure. The commissions are accountable for their
decisions, and they are subject to judicial review.
VIII. Apart from examining the legality and propriety of the orders
of the Commissions in appeal, the APTEL has extraordinary powers
under Section 121 to issue orders, instructions or directions for
effective enforcement of the regulatory regime. This is one of the
most important powers allocated to APTEL by the Parliament.
IX. We have affirmed the limits of creation, continuation and
liquidation of the regulatory asset, recognised the obligations of the
Regulatory Commissions, and directed that they will be accountable
and subject to such orders, instructions or directions as the APTEL
may issue in this regard under Section 121.
X. The regulatory regime under the Act is a complete code
enunciating rights, prescribing obligations, and laying down the
mechanism for course correction. The effectiveness of these laws
will be reflected in the will to enforce them.
79
12. Directions .
71. For the reasons state above, we issue the following directions:
(i) As a first principle, tariff shall be cost-reflective;
(ii) The revenue gap between the approved ARR and the
estimated annual revenue from approved tariff may be in
exceptional circumstances;
(iii) The regulatory asset should not exceed a reasonable
percentage, which percentage can be arrived on the basis
of Rule 23 of the Electricity Rules that prescribes 3% of the
ARR as the guiding principle;
(iv) If a regulatory asset is created, it must be liquidated within
a period of 3 years, taking Rule 23 as the guiding principle;
(v) The existing regulatory asset must be liquidated in a
maximum of 4 years starting from 01.04.2024, taking Rule
23 as the guiding principle;
(vi) Regulatory Commissions must provide the trajectory and
roadmap for liquidation of the existing regulatory asset,
which will include a provision for dealing with carrying
costs. Regulatory Commissions must also undertake strict
and intensive audit of the circumstances in which the
80
distribution companies have continued without recovery of
the regulatory asset;
(vii) Regulatory Commissions shall in general follow the
principles governing creation, continuation and
liquidation of the regulatory asset, as laid down in
paragraph 70, and also abide by the directions of the
APTEL summarised in paragraph 69.8;
(viii) The APTEL shall invoke its powers under Section 121 and
issue such orders, instructions or directions as it may
deem fit to the Regulatory Commissions for performance of
their duties with respect to regulatory asset as enunciated
by us in this judgment and as per the orders of the APTEL
in O.P. No. 1/2011 dated 11.11.2011 and O.P. Nos. 1 and
2/2012 dated 14.11.2013.
(ix) The APTEL shall register a suo moto petition under Section
121 of the Act to monitor implementation of above
directions (v) and (vi) till the conclusion of the period
mentioned therein.
72. With these directions, the present writ petitions in W.P. (C)
No. 104/2014, W.P. (C) No. 105/2014 and W.P. (C) No. 1005/2021
and the present civil appeals in C.A. No. 4010/2014 and
81
C.A. No. 4013/2014 against the APTEL’s order dated 11.03.2014
stand disposed of.
………………………………....J.
[PAMIDIGHANTAM SRI NARASIMHA]
………………………………....J.
[SANDEEP MEHTA]
NEW DELHI;
AUGUST 06, 2025
82
IN THE SUPREME COURT OF INDIA
ORIGINAL/CIVIL APPELLATE JURISDICTION
2025 INSC 937
WRIT PETITION (C) 104 OF 2014
BSES RAJDHANI POWER LTD. & ANR. ...PETITIONER(S)
VERSUS
UNION OF INDIA AND ORS. …RESPONDENT(S)
WITH
WRIT PETITION (C) 105 OF 2014
WITH
CIVIL APPEAL No. 4010 OF 2014
WITH
CIVIL APPEAL No. 4013 OF 2014
WITH
WRIT PETITION (C) 1005 OF 2021
J U D G M E N T
Table of Contents
1. Introduction. .......................................................................................... 4
2. Concept of a Regulatory Asset. ............................................................... 7
3. Facts. ..................................................................................................... 9
Signature Not Verified
Digitally signed by
KAPIL TANDON
Date: 2025.08.06
19:12:21 IST
Reason:
4. Submissions of Parties. ........................................................................ 11
5. Impleadment of the State Commissions and Governments. ................... 20
1
5 (i). Affidavits by State Commissions. ...................................................... 21
5 (ii). Affidavits by State Governments. ...................................................... 25
6. Law Governing the Electricity Sector Prior to 2003. .............................. 26
7. Electricity Act, 2003. ............................................................................ 28
8. Provisions of the Electricity Act relating to determination of Tariff. ....... 31
9. Provisions of Act, Policies, Rules, Regulations, and Orders having a bearing
on creation of a Regulatory Asset. ............................................................. 35
9 (i). National Electricity Policy, 2005. ....................................................... 35
9 (ii). National Tariff Policy, 2006. ............................................................. 36
9 (iii). DERC Tariff Determination Regulations, 2007. ............................... 37
9 (iv). DERC Statutory Advice dated 15.12.2010. ...................................... 38
9 (v). Ministry of Power’s Letter to the APTEL. ........................................... 40
9 (vi). APTEL’s Order dated 11.11.2011. ................................................... 40
9 (vii). DERC Tariff Determination Regulations, 2011. .............................. 41
9 (viii). DERC’s Tariff Order dated 26.08.2011 (FY 2011-12). .................... 42
9 (ix). DERC’s MYT Order dated 13.07.2012 (FY 2012-15). ....................... 43
9 (x). DERC’s Statutory Advice dated 01.02.2013. .................................... 43
9 (xi). DERC’s Tariff Order dated 31.07.2013 (FY 2013-14). ...................... 44
9 (xii). APTEL’s Order dated 14.11.2013. .................................................. 45
9 (xiii). APTEL’s Order dated 11.03.2014. ................................................. 46
9 (xiv). National Tariff Policy, 2016. .......................................................... 47
2
9 (xv). DERC Tariff Determination Regulations, 2017. .............................. 48
9 (xvi). Ministry of Power’s Affidavit dated 10.08.2022. ............................. 49
9 (xvii). Ministry of Power’s Affidavit dated 12.12.2022. ............................ 51
9 (xviii). Electricity (Amendment) Rules, 2024 introducing Rule 23. .......... 52
9 (xix). DERC’s Order dated 19.07.2024 (true-up till FY 2020-21). ............ 53
10. Analysis. ............................................................................................ 53
10 (i). Electricity is a public good and is regulated under the Act. ............. 54
10 (ii). Tariff determination is governed by the Act, which entrusts this
function to independent Regulatory Commissions. .................................... 54
10 (iii). Collaborative effort of the Regulatory Commissions to balance social
justice obligations with efficiency. ............................................................. 57
10 (iv). Tariff fixation takes into account multiple variables and requires
flexibility. Regulatory asset is a measure adopted during tariff fixation that
recognises right of recovery. ...................................................................... 58
10 (v). Factors leading to an unmanageable regulatory asset, and consequent
‘regulatory failure’. .................................................................................... 59
10 (vi). Law that governs creation, continuation and liquidation of regulatory
asset.. ....................................................................................................... 62
10 (vii). Accountability of the Regulatory Commissions. ............................ 67
10 (viii). Powers of the APTEL. .................................................................. 69
11. Conclusions. ....................................................................................... 77
12. Directions. ......................................................................................... 80
3
1. Introduction.
1 2
1. We are entertaining these writ petitions and civil appeals
only for examining a limited question as to the law that governs
the creation of a “regulatory asset” during the process of tariff
determination by the Electricity Regulatory Commissions, its
impact on the rights and liabilities of the stakeholders, the limits
within which it can be operated, and finally the regulatory duties
that it invokes for the Regulatory Commissions. We also clarify
that through these proceedings, we are not determining the rights
and liabilities of the parties, which will anyways be considered in
the pending civil appeals against the orders of the Appellate
3
Tribunal of Electricity .
2. In these writ petitions and civil appeals, the three distribution
companies that supply electricity to consumers in the National
4 5
Capital Territory of Delhi , namely BSES Rajdhani Power Ltd. ,
6
BSES Yamuna Power Ltd. , and Tata Power Delhi Distribution
7
Limited , have challenged the manner in which the Delhi
1
W.P. (C) No. 104/2014, W.P. (C) No. 105/2014 and W.P. (C) No. 1005/2021 under Article
32 of the Constitution.
2
C.A. No. 4010/2014 and C.A. No. 4013/2014 against the order dated 11.03.2014 passed
by the Appellate Tribunal for Electricity in I.A Nos. 364-365/2013 in Appeal Nos. 265-
266/2013.
3
Hereinafter “APTEL”.
4
Hereinafter “NCT of Delhi”.
5
Hereinafter “BRPL”.
6
Hereinafter “BYPL”.
7
Hereinafter “TPDDL”.
4
8
Electricity Regulatory Commission has determined the tariff for
retail supply of electricity over the years, leading to the creation
and continuation of a “regulatory asset”. The prayers in W.P. (C)
9
Nos. 104 and 105/2014 by BRPL and BYPL are similar, which we
may formulate as follows:
i. To hold and declare that the petitioners are entitled to
prudently incurred cost and allowances in terms of
10
Sections 61 and 62 of the Electricity Act, 2003 and Multi
Year Tariff Regulations;
ii. To direct the DERC to give effect to the deferred cost
creating a regulatory asset in accordance with Para 8.2.2
of the National Tariff Policy;
iii. To direct the respondent-generating companies to not
disconnect or discontinue power supply or take any other
coercive steps till this Court determines an appropriate
mechanism for adjustment of dues owed by the
distribution companies from the amounts due and owed to
them; and
iv. To protect their investment and assured return from the
licensed business.
3. TPDDL has also filed W.P. (C) No. 1005/2021, where it has
prayed for the following reliefs:
8
Hereinafter “DERC”.
9
Hereinafter collectively referred to as “BSES Discoms”.
10
Hereinafter “the Electricity Act”.
5
i. To direct DERC to recognise its regulatory asset and
formulate and implement a clear roadmap for the
liquidation of the regulatory asset in a time-bound manner
of 3 years;
ii. In the alternative, to direct DERC to increase the Deficit
Recovery Surcharge to 20% to amortise the regulatory
asset as per the National Tariff Policy;
iii. To direct DERC to implement various judgments of the
APTEL in appeals against tariff orders by the DERC.
4. In order to consider these prayers as well as the
maintainability of the writ petitions, which has been contested by
the respondents, we will have to examine the concept of a
‘regulatory asset’ and its creation and continuation in the context
of the law that may govern it. Further, we will also examine
whether the law creates any statutory duties and whether failure
to fulfil the same gives rise to an enforceable legal right. For this
purpose, we will commence with examining the Electricity Act, and
the rules, regulations, and policies framed thereunder as well as
judicial precedents and necessary practices for good governance of
the electricity sector.
6
2. Concept of a Regulatory Asset.
5. A “regulatory asset” in the context of tariff determination for
electricity utilities is an intangible asset that is created by the
Regulatory Commissions in recognition of an uncovered revenue
gap or revenue shortfall when a distribution licensee could not
fully recover the costs reasonably incurred by it through revenue
11
from tariff. This portion of the revenue requirement is not
included while determining the tariff for the particular year.
Rather, the distribution company is entitled to receive or recover
such revenue in the future, over a period of time.
6. There are several situations and factors leading to the
creation of such a regulatory asset. It is generally created when the
projected revenue based on the determined tariff is significantly
lower than the revenue required by the distribution company to
recover reasonably-incurred costs as well as for return on
investment. When it is not feasible to recover this gap either by
increasing tariffs or through other means such as government
subsidy during that year, a regulatory asset equivalent to the
uncovered expenses is created. Another situation requiring the
11
Tamil Nadu Electricity Consumers’ Association v. Tamil Nadu Electricity Board
See , Appeal
Nos. 192 and 206 of 2010, APTEL order dated 28.07.2011.
7
creation of a regulatory asset is at the time of truing up, if the
actual revenue realisation from tariffs is much lesser than the
12
Annual Revenue Requirement .
7. This revenue gap can be recovered through government
subsidies or by increasing the tariff. However, the latter may lead
to a tariff shock to consumers in a given year. Hence, to protect
consumer interests, the Regulatory Commission may choose to
direct recovery of only some portion of the gap while creating a
regulatory asset for the remaining portion, which can be recovered
in the subsequent years. At the same time, the financial health
and commercial viability of the distribution company must be
ensured by the Regulatory Commission. Hence, the Regulatory
Commission must ensure that if a regulatory asset is created, the
same is recovered in a time-bound manner.
8. The creation and continuation of a regulatory asset is neither
a statutory concept nor a power granted under the Electricity Act.
Rather, it is a measure adopted by the Regulatory Commissions,
which are statutory bodies, in exercise of their powers and
functions under the Act. It is hence guided by the legal regime of
the Electricity Act and the rules, regulations, and policies framed
12
Hereinafter “ARR”.
8
thereunder, along with their interpretation in various judicial
precedents.
3. Facts.
9. Initially, the Delhi Vidyut Board was responsible for
generation, transmission and distribution of electricity in NCT of
Delhi. With the Delhi Electricity Reform Act, 2000 and the Delhi
Electricity Reform (Transfer Scheme) Rules, 2001, these functions
were unbundled and different entities were made responsible for
13
each function. Until 2007, the Delhi Transco Limited was solely
responsible for bulk procurement and bulk supply of power in
Delhi, and all distribution companies were required to purchase
power from it. After 31.03.2007, the responsibility for power
purchase in Delhi was transferred to the distribution companies.
14
10. DERC adopted the Multi Year Tariff framework in
generation, transmission, and distribution businesses so as to
bring certainty regarding tariff and its annual basis during each
control period.
13
Hereinafter “DTL”.
14
Hereinafter “MYT”.
9
11. A regulatory asset was first created by the DERC in the tariff
15
order dated 09.06.2004 for North Delhi Power Limited and orders
dated 11.06.2004 for BRPL and BYPL. In these orders, the DERC
introduced the regulatory asset as a mechanism to bridge the
revenue gap in the tariff order for FY 2004-05, and it amounted to
a total of Rs. 696 crores across BRPL, BYPL, NDPL and DTL.
12. Over the years, various orders of the DERC determining ARR
for each year, MYT orders, and truing-up orders demonstrate an
increase in the quantum of the regulatory asset across all three
distribution companies before us. The DERC also provided for
carrying costs on the regulatory asset to each distribution
company, which further contributed to its ballooning. We are
informed that as on 31.03.2024, the regulatory asset including
carrying costs is Rs. 12,993.53 crores for BRPL, Rs. 8419.14 crores
for BYPL, and Rs. 5,787.70 crores for TPDDL, totally amounting to
Rs. 27,200.37 crores across all three distribution companies.
During this time, the DERC has taken note of this increase and
introduced various measures like increasing tariffs, Deficit
16
Recovery Surcharge , fuel price adjustment charge and Power
15
Hereinafter “NDPL”, which is now TPDDL.
16
Hereinafter “DRS”.
10
17
Purchase Adjustment Charge . These measures are byproducts of
the regulatory asset and are intended for its liquidation.
13. After setting out the submissions of the parties as well as
views of various State Commissions and State Governments, we
will examine framework within which the regulatory asset is
created, continued, and liquidated. We will refer to the relevant
provisions of the Electricity Act, National Tariff Policies, the
Electricity Rules, DERC’s Tariff Determination Regulations, and
introduction of various measures by the DERC, either as mitigative
or alleviative to deal with the problem. Following this, we will
determine the status of the regulatory asset and the consequential
directions that may be passed in these writ petitions and civil
appeals.
4. Submissions of Parties.
14. We have heard Mr. Kapil Sibal and Dr. Abhishek Manu
Singhvi, learned senior counsels and Mr. Amit Kapur, learned
counsel for the three distribution companies, who are the
petitioners and appellants. On behalf of the respondents, we have
heard Mr. Nikhil Nayyar, learned senior counsel for the DERC,
17
Hereinafter “PPAC”.
11
Mr. R. Venkataramani, learned Attorney General of India for
certain generating and transmission companies, Mr. K.M. Nataraj,
learned ASG for the Ministry of Power, Union of India, and Mr.
Siddharth Dave and Mr. Shadan Farasat, learned senior counsels
for the Government of NCT of Delhi.
15. Mr. Sibal made the following submissions:
i. Referring to the Statement of Objects and Reasons of the
Electricity Act, he submitted that the statute intends to
distance the government from tariff regulation and
determination by establishing independent regulators, and
it aims to encourage private sector participation in the
electricity sector.
ii. Mr. Sibal then referred us to various provisions of the
Electricity Act, including factors guiding tariff
determination under Section 61, tariff determination for
retail supply of electricity under Sections 62 and 64, and
advance payment of government subsidies under Section
65. He also took us through the mandatory and advisory
functions of the State Commission under Section 86,
emphasising that the Commission must be guided by the
policies and plans formulated under the Act in discharge
of its functions.
iii. He then referred us to the relevant portions of the statutory
advice issued by the DERC to the Government of NCT of
Delhi by letters dated 15.12.2010 and 01.02.2013, which
we will deal with in more detail at a later stage.
12
iv. Referring to Clause 8.2.2 of the National Tariff Policy,
2006, he submitted that a regulatory asset must be
created only in exceptional circumstances that are clearly
defined in the regulations and that only include natural
causes or force majeure conditions. Further, that the
regulatory asset must be recovered in a time-bound
manner in 3 years, and preferably within the control
period. These conditions are also incorporated in
Regulation 5.42 of the DERC (Terms and Conditions for
Determination of Wheeling Tariff and Retail Supply Tariff)
18
Regulations, 2007 and Regulation 5.40 of the DERC
(Terms and Conditions for Determination of Wheeling
19
Tariff and Retail Supply Tariff) Regulations, 2011 , which
we will deal with at a later stage. Mr. Sibal submitted that
these conditions for creation of a regulatory asset have not
been complied with by the DERC.
v. He then referred us to the Electricity (Amendment) Rules,
2024 (notified on 10.01.2024) that inserts Rule 23 in the
Electricity Rules, 2005, which stipulates various
conditions for creation, continuation, and recovery of a
revenue gap or regulatory asset.
vi. To conclude, Mr. Sibal submitted that the creation,
continuation, and expansion of the regulatory asset over
the years can be attributed to the following causes: (i)
assumed power purchase cost for tariff determination is
lower than the actual cost; (ii) assumption of inflated
18
Hereinafter “Tariff Determination Regulations, 2007”.
19
Hereinafter “Tariff Determination Regulations, 2011”.
13
revenue; (iii) tariffs determined by the DERC are not cost-
reflective; (iv) the orders of the APTEL and this Court
regarding tariff fixation are not implemented; (v) the state
government has not paid the subsidy amount in advance
as per Section 65; (vi) payment of Late Payment
20
Surcharge @ 18% on late payments to the generating
companies; and (vii) the truing-up exercise is not carried
out properly.
16. Mr. Amit Kapur, for the BSES Discoms has submitted that
currently, the regulatory asset is about Rs. 26,000 crores
(including the carrying cost payable to date). The continuation of
the revenue gap, without liquidating it in a time-bound manner
undermines the very purpose of the Electricity Act to promote
private sector participation and to provide for cost-reflective tariffs.
He submits that there is a creeping acquisition of private
distribution companies due to this.
17. Dr. Singhvi appearing for TPDDL then addressed us and
made the following submissions:
i. To liquidate the regulatory asset, certain measures may be
taken such as increasing the DRS, increasing tariffs
payable by consumers, and through government support.
Further, there must be a fixed timeline for liquidation as
20
Hereinafter “LPS”.
14
the quantum of the regulatory asset only increases with
the passage of time due to accumulation of carrying costs.
ii. While the DERC’s roadmap for liquidation submitted
before this Court estimated recovery of the entire
regulatory asset by 2022, this has not fructified. In this
context, he submitted that DRS of 8% is wholly inadequate
as it is insufficient to even meet the carrying cost on the
regulatory asset.
18. Mr. Nikhil Nayyar, learned senior counsel appearing on
behalf of the DERC then addressed us. He took us through the
scheme of the Electricity Act and its provisions, and also traced
the history of the creation and continuation of a regulatory asset
by the DERC. While doing so, he made the following submissions:
i. The DERC’s tariff order dated 11.06.2004 shows that the
BSES Discoms themselves suggested the creation of a
regulatory asset to enable recovery of the revenue gap over
a period of time through gradual increase in tariffs.
ii. Over the years, the DERC introduced various measures to
liquidate the regulatory asset, including tariff hikes, 8%
DRS, carrying cost, fuel purchase adjustment charge, and
PPAC. Currently, TPDDL, BRPL, and BYPL levy 29.13%,
27.08%, and 31.60% PPAC respectively and between FY
2018-19 to FY 2022-23, they have earned Rs. 3,230.48
crores, Rs. 4,399.48 crores, and Rs. 2,210 crores through
PPAC. The DERC also increased the tariff by 50% between
15
FY 2011-15 as follows - 22% by order dated 26.08.2011),
23% by order dated 13.07.2012, 5% by order dated
31.07.2013, and 8.32% by order dated 23.07.2014.
iii. However, these measures were not sufficient as between
2007 and 2012, the power purchase cost, which
constitutes 80% of the ARR, increased by more than 80%
from Rs. 2.86 to Rs. 5.16 per unit. The regulatory asset
ballooned during this period due to this unprecedented
increase in power purchase costs, which is attributable to
the increase in coal and gas prices. Further, the
introduction of CERC (Unscheduled Interchange charges
and related matters) (Amendment) Regulations, 2010
prevented the use of UI mechanism for sale of surplus
power at profitable rates.
iv. While the roadmap submitted by the DERC before this
Court estimated that the regulatory asset would be
liquidated by 2022, this did not materialise for several
reasons such as the distribution companies not achieving
the estimated 15% growth rate and carrying cost on the
regulatory asset being a compound interest that itself
amounts to Rs. 8,692 crores across BRPL, BYPL, and
TPDDL from FY 2012-13 to FY 2019-20, while DRS @ 8%
led to a collection Rs. 11,073 crores.
v. He submitted that the regulatory asset could not be
liquidated as planned as the amount does not remain
static. With each tariff order, some portion is recovered
while other factors lead to an increase in the regulatory
16
asset. Further, considering that the roadmap for
liquidation was prepared in 2014, it needs to be revised.
vi. Mr. Nayyar also disputed the maintainability of these writ
petitions as there is a statutory mechanism under the
Electricity Act for tariff determination, which is a quasi-
judicial exercise by an expert body and the scope of judicial
review is limited. Further, the Act also provides for
appealing the DERC’s decision before the APTEL under
Section 111. Finally, there is no allegation regarding
violation of any fundamental right for this Court to exercise
writ jurisdiction.
vii. Finally, Mr. Nayyar averred to tariff determination and
regulatory assets created by other State Commissions. He
submitted that 15 states have implemented an automatic
pass-through for fuel costs, which means that the
distribution companies in these states can pass on the rise
in power purchase costs to the consumers. He also
submitted that other than Delhi, regulatory assets have
been created in Tamil Nadu, Rajasthan, Kerala, and
Maharashtra.
19. We then heard the learned Attorney General for the
generating and transmission companies namely Indraprastha
21
Power Generation Company Limited , Pragati Power Corporation
22
Limited , and DTL. He submitted that while the DERC has
21
Hereinafter “IPGCL”.
22
Hereinafter “PPCL”.
17
recognised a revenue gap for all three distribution companies,
BRPL and BYPL are not making regular payments to IGPCL, PPCL
and DTL, despite making regular payments to other power utilities.
He also submitted that TPDDL has been regularly paying the bill
amounts. With regard to non-payment by BRPL and BYPL, he
submitted that these dues cannot be set-off/netted-off/squared off
against the unrecovered tariff, which must be realised by the
distribution companies from consumers in accordance with DERC
orders. He also submitted that the adjustment of any payments
against past dues is in accordance with the provisions of their
power purchase agreements and Rule 4 of the Electricity (Late
Payment Surcharge) Rules, 2022.
20. We then heard Mr. K.M. Nataraj, learned ASG appearing for
the Ministry of Power, Union of India. He submitted that a
regulatory asset is created when State Commission determines
tariffs while ignoring the principles laid down in Section 61 of the
Electricity Act, specifically in sub-sections (b), (c), and (d). In such
situations, the approved tariff and revenue generated from it is
lower than the actual ARR of the distribution company. Further,
the regulatory asset is created without following the conditions
specified in Clause 8.2.2 of the National Tariff Policy, 2006 and
18
without a specific time period for liquidation. In order to recover
this amount, he submits that the tariffs may be increased, the
state government may provide additional subsidies to reduce the
burden on the consumers due to increased tariffs, and through
financial support by the state government. He also submitted that
liquidation must be in accordance with Rule 23 of the Electricity
(Amendment) Rules, 2024.
21. Finally, Mr. Shadan Farasat and Mr. Siddharth Dave, learned
senior counsels for the Government of NCT of Delhi addressed us.
They submitted that the regulatory asset is not attributable to the
subsidies granted by the Government and its payments under
Section 65 of the Electricity Act.
22. By order dated 23.10.2024, this Court directed the
Government of NCT of Delhi to respond to the subsisting
regulatory asset. When the matters were listed on 20.11.2024, Mr.
Shadan Farasat, learned senior counsel appeared for the
Government and expressed that the Government has not yet taken
its decision regarding subsidies and creation of the regulatory
asset, the reasons for which we directed be placed in an affidavit
before us. An affidavit dated 06.01.2025 was filed by the
Government of NCT of Delhi indicating that the Department of
19
Power had prepared a cabinet note for circulation on 29.10.2024,
which was circulated for comments. The same received
concurrence from the Law Department on 01.11.2024 but the
comments of the Finance and Planning Departments are awaited.
It was also stated that the Government of NCT of Delhi is releasing
the subsidy amounts without default, and there is no relation
between the grant of electricity subsidy and accumulation of the
revenue gap. The amounts payable to the BSES Discoms are
directly released to IPGCL, PPCL, and DTL for adjustment against
outstanding dues, in accordance with interim orders of this Court
in these writ petitions and civil appeals.
5. Impleadment of the State Commissions and Governments.
23. After hearing the learned counsels for the parties, by this
Court’s order dated 23.10.2024 we directed the impleadment of
State Governments and State Electricity Regulatory Commissions
to gather their views in light of the large-scale and nation-wide
implications of creation and continuation of regulatory assets on
the electricity sector. Subsequently, by order dated 20.11.2024, we
directed the State Governments and State Commissions to express
their views through affidavits. Upon perusing these affidavits, the
20
position of each state vis-à-vis regulatory assets can be captured
as follows:
5 (i). Affidavits by State Commissions.
24. Following is the gist of the affidavits filed by various
Commissions.
i. The State Commissions of Andhra Pradesh, Assam, Haryana,
Himachal Pradesh, Jharkhand, Madhya Pradesh, Odisha,
Punjab, Sikkim, Telangana, and Uttar Pradesh have
submitted that they have not created any regulatory asset at
any point in time.
ii. The Maharashtra Electricity Regulation Commission submits
that in compliance with Clause 8.2.2 of the National Tariff
Policy, 2016 and Rule 23 of the Electricity (Amendment)
Rules, 2024, it has not created a regulatory asset since March
2020 in respect of any distribution licensee in the state.
iii. The Joint Electricity Regulatory Commission for UT of
Jammu and Kashmir and UT of Ladakh also submits that it
has not created any regulatory asset since FY 2019-2020 and
tariff determination is such that the ARR of the distribution
companies is met from the revenue from consumers and
grant-in-aid from the UT Government.
iv. The Chhattisgarh State Electricity Regulatory Commission
submits that there was a revenue gap of Rs. 343 crores in FY
2011-12, even after tariff increase by 14%, but the same was
fully apportioned in FY 2012-13 with carrying cost. In FY
2012-13, there was a cumulative deficit of Rs. 1752 crores
21
that was partially apportioned by a 17% tariff increase and
the remaining revenue gap of Rs. 828 crores was carried
forward as a regulatory asset, which was subsequently
apportioned in FY 2013-14 with carrying costs. There was no
regulatory asset between FY 2013-14 and FY 2015-16. Then
in FY 2016-17, the State Commission had to allow Rs.
1130.80 crores over and above the ARR to comply with an
APTEL order. To prevent a tariff shock, it allowed recovery of
Rs. 370 crores in that year, and created a regulatory asset for
Rs. 760.80 crores that was recovered in FY 2017-18. There
was no regulatory asset created or carried forward between
FY 2017-18 to FY 2019-20. In FY 2020-21, considering the
COVID-19 pandemic and to avoid increasing tariffs, the
Commission created a regulatory asset of Rs. 213 crores that
was recovered in FY 2021-22. Post-COVID, the Commission
increased tariff by 6.19% and 2.31%, with no regulatory
assets. However, as of FY 2023-24, there was a cumulative
revenue deficit of Rs. 2924.53 crores as the tariff hikes were
insufficient to meet expenditure. The Commission
implemented various rationalisation measures to reduce the
regulatory asset to Rs. 2528 crores, which would be recovered
with carrying cost during the true-up for FY 2023-24 and
tariff determination of FY 2025-26. It also submitted that no
further regulatory asset has been crated in the tariff order
dated 01.06.2024 for ARR of FY 2024-25.
v. Kerala State Electricity Regulatory Commission has
submitted that till FY 2022-23, the regulatory asset is Rs.
7123 crores as per the Commission’s order dated 25.06.2022.
22
Against this, the average GPF balance estimated by the
Kerala State Electricity Board at the end of FY 2026-27 is
about Rs. 3500 crores, and the average surplus security
deposit at the end of FY 2026-27 is Rs. 285 crores.
Considering these funds available with the Kerala State
Electricity Board, the Commission decided to amortise the
balance gap of about Rs. 3350 crores during the control
period while avoiding tariff shock and financial burden to the
consumers, in the following manner: Rs. 850 crores each year
from FY 2022-23 to FY 2024-25, Rs. 500 crores in FY 2025-
26, and Rs. 300 crores in FY 2026-27.
vi. The Rajasthan Electricity Regulatory Commission has
submitted that as per its orders dated 31.03.2023 and
26.07.2024, the regulatory asset across the three distribution
companies in the state is Rs. 47,578 crores upto FY 2023-24
and Rs. 47,114 crores upto FY 2024-25. Various measures
have been taken for recovery of the accumulated regulatory
assets including financial support from the state government
and introduction of monthly fuel surcharge to account for
increasing power purchase costs. The Commission also noted
that decision regarding regulatory surcharge, tariff increase,
and adjustment of regulatory asset against revenue surplus
will be taken in the successive years. It has also submitted
that under the Draft RERC (Terms and Conditions for
Determination of Tariff) Regulations, 2025, Regulation 91
provides for the creation of a regulatory asset only in
exceptional circumstances under natural calamity
conditions. Even then, it shall not be more than 3% of the
23
approved ARR and it shall be liquidated with carrying costs
in maximum 3 equal yearly instalments. Existing regulatory
asset, along with the carrying costs, shall be liquidated in a
maximum of 7 equal yearly instalments. In case there is
surplus in any financial year, it shall be adjusted first against
regulatory assets. This is exactly what is prescribed in Rule
23 of the Electricity Rules made by the Central Government,
which we will refer to in further detail at a later stage.
vii. The Tamil Nadu Electricity Regulatory Commission submits
that the regulatory asset in the State of Tamil Nadu till FY
2021-22, including carrying cost, is estimated at Rs.
89,375.09 crores. The Commission submits that this is more
than 100% of the ARR, and hence a tariff-based liquidation
would not be feasible as it would excessively burden
consumers. Rather, the same must be recovered by
upgrading transmission infrastructure, reducing aggregate
technical and commercial (AT&C) losses, and sourcing low-
cost renewable energy sources. Essentially, the cost of
procurement must be lowered such that the revenue
requirement of the distribution company is on par with the
consumers’ paying capacity. It further submits that in the
true-up order for FY 2022-23, the Commission directed the
Tamil Nadu Generation and Distribution Corporation to seek
approval from the Government of Tamil Nadu to liquidate the
revenue gap till FY 2021-22 of Rs. 83,000 crores through
government resources. Based on the Government’s decision,
the Commission submits that it will finalise the strategy for
amortisation of the regulatory asset. It also submits that it
24
has endeavoured to not create any new regulatory asset from
FY 2022-23 by proposing a tariff increase in a socially
balanced manner.
5 (ii). Affidavits by State Governments.
25. Following is the gist of the affidavits filed by various State
Governments.
i. The State of Nagaland has filed an affidavit stating that it is
a bulk power customer and is allotted power by the
Government of India from generating stations within and
outside the state. The tariff for the same is determined by the
Central Electricity Regulatory Commission.
ii. The State of Odisha submitted that as per its communication
with the Odisha Electricity Regulatory Commission, the
Commission has never created a regulatory asset.
iii. The Government of Madhya Pradesh also filed its affidavit
through the Madhya Pradesh Power Management Co. Ltd.,
which has submitted that the State Commission has always
followed a cost-reflective tariff and has not created any
regulatory asset.
26. We would have expected the State Governments to take a
clear stand on the social justice obligations of the State in the
context of the power of the Regulatory Commissions to determine
tariff. The Regulatory Commissions are required to balance the
interplay of the obligations of the State to ensure access to
25
electricity on the one hand, and the right of the utilities to recover
cost-based expenses on the other. We are aware of the autonomy
that the Regulatory Commissions exercise in the context of tariff
determination, as well as of applicability of the National Tariff
Policy and Rules formulated by the Central Government on
regulatory asset. We were conscious of this aspect and the same is
reflected in our consideration.
6. Law Governing the Electricity Sector Prior to 2003.
27. The supply and use of electricity was originally governed
under the Indian Electricity Act, 1910, which provided the legal
framework for laying cables and other works. With independence
and industrialisation, the need for electricity in urban as well as
rural areas increased, leading to enactment of the Electricity
(Supply) Act, 1948 that mandated State Governments to constitute
separate State Electricity Boards that would be responsible for
arranging supply of electricity in each state and administering the
23
grid system. It also provided for a Central Electricity Authority
24
for planning and development of the national power system.
23
Hereinafter “CEA”.
24
Tata Power Co. Ltd. v. Reliance Energy Ltd. , (2009) 16 SCC 659, paras 67-71; BSES
Rajdhani Power Ltd. v. Delhi Electricity Regulatory Commission
, (2023) 4 SCC 788, paras 11-
13.
26
These were the regulators, but the governments exercised
substantial control on policy as well as management of the sector.
28. Over time it was noticed that these State Electricity Boards
were unable to respond to the rapidly growing demand of electricity
due to financial losses, low tariffs, lack of budgetary support from
25
the governments, or investments. Further, various problems
plagued the power sector, namely the lack of rational retail tariffs,
high level of cross-subsidies, poor planning and operation,
inadequate capacity, neglect of consumer interest, limited
involvement of the private sector’s skills and resources, and the
26
absence of an independent regulatory authority. This led to the
enactment of the Electricity Regulatory Commissions Act, 1998
with the objective of reforming the electricity sector by establishing
Central and State Electricity Regulatory Commissions,
rationalising electricity tariffs, transparent policies regarding
subsidies, and promoting efficient and environmentally benign
27
policies.
25
Statement of Objects and Reasons, Electricity Regulatory Commissions Act, 1998.
26
ibid.
27
The Preamble of this Act reads:
“ An Act to provide for the establishment of a Central Electricity Regulatory
Commission and State Electricity Regulatory Commissions, rationalization of
electricity tariff, transparent policies regarding subsidies, promotion of efficient and
environmentally benign policies and matters connected therewith or incidental
thereto . “
27
29. In the NCT of Delhi, the Delhi Electricity Reforms Act, 2000
was enacted to restructure the electricity industry by unbundling
generation, transmission and distribution, to increase avenues for
private sector participation, and to take measures conducive to the
development and management of the electricity industry in an
28
efficient, commercial, economic, and competitive manner.
7. Electricity Act, 2003.
30. The Electricity Act, 2003 was enacted by the Parliament as a
complete and comprehensive law for regulating the generation,
transmission, distribution, and use of electricity in India. The
Preamble of the Act reads:
“ An Act to consolidate the laws relating to generation,
transmission, distribution, trading and use of electricity and
generally for taking measures conducive to development of
electricity industry, promoting competition therein,
protecting interest of consumers and supply of electricity to
all areas, rationalization of electricity tariff, ensuring
transparent policies regarding subsidies, promotion of
efficient and environmentally benign policies, constitution of
Central Electricity Authority, Regulatory Commissions and
establishment of Appellate Tribunal and for matters
connected therewith or incidental thereto .”
28
BSES Rajdhani Power Ltd (supra), para 15. The Preamble of the Delhi Electricity Reform
Act, 2000 reads:
“ An Act to provide for the constitution of an Electricity Regulatory Commission,
restructuring of the electricity industry (rationalisation of generation, transmission,
distribution and supply of electricity), increasing avenues for participation of private
sector in the electricity industry and generally for taking measures conducive to the
development and management of the electricity industry in an efficient, commercial,
economic and competitive manner in the National Capital Territory of Delhi and for
matters connected therewith or incidental thereto .”
28
31. Further, the purpose of the enactment is explained in detail
in its Statement of Objects and Reasons, the relevant portions of
which are extracted hereinbelow:
“3. With the policy of encouraging private sector
participation in generation, transmission and distribution
and the objective of distancing the regulatory
responsibilities from the Government to the Regulatory
Commissions, the need for harmonising and rationalising
the provisions in the Indian Electricity Act, 1910, the
Electricity (Supply) Act, 1948 and the Electricity Regulatory
Commissions Act, 1998 in a new self-contained
comprehensive legislation arose. Accordingly it became
necessary to enact a new legislation for regulating the
electricity supply industry in the country which would
replace the existing laws, preserve its core features other
than those relating to the mandatory existence of the State
Electricity Board and the responsibilities of the State
Government and the State Electricity Board with respect to
regulating licensees. There is also need to provide for newer
concepts like power trading and open access. There is also
need to obviate the requirement of each State Government
to pass its own Reforms Act. The Bill has progressive
features and endeavours to strike the right balance given
the current realities of the power sector in India. It gives the
State enough flexibility to develop their power sector in the
manner they consider appropriate. The Electricity Bill, 2001
has been finalised after extensive discussions and
consultations with the States and all other stake holders
and experts.”
32. Through reading the Statement of Objects and Reasons as
well as the Preamble, the salient features of the Act are:
i. The Act is a comprehensive code to regulate the generation,
transmission, distribution, trading and use of electricity and
replaces the erstwhile 1910 Act, 1948 Act, and 1998 Act that
29
governed electricity supply and use;
29
Tata Power Co Ltd (supra), para 76.
29
ii. The State Electricity Boards are unbundled into separate
utilities for electricity generation, transmission, and
30
distribution, and private sector participation is encouraged
31
in these activities;
iii. The Act provides for development of the electricity sector
through coordinated efforts of the Central Government, State
Governments, and various statutory authorities and
regulators by institutionalising electricity policies and plans;
iv. While generation has been delicensed, the transmission,
32
distribution, and trading of electricity are licensed activities;
v. The Act provides for a price discovery mechanism through
tariff fixation;
vi. The Act entrusts the performance of regulatory and
adjudicatory functions, including licensing and tariff fixation,
to permanent, independent Regulatory Commissions that act
33
as expert and specialised bodies. It also enables dispute
resolution through arbitration in specified cases;
vii. The Act established the APTEL as a specialised appellate
34
forum;
viii. The Act provides for offences as well as their penalties.
30
PTC India Ltd. v. Central Electricity Regulatory Commission , (2010) 4 SCC 603, para 17.
31
Tata Power Co Ltd (supra), para 80; Hindustan Zinc Ltd. v. Rajasthan Electricity Regulatory
Commission , (2015) 12 SCC 611, para 29.
32
Tata Power Co. Ltd. (supra).
33
Tata Power Co Ltd (supra), para 78; PTC India Ltd (supra), para 17.
34
West Bengal Electricity Regulatory Commission v. CESC Ltd.
See , (2002) 8 SCC 715, para
102.
30
8. Provisions of the Electricity Act relating to determination
of Tariff.
33. Section 3 of the Electricity Act provides for the preparation,
publication, review, and revision of the National Electricity Policy
and tariff policy by the Central Government in consultation with
the State Governments and the CEA for development of the power
sector through optimal utilisation of resources. Sub-section (4)
also provides for the CEA to prepare a National Electricity Plan as
per the National Electricity Policy.
34. A distribution licensee is defined under Section 2(17) as a
licensee operating and maintaining a distribution system for
supplying electricity to consumers in its area of supply. Electricity
distribution is a licensed activity as per Section 12, and the license
is granted by the Regulatory Commission under Section 14. Part
VI of the Act deals with distribution of electricity – Sections 42
and 43 set out of the duties of a distribution licensee and open
access, Sections 45 and 46 provide for the power to recover charges
and expenditure for supply of electricity, Section 47 provides for
the power to require security, and Sections 48 and 49 empower the
distribution licensee to impose restrictions and enter into
agreements for supply of electricity.
31
35. The Electricity Act also lays down a regulatory mechanism as
follows: Section 2(4) defines “Appropriate Commission” as meaning
the Central, State, or Joint Electricity Regulatory Commission, as
the case may be. The Central Commission is constituted under
Section 76, its functions are stipulated under Section 79, and its
regulation-making powers are provided under Section 178.
Sections 80 and 81 deal with the Central Advisory Committee and
its objects.
35.1 Similarly, the State Commissions are constituted under
Section 82 and their functions are provided in Section 86, which
include both mandatory and advisory functions. The relevant
mandatory function for our purpose is under sub-section (1)(a),
which provides for tariff determination for retail supply of
electricity within the State. Sub-section (4) provides that the State
Commission shall be guided by the National Electricity Policy, tariff
policy, and National Electricity Plan formulated under Section 3.
The State Commission can also make regulations in exercise of its
powers under Section 181, including on the terms and conditions
for determination of tariff under Section 61 (sub-section (2)(zd)),
methodologies and procedures for calculating expected revenue
from tariff and charges under Section 62(5) (sub-section (2)(zf)), the
32
manner of making an application and fee payable under Section
64 (sub-section (2)(zg)), and modifications or conditions under
Section 64(3) (sub-section (zh)). Sections 87 and 88 deal with State
Advisory Committees and their objects.
35.2 The Joint Regulatory Commission is constituted under
Section 83, and its functions and powers are under sub-sections
(4) and (5).
35.3 Lastly, it is important to note that Section 142 empowers the
Commissions to punish for non-compliance of their directions, or
any provision of the Act or rules or regulations made thereunder.
36. The Central and State Governments are also given the power
to make rules under the Act, under Sections 176 and 180
respectively. Beyond rule-making, the Central and State
Governments can issue policy directions to the Central and State
Commissions respectively in matters involving public interest
under Sections 107 and 108. These directions “shall guide” the
35
Regulatory Commissions, but shall not be binding on them.
37. In exercise of their powers and functions, the Central and
State Commissions are required to determine tariff as per Part VII
of the Electricity Act. Section 61 lays down the guiding principles
35
Kerala State Electricity Board Ltd. v. Jhabua Power Ltd ., 2024 SCC OnLine SC 2819.
33
for the Commissions to specify the terms and conditions of tariff
determination, of which the following are relevant:
“ The Appropriate
Section 61. (Tariff regulations):
Commission shall, subject to the provisions of this Act,
specify the terms and conditions for the determination of
tariff, and in doing so, shall be guided by the following,
namely:-
*
(b) the generation, transmission, distribution and supply of
electricity are conducted on commercial principles;
(c) the factors which would encourage competition,
efficiency, economical use of the resources, good
performance and optimum investments;
(d) safeguarding of consumers' interest and at the same
time, recovery of the cost of electricity in a reasonable
manner;
(e) the principles rewarding efficiency in performance;
(f) multi year tariff principles;
(g) that the tariff progressively reflects the cost of supply of
electricity and also, reduces cross-subsidies in the manner
specified by the Appropriate Commission;
*
(i) the National Electricity Policy and tariff policy… ”
38. While these principles have a bearing on making the
regulations for tariff determination, tariff is fixed under Section 62,
inter alia, for retail supply of electricity. Sub-section (5) also
provides for compliance with procedures specified for calculating
expected revenues from tariff and charges that can be recovered.
Section 63 deals with tariff determination through bidding, and
Section 64 provides the procedure for application for tariff
determination. Section 65 mandates that if the State Government
requires the grant of subsidy to any class of consumers in tariff, it
34
shall pay the amount of such subsidy in advance to compensate
the person affected by the grant of subsidy.
9. Provisions of Act, Policies, Rules, Regulations, and Orders
having a bearing on creation of a Regulatory Asset.
9 (i). National Electricity Policy, 2005.
39. The Central Government notified the National Electricity
Policy under Section 3 of the Electricity Act on 12.02.2005, which
laid down guidelines for development of the power sector, providing
electricity supply to all areas, and protecting consumer and other
stakeholders’ interests keeping in view availability of energy
resources, technology, and energy security issues.
40. On 01.01.2006, the DERC issued a Public Awareness
Bulletin setting out the major components of ARR for Delhi’s
distribution companies as well as the approximate ratio of each
component in the tariff. Power purchase costs are 80% of the tariff,
operations and maintenance expenses are 9-10% of the tariff,
depreciation is 3-4%, return on capital employed is 6-7%, and
income tax is 0.5-1%.
35
9 (ii). National Tariff Policy, 2006 .
41. On 06.01.2006, the Central Government notified the National
Tariff Policy, 2006 under Section 3 of the Act. Clause 8.2.2 of the
Policy provides for the creation of a regulatory asset, as well as
certain restrictions on time-period and circumstances. It reads:
“ 8.2.2. The facility of a regulatory asset has been adopted by some
Regulatory Commissions in the past to limit tariff impact in a
particular year. This should be done only as exception, and subject to
the following guidelines:
a. The circumstances should be clearly defined through regulations,
and should only include natural causes or force majeure conditions.
Under business as usual conditions, the opening balances of
uncovered gap must be covered through transition financing
arrangement or capital restructuring;
b. Carrying cost of Regulatory Asset should be allowed to the utilities;
c. Recovery of Regulatory Asset should be time-bound and within a
period not exceeding three years at the most and preferably within
control period;
d. The use of the facility of Regulatory Asset should not be repetitive.
e. In cases where regulatory asset is proposed to be adopted, it
should be ensured that the return on equity should not become
unreasonably low in any year so that the capability of the licensee to
borrow is not adversely affected. ”
(emphasis supplied)
41.1 As stated above, Section 86(4) provides that the State
Commission shall be guided by the National Tariff Policy in
discharging its functions, and the Policy is also a guiding principle
for tariff determination as per Section 61(1)(i). This Court has held
that while the Policy does not bind the State Commission, it is a
36
material consideration that must guide tariff determination.
36
Tata Power Co. Ltd. v. Maharashtra Electricity Regulatory Commission
, (2023) 11 SCC 1,
para 122.
36
41.2 Nothing can be clearer than the mandate under Clause 8.2.2
of the National Tariff Policy, 2006. The real issue is to examine the
circumstances and the compelling reasons for the creation and
undue extension of the regulatory asset over a period of time,
which we will undertake in our Analysis.
9 (iii). DERC Tariff Determination Regulations, 2007 .
42. On 30.05.2007, the DERC framed the Tariff Determination
Regulations, 2007 for the first control period (FY 2007-2011),
under which Regulation 5.42 deals with regulatory asset. It
stipulates that at the time of truing up, if variations on account of
uncontrollable items like energy sales and power purchase costs
are large and it is not feasible to recover them in one year, the
Commission can create a regulatory asset as per Clause 8.2.2 of
the National Tariff Policy, 2006. Regulation 5.42 in fact
incorporates the National Tariff Policy and makes it a part of the
enforceable regime. The relevant portion is extracted below for
ready reference:
“ 5.42 Variations on account of uncontrollable items like energy sales
and power purchase cost shall be trued up. Truing-up shall be carried
out for each year based on the actual/audited information and
prudence check by the Commission;
Provided that if such variations are large, and it is not feasible to
recover in one year alone, the Commission may take a view to create
a regulatory asset, as per the guidelines provided in clause 8.2.2 of
the National Tariff Policy. ”
(emphasis supplied)
37
9 (iv). DERC Statutory Advice dated 15.12.2010 .
43. On 15.12.2010, the DERC issued a statutory advice to the
Government of NCT of Delhi regarding the financial position of
BRPL and BYPL and whether they are able to meet expenses from
tariff revenue and return on equity. In this letter, the DERC stated
that the tariffs for FY 2008-09 to FY 2010-11 are not cost-reflective
and they do not account for the increase in power purchase costs
during this period, which constituted more than 80% of the tariff.
While generating companies recover the increase in cost from the
distribution companies, the latter are unable to recover the same
from consumers under the present tariff. Distribution licensees
resorted to extensive borrowing to sustain operations, resulting in
substantial interest costs and a precarious financial position. The
DERC noted that this is against consumer interests as these costs
must ultimately be recovered from consumers with carrying cost,
and would burden future consumers with previously incurred
costs. The relevant portions of the DERC’s letter are extracted
below:
“ 16. The Commission has analysed the ability of the
distribution licensees to meet their expenses and has
considered the revenue from retail sale of electricity at the
tariffs determined by the Commission. These have been
compared with various heads of expenditure i.e. power
purchase cost, operating expenses including interest and
38
depreciation, to determine the extent of surplus available
towards the return on equity allowed by the Commission.
18. Power purchase cost should not be exceeding 80%
which was in the range of 73-80% in the year 2008-09, 77-
98% in the year 2009-10 and 113-135% in the first six
months of 2010-11.
20. Power purchase and revenue recovered from sale of
energy are not within the control of the distribution
licensees. Power purchase cost is mostly dependent upon
the fuel cost which is market driven. The generating
company recovers the increase in the fuel cost and other
variable expenses every month from the distribution
licensees, who in turn are not able to recover timely from the
consumers under the present dispensation. Thus, the
operations of the distribution companies are dependent on
borrowings over a period of 18-24 months which entails
substantial interest cost. This, in any case, is detrimental to
consumer Interest as all power purchase costs whether
short term or long term are passed through to the consumers
(and recovered from the consumers along with the carrying
cost).
*
Conclusion
The Commission is of the view that the tariff during previous
years has not been cost effective. The distribution licensees
have had to resort to extensive borrowing to sustain their
operations.
*
(3) Accumulation of Revenue gaps beyond sustainable
levels
Analysis of the Audited Accounts of the distribution
licensees in Tables 1-3 would indicate that there is shortfall
in the years 2009-10 and 2010-11 beyond sustainable
levels. Thus, it would be quite obvious that in the absence
of tariff revision there is a growing revenue gap which is to
be funded out of borrowings which are increasing from year
to year.
*
(5) Power purchase cost/quantum
Analysis carried out for the years 2008-09 and 2009-10 in
Tables 1-4 would indicate that there has been a steep
increase in the power purchase cost. These issues would
get addressed while taking the ground realities into
consideration and estimating the quantum and the cost
based upon the current data based upon the latest bills
available from the generating companies, power purchase
rates in the Power Exchange, Ul and bilateral contracts.
”
39
9 (v). Ministry of Power’s Letter to the APTEL.
44. On 21.01.2011, the Minister of Power issued a letter to the
APTEL to take suo motu cognisance and issue necessary directions
under Section 121 of the Electricity Act regarding periodical tariff
revisions for improving the long-term financial health and viability
of the electricity sector.
9 (vi). APTEL’s Order dated 11.11.2011 .
45. Pursuant to this letter, the APTEL passed an order dated
37
11.11.2011 wherein it issued various directions to Regulatory
Commissions regarding timely tariff determination, truing up, and
creation, continuation, and recovery of the regulatory asset. The
directions issued by the APTEL are as follows:
“ 65. In view of the analysis and discussion made above, we deem it
fit to issue the following directions to the State Commissions:
(i) Every State Commission has to ensure that Annual
Performance Review, true-up of past expenses and Annual
Revenue Requirement and tariff determination is conducted
year to year basis as per the time schedule specified in the
Regulations.
(ii) It should be the endeavour of every State Commission to ensure
that the tariff for the financial year is decided before 1st April
of the tariff year. For example, the ARR & tariff for the financial
year 2011- 12 should be decided before 1st April, 2011. The
State Commission could consider making the tariff applicable
only till the end of the financial year so that the licensees
remain vigilant to follow the time schedule for filing of the
application for determination of ARR/tariff.
(iii) In the event of delay in filing of the ARR, truingup and Annual
Performance Review, one month beyond the scheduled date of
37
In O.P. No. 1/2011, order dated 11.11.2011.
40
submission of the petition, the State Commission must initiate
suo-moto proceedings for tariff determination in accordance
with Section 64 of the Act read with clause 8.1 (7) of the Tariff
Policy.
(iv) In determination of ARR/tariff, the revenue gaps ought not to
be left and Regulatory Asset should not be created as a matter
of course except where it is justifiable, in accordance with the
Tariff Policy and the Regulations. The recovery of the
Regulatory Asset should be time bound and within a period not
exceeding three years at the most and preferably within
Control Period. Carrying cost of the Regulatory Asset should be
allowed to the utilities in the ARR of the year in which the
Regulatory Assets are created to avoid problem of cash flow to
the distribution licensee.
(v) Truing up should be carried out regularly and preferably every
year. For example, truing up for the financial year 2009-10
should be carried out along with the ARR and tariff
determination for the financial year 2011-12.
(vi) Fuel and Power Purchase cost is a major expense of the
distribution Company which is uncontrollable. Every State
Commission must have in place a mechanism for Fuel and
Power Purchase cost in terms of Section 62 (4) of the Act. The
Fuel and Power Purchase cost adjustment should preferably be
on monthly basis on the lines of the Central Commission’s
Regulations for the generating companies but in no case
exceeding a quarter. Any State Commission which does not
already have such formula/mechanism in place must within 6
months of the date of this order must put in place such formula/
mechanism.
66. We direct all the State Commissions to follow these directions
scrupulously, and send the periodical reports by 1st June of the
relevant financial year about the compliance of these directions to the
Secretary, Forum of Regulators, who in turn will send the status
report to this Tribunal and also place it on its website .”
9 (vii). DERC Tariff Determination Regulations, 2011.
46. The DERC then issued the Tariff Determination Regulations,
2011 for the second control period (FY 2012-2015, later extended
till 31.03.2017), under which Regulation 5.40 is relevant and deals
with regulatory asset. Similar to Regulation 5.42 of the Tariff
41
Determination Regulations, 2007, it provides for creation of a
regulatory asset when the variations at the truing up stage are
large and cannot be recovered in one year. Further, the regulatory
asset must be created as per the guidelines in Clause 8.2.2 of the
National Tariff Policy, 2006. The Regulation reads:
“ 5.40 Truing-up shall be carried out in accordance with
Regulation 4.21, for each year based on the actual/audited
information and prudence check by the Commission;
Provided that if such variations are large, and it is not
feasible to recover in one year alone, the Commission may
take a view to create a regulatory asset, as per the
guidelines provided in clause 8.2.2 of the National Tariff
Policy.
Provided further that under business as usual conditions,
the Commission, to ensure tariff stability, may include the
opening balances of uncovered gap / trued-up costs in the
subsequent Control Period’s ARR instead of including in the
year succeeding the relevant year of the control period after
providing for transition financing arrangement or capital
restructuring. ”
9 (viii). DERC’s Tariff Order dated 26.08.2011 (FY 2011-12) .
47. The DERC also passed an order dated 26.08.2011 wherein it
determined the ARR for FY 2011-12 and the true-up for FY 2008-
2010. In this order, it increased the tariff by 22% across the board
for all consumer categories and also introduced a fuel price
adjustment charge.
42
9 (ix). DERC’s MYT Order dated 13.07.2012 (FY 2012-15) .
48. In its subsequent MYT order dated 13.07.2012 determining
ARR for FY 2012-2015 and true-up for FY 2010-11, the DERC
approved tariff increase of 23%, introduced the DRS @ 8%, and the
PPAC. The fuel price adjustment charge was absorbed into these.
9 (x). DERC’s Statutory Advice dated 01.02.2013.
49. On 01.02.2013, the DERC issued another statutory advice to
the Government of NCT of Delhi, wherein it noted that the revenue
gap was Rs. 19,505.04 crores, including carrying costs, across
BRPL, BYPL, and TPDDL since FY 2009-10. The DERC also
specified various measures taken to recover the revenue gap,
including the 23% tariff hike w.e.f. 01.07.2012 and the DRS of 8%,
but that these were insufficient. In this light, the DERC
recommended that the Government of NCT of Delhi may take steps
to ensure that benefits of Central Government sponsored schemes,
direct subsidies from state governments, and additional budgetary
support are extended to the distribution licensees. The relevant
recommendations of the DERC to the Government of NCT are
extracted below:
“14. Recommendations:-
*
43
i) …The Commission recommends that Govt. of NCT of Delhi
may take urgent steps so that the benefits of various Central
Government sponsored schemes are extended to the Delhi
distribution utilities and, in tum, to the electricity consumers
in Delhi. Unless this is done, tariffs in Delhi could become
unsustainable, especially when compared to other States in
the country where State owned utilities not only avail the
benefits of the centrally sponsored schemes but also avail
direct subsidies from the State Governments as well as
additional budgetary support for lower tariff levels.
ii) In case of APDRP, R-APDRP and JNNURM schemes of the
Central Govt., the view of the Govt. been that privately
managed distribution entities should not be allowed to avail
the benefits of these programmes. The Commission is of the
view that denial of the benefits of these programmes to the
distribution entities of Delhi does not affect the
managements of these distribution companies but, in fact,
denies the benefit of the schemes to the consumers of
electricity of Delhi who are as a result required to pay higher
tariffs than are paid by the electricity consumers in other
States which avail of the benefits of these schemes. Thus,
the Govt. of NCT of Delhi may take up with the Ministry of
Power that these schemes are availed of by the Delhi
distribution utilities for the benefit of the consumers in the
NCT of Delhi.
iii) The financial bailout package introduced by the Central
Govt. for financial restructuring of State distribution entities
with certain conditions including support from the State
Govt. is also being denied to the distribution entities in
Delhi. Here again, this view does not impact the private
managements of these companies but has a direct impact
on their revenue requirements and consequently, the tariff
required to be paid by electricity consumers in the city. The
Govt. of NCT of Delhi may take up with the Ministry of Power
to sanction the bail-out package for the DISCOMs of Delhi.
This would be the single most important measure for
deferring the incidence of high levels of past revenue gaps
on the tariff determination process. ”
9 (xi). DERC’s Tariff Order dated 31.07.2013 (FY 2013-14).
50. In the next tariff order dated 31.07.2013 to determine ARR
for FY 2013-14 and true-up for FY 2011-12, the DERC increased
44
the tariff by 5% and continued the existing DRS @ 8% over and
above the revised tariff. It also allowed carrying cost on the
regulatory asset to all distribution companies. At this stage, the
regulatory asset amounted to Rs. 8060 crores across the BSES
Discoms and Rs. 3370 crores for TPDDL.
9 (xii). APTEL’s Order dated 14.11.2013.
38
51. The APTEL also passed the order dated 14.11.2013 ,
wherein it reiterated its direction to the DERC to provide for
recovery of the regulatory asset in 3 years as per its order dated
11.11.2011 and to implement the judgments of the APTEL. The
DERC has filed civil appeals against this order, which have been
dismissed by this Court’s order dated 01.12.2021 as there was no
39
substantial question of law. This Court also directed the DERC
to implement the issues decided by the APTEL, if not already
complied, within a period of 3 months and to file a compliance
40
report in 2 weeks thereafter. The relevant portion of the APTEL
order is as follows:
“ 37. As regards recovery of the Regulatory
assets/amortization schedule and fuel and power purchase
adjustment mechanism, this Tribunal in OP No.1 of 2011
38
In O.P. Nos. 1 and 2/2012, order dated 14.11.2013.
39
In C.A. No. 1854-1855/2014, order dated 01.12.2021.
40
ibid.
45
dated 11.2011 has given the following directions to the
State Commission…
38. In view of the above, we direct the State Commission to
take immediate steps for recovery of the admitted revenue
gap and decide amortization schedule and also ensure that
the Fuel and Power Purchase costs are passed on regularly
and effectively as per the above directions of this Tribunal
to avert the problems of cash flow experienced by the
Petitioners which may come in the way of smooth operation
of the distribution system and meeting the requirements of
electricity of the consumers in the national capital in a
reliable manner if not remedied in time.
39. In view of the categorical stand taken by the Delhi
Commission now, it is enough for us to direct the Delhi
Commission to implement the directions of this Tribunal
given in the decisions referred to above and pass an order
in terms of those directions in future .”
9 (xiii). APTEL’s Order dated 11.03.2014 .
52. The above-referred tariff order dated 31.07.2013 was
appealed before the APTEL by BRPL in Appeal No. 266/2013 and
by BYPL in Appeal No. 265/2013 on the ground that the tariff
order did not provide a roadmap for recovery of the regulatory
asset. In these appeals, BRPL and BYPL filed IA 365/2013 and
364/2013 respectively for an order to increase the DRS to meet
carrying costs upto 31.03.2014, to repay one-third of the principal
component of the regulatory asset, and to provide a plan for
completely recovery of the regulatory asset in 3 years as per the
National Tariff Policy, 2006.
53. The APTEL rejected the prayer for liquidating the regulatory
asset in 3 years by order dated 11.03.2014, which has been
46
appealed by BRPL and BYPL in the present civil appeals. However,
the APTEL directed the DERC to prepare a roadmap for liquidation
of the regulatory asset, both principal amount and carrying cost,
keeping in mind the interests of consumers and the distribution
licensees.
54. In the present civil appeals (C.A. No. 4010 and 4013/2014)
against the APTEL’s order dated 11.03.2014, as well as writ
petitions by BRPL and BYPL, this Court by order dated 26.03.2014
directed the DERC to submit a roadmap for liquidation of the
regulatory asset and also directed BRPL and BYPL to pay the
current dues to the generating and transmission companies. In
compliance with this order, the DERC submitted a liquidation
schedule on 01.05.2014 before this Court, in which it proposed to
liquidate the regulatory asset including carrying cost in 6-7 years
(by FY 2020-21) by taking the average growth rate of distribution
companies at 15%.
9 (xiv). National Tariff Policy, 2016 .
55. On 28.01.2016, a revised National Tariff Policy, 2016 was
notified by the Central Government, wherein Clause 8.2.2 deals
with regulatory asset. While the other conditions for creation of a
regulatory asset are similar to the National Tariff Policy, 2006, the
47
time-period for recovery was increased from 3 to 7 years. The
relevant portion is extracted below:
“ 8.2.2 The facility of a regulatory asset has been adopted
by some Regulatory Commissions in the past to limit tariff
impact in a particular year. This should be done only as a
very rare exception in case of natural calamity or force
majeure conditions and subject to the following:
a. Under business as usual conditions, no creation of
Regulatory Assets shall be allowed;
b. Recovery of outstanding Regulatory Assets along with
carrying cost of Regulatory Assets should be time bound
and within a period not exceeding seven years. The State
Commission may specify the trajectory for the same. ”
(emphasis supplied)
9 (xv). DERC Tariff Determination Regulations, 2017 .
56. The DERC then framed the DERC (Terms and Conditions for
Determination of Tariff) Regulations, 2017, which contains a
separate section on regulatory asset. Regulation 154 provides that
an accumulated revenue gap approved by the Commission in the
relevant tariff order shall be treated as a regulatory asset, and that
such revenue gap shall be computed on the basis of excess of ARR
over revenue approved after truing up for the relevant year.
Regulation 155 provides for carrying cost, and Regulation 156
deals with the how the regulatory asset must be shown in the
books of accounts. On a perusal of these regulations, it is clear
that Clause 8.2.2 of the National Tariff Policy, 2016 has not been
48
referred, nor are there any conditions on when a regulatory asset
can be created, its quantum, and the time-period for its recovery.
9 (xvi). Ministry of Power’s Affidavit dated 10.08.2022 .
57. On 10.08.2022, the Ministry of Power, Union of India
submitted an affidavit before this Court in the present writ
petitions. It submitted that while the DERC created the regulatory
asset as an exception, it is now being continued in a manner
inconsistent with the Electricity Act and its larger objective of a
healthy and economical electricity sector. The affidavit also relied
41
on the APTEL’s judgment dated 11.11.2011 where it was held
that the regulatory asset must be recovered in a time-bound
manner within 3 years, and preferably within the control period.
The Ministry of Power prayed that this Court direct DERC to devise
a roadmap or plan for amortisation of the regulatory asset in a
time-bound manner as per the National Tariff Policies, to direct the
State Commissions to determine cost-reflective tariffs, and that no
new regulatory asset be created except as per the National Tariff
Policy, 2016. The relevant portions of the affidavit are extracted
below:
41
In O.P. No. 1/2011 (supra).
49
“ 10. That creation of Regulatory Asset essentially requires
deferment of admitted cost due to a Distribution Company
to a future period in order to avoid tariff shock. This concept
was adopted by the Respondent No. 2 as an exception,
however, gradually the exercise of creation of Regulatory
Asset seems to have become a trend and is now being done
on year to year basis. Such an approach is not only
inconsistent with the Act but is also irreconcilable with the
larger objective to have a healthy and economical electricity
sector in the country.
11. That in order to address this situation, the Answering
Respondent in compliance with section 3 of the Act, notified
the National Tariff Policy ("NTP, 2006") on 06.01.2006,
wherein the Answering Respondent had directed that the
'Regulatory Asset' should not be created under usual
business condition and the recovery of Regulatory Asset
should be timebound, within a period of three years.
Following are the relevant extracts of the NTP, 2006…
12. That despite the above mandate, it was observed that
the SERCs have failed/or are reluctant to conduct the tariff
determination exercise in consistency with the Act. In this
respect, on 21.01.2011, the Answering Respondent issued
a Letter to the Appellate Tribunal for Electricity ("Appellate
Tribunal"), inter alia, requesting the Appellate Tribunal to
issue necessary directions to the SERCs to revise the tariff
periodically for improving the financial health and long-term
viability of the electricity sector, particularly for distribution
utilities. Basis the letter issued by the Answering
Respondent, the Appellate Tribunal initiated a Suo- Moto
proceeding being O.P. No. 01 of 2011 wherein, various
issues with respect to power of SERCs to determine tariff
were discussed…
14. That the Answering Respondent on 28.01.2016 issued
the National Tariff Policy, 2016 ("NTP, 2016"). Clause 8.2.2
of NTP, 2016, provided that the SERCs cannot continue to
delay the liquidation of Regulatory Assets and the recovery
of outstanding Regulatory Assets along with the Carrying
Cost should be done in a time bound manner not exceeding
7 years…
15. That it is evident from the above that Answering
Respondent has taken steps and mandated that the SERCs
(including the Respondent No.2) cannot create Regulatory
Asset as a matter of routine and the Regulatory Asset and
directed the SERCs to recover the outstanding Regulatory
Assets in a time bound manner…
18. That in view of the above, it is submitted that the
creation of a Regulatory Asset' with no mechanism for
recovery is contrary to the Act's legislative intent, as it
amounts to artificially keeping the tariff low while
50
prejudicing the efficient recovery of the tariff. Answering
Respondent vide the statutory policies and various
communications have directed the Commissions to refrain
from creating Regulatory Asset and to amortise the
Regulatory Asset within a time bound manner. However, as
evident in the present case, the Respondent No. 2 has not
acted in the compliance of the Act, Statutory policies issued
by the Answering Respondent and the Judgments/Order of
the Appellate Tribunal and deferred the recovery of
recognised revenue gap for 17 years by creating the
Regulatory Asset.
19. That it is therefore submitted that this Hon'ble Court
may be pleased to direct the Respondent No. 2 to devise a
roadmap/plan to amortise the Regulatory Asset in a time-
bound manner as mandated under the Tariff Policies
notified by the Answering Respondent or any other
methodology as this Hon'ble Court may deem fit in the
present situation. Since such problem is also observed in
other State Commissions also, Hon'ble Court may also be
pleased to direct all State Commission for determination of
cost reflective tariff and no new regulatory assets be created
as stipulated in the Tariff Policy 2016. State Commission
may also be directed to devise a roadmap/plan to amortise
the Regulatory Asset in a time-bound manner as mandated
under the Tariff Policies notified by the Answering
Respondent. ”
9 (xvii). Ministry of Power’s Affidavit dated 12.12.2022.
58. In another affidavit dated 12.12.2022, the Ministry of Power
submitted that the LPS fixed by the State Commissions was 18%,
which is “usurious” as bank lending rates are 6-7%. This higher
LPS means that distribution companies bear a heavy burden in
case of delayed payments, which is subsequently passed on to
consumers. Hence, LPS must be linked to the Bank Lending Rate
to make it reasonable. Though this issue does not directly arise for
our consideration, we are aware that it has a bearing on the tariff,
51
if not for the present but in future. Eventually, the burden is
shifted on the consumer. The Ministry also submits that taking
into account these concerns, it has notified the Electricity (LPS)
Rules, 2022. The relevant portions of the affidavit are extracted
below:
“ In the absence of any Rules or directions with regard to the
specific rates for Late Payment Surcharge (LPS), the CERC
and SERCS notified their respective Tariff Regulations from
time to time wherein different rates of the LPS were
specified and which were exorbitant- as high as 18 percent-
whereas Banks are charging an interest of only 6 to 7
percent on their loans. The extortionate rate of LPS lead to
higher cost of electricity for the common man; and a heavy
burden on the distribution companies putting them virtually
into a debt trap. ”
9 (xviii). Electricity (Amendment) Rules, 2024 introducing
Rule 23.
59. On 10.01.2024, the Central Government notified the
Electricity (Amendment) Rules, 2024 by which it inserted Rule 23,
which deals with regulatory asset, in the Electricity Rules, 2005.
This was in exercise of its rule-making powers under Section 176
of the Electricity Act. Rule 23 prescribes as a first principle that
tariff shall be cost-reflective and that there shall not be any gap
between the ARR and the estimated revenue from approved tariff.
The only exception to this rule is natural calamity conditions. Four
conditions are formulated for the creation, management, and
52
liquidation of a regulatory asset under Rule 23: First, the
regulatory asset shall not be more than 3% of the ARR. Second,
the revenue gap shall be liquidated within 3 years. Third, the
existing regulatory assets shall be liquidated within 7 years.
Fourth, the regulatory asset will have carrying cost as prescribed
under the Rules. We will deal with Rule 23 in more detail at a later
stage.
9 (xix). DERC’s Order dated 19.07.2024 (true-up till FY 2020-
21) .
60. Finally, in its orders dated 19.07.2024 for truing-up till FY
2020-21, the DERC implemented various decisions of the APTEL
and this Court. Pursuant to this, the regulatory asset including
carrying costs is as follows: Rs. 12,993.53 crores for BRPL, Rs.
8419.14 crores for BYPL, and Rs. 5,787.70 crores for TPDDL. This
amounts to Rs. 27,200.37 crores across all three distribution
companies until the end of FY 2020-21.
10. Analysis.
61. We are considering the legal position and status of a
regulatory asset, the rights and liabilities of stakeholders,
consequences of regulatory failure to manage the regulatory asset
53
as a reasonable measure, and the appellate and review powers of
the APTEL and this Court to ensure accountability and restitution.
10 (i). Electricity is a public good and is regulated under the
Act.
62. Since electricity is a material resource, the State has a public
interest in ensuring that its ownership and control is so distributed
as best to subserve the common good. Therefore, the public policy
that governs purchase, sale and distribution of electricity is not
based on market forces of demand and supply but by regulation
through statute. The Electricity Act 2003, the policies and plan(s)
formulated under Section 3 of the Act, rules made by the Central
and State Governments, and more importantly, the regulations
formulated by the Regulatory Commissions, followed by the
precedents laid down by the APTEL and this Court form the legal
regime, by which tariff is determined, restructured, and reviewed
from time to time.
10 (ii). Tariff determination is governed by the Act, which
entrusts this function to independent Regulatory
Commissions.
63. The Electricity Act unbundled generation, distribution and
transmission of electricity, and at the same time, institutionalised
54
important functions such as grant of licenses and determination
of tariff through the establishment of Regulatory Commissions.
These Regulatory Commissions have autonomy as provided in the
statute, expertise through human resource, continuation through
seal and succession, plurality by composition, and accountability
by transparency. With the powers that they are granted, coupled
with autonomy that they enjoy, these Commissions are the
primary duty bearers to implement the provisions of the Act.
63.1 Tariff determination is the exclusive province of the
Regulatory Commissions. In performance of their functions, the
Central and State Electricity Regulatory Commissions determine
tariff for supply of electricity by generating companies to
distribution licensees, for transmission, wheeling, and also for
42
Section 61 provides the guiding
retail sale of electricity.
42
Section 62 of the Electricity Act, which reads:
“ Section 62. (Determination of tariff): ---
(1) The Appropriate Commission shall determine the tariff in accordance with the
provisions of this Act for –
(a) supply of electricity by a generating company to a distribution licensee:
Provided that the Appropriate Commission may, in case of shortage of
supply of electricity, fix the minimum and maximum ceiling of tariff for sale or
purchase of electricity in pursuance of an agreement, entered into between a
generating company and a licensee or between licensees, for a period not
exceeding one year to ensure reasonable prices of electricity;
(b) transmission of electricity;
(c) wheeling of electricity;
(d) retail sale of electricity:
Provided that in case of distribution of electricity in the same area by two or
more distribution licensees, the Appropriate Commission may, for promoting
competition among distribution licensees, fix only maximum ceiling of tariff for retail
sale of electricity .”
55
principles for good governance for development, sale, and
distribution of power and also emphasises the overarching
principle of subserving the interests of consumers. The journey as
well as the destination of tariff determination indicates that the
Commissions shall adopt commercial principles, encourage
competition, promote efficiency, use resources economically,
perform efficiently and optimise investments. The purpose of
adopting such measures is to “ safeguard and protect the interest of
the consumers ”. Section 61 also recognises the vulnerability of the
electricity sector to undue political posturing, and therefore
emphasises that the Commission shall ensure that “ the tariff
progressively reflects the cost of supply of electricity and also,
Sections 79 sets out the functions of the Central Commission. The relevant portion is as
follows:
“ Section 79. (Functions of Central Commission): ---
(1) The Central Commission shall discharge the following functions, namely:-
(a) to regulate the tariff of generating companies owned or controlled by the Central
Government;
(b) to regulate the tariff of generating companies other than those owned or
controlled by the Central Government specified in clause (a), if such generating
companies enter into or otherwise have a composite scheme for generation and sale
of electricity in more than one State;
*
(d) to determine tariff for inter-State transmission of electricity;… ”
Section 86 sets out the functions of the State Commission. The relevant portion is as follows:
“
Section 86. (Functions of State Commission): ---
(1) The State Commission shall discharge the following functions, namely:-
(a) determine the tariff for generation, supply, transmission and wheeling of
electricity, wholesale, bulk or retail, as the case may be, within the State:
(b) regulate electricity purchase and procurement process of distribution licensees
including the price at which electricity shall be procured from the generating
companies or licensees or from other sources through agreements for purchase of
power for distribution and supply within the State; …”
56
43
reduce cross-subsidies ”. In this endeavour the National
Electricity Policy and the National Tariff Policy shall also be guiding
44
factors.
10 (iii). Collaborative effort of the Regulatory Commissions
to balance social justice obligations with efficiency.
64. The Electricity Act contemplates multiple stakeholders, in
other words, a plurality of collaborators – the Central Government,
the State Governments, Regulatory Commissions, the Appellate
Tribunal, statutory policy makers, and the utilities. These
authorities collaborate to ensure that the purpose of the Act is
subserved and, in this endeavour, the Regulatory Commissions
share the social justice obligations of the State. Since electricity is
45
a public good, Regulatory Commissions must undertake joint
and collaborative efforts with the other authorities to enable access
46
to electricity across urban and rural areas and affordability
47
through rationalisation of tariffs . The statutory authorities must
work in cohesion towards a common goal of ensuring supply of
electricity across regions and terrains, and cheaper and affordable
43
Section 61(1)(g) of the Electricity Act.
44
Section 61(1)(i) of the Electricity Act.
45
See K.C. Ninan v. Kerala State Electricity Board , (2023) 14 SCC 431, para 93.
46
See Preamble of the Electricity Act; Section 6 of the Electricity Act that places the
responsibility of rural electrification jointly on the Central and State Governments.
47
See Preamble of the Electricity Act.
57
supply of electricity to those sections of society who cannot afford
48
it. At the same time the Regulatory Commissions maintain their
independence and autonomy and ensure that the final decision
with respect to fixation of tariff will be that of the Regulatory
Commissions alone.
10 (iv). Tariff fixation takes into account multiple variables
and requires flexibility. Regulatory asset is a measure
adopted during tariff fixation that recognises right of
recovery .
65. A regulatory asset is adopted as a measure by the Regulatory
Commissions when the gap between the revenue required by the
distribution company to meet its costs and expenditure and the
actual revenue realised through immediate tariff is so high that it
would not only prejudice the consumer but lead to what is called
a tariff shock. By adopting such a measure, the Commission
liquidates the revenue required by the utility through future tariff
48
Paul Craig, UK, EU and Global Administrative Law: Foundations and Challenges (Cambridge
University Press, 2015), 305-306. The relevant portion is extracted hereinbelow:
“ Regulation as an enterprise conceives regulators as governments in miniature, in
which efficiency and distributive goals are both legitimate regulatory concerns, and
anyway are inseparable'. The regulatory goals may include social cohesion, and
this function may be shared with government Regulatory independence is not
regarded as central, because regulation is conceived as a collaborative project
between agencies and other organs of government. Regulation in this mould is seen
as delegation by government of its inherent powers to act in the public interest. The
emphasis is on different actors working towards a common enterprise, with
accountability conceived primarily in terms of public law mechanisms such as
proceduralization, judicial review and parliamentary scrutiny. For Prosser this
model has the virtue of rendering it easier to understand in areas where regulation
has a social rationale, and is not driven by considerations of economic efficiency. ”
58
determinations. ‘Revenue assets’ are costs incurred by power
distribution companies that are recognised as recoverable from
consumers in future tariffs but are not immediately recovered in
the current bills.
65.1 The measure adopted by the Commissions in creating a
‘regulatory asset’ can also be seen as an accounting treatment.
Regulatory assets are treated as assets in the balance sheet and
are liquidated over a defined period of time through tariff
adjustments or government subsidies. The regulatory asset is a
cost incurred by the utility that the Regulatory Commission allows
to be deferred on the balance sheet instead of being immediately
expensed. It enables the distribution company to utilise the
‘recognition’ of a regulatory asset to obtain bridge funds from
bankers and the financial institutions as they have the
confirmation that the said amount will be recovered in the ensuing
financial years.
10 (v). Factors leading to an unmanageable regulatory asset,
and consequent ‘regulatory failure’ .
66. While determining tariff, Regulatory Commissions have to
deal with situations where there could be a sudden increase in the
fuel cost, infrastructure investments, or some extraordinary
59
expenditure. Further, lack of discipline followed by delays in filing
the ARR leads to uncertainties. Equally, not conducting quick and
effective truing up multiplies the problem of ascertaining the
actual cost incurred. The failure to file ARR in time and the
Regulatory Commissions not invoking their suo motu powers to
rectify the same are not addressed. There is a lack of accountability
here. Further, even though Section 65 provisions that State
Governments shall pay in advance the subsidy to subserve social
justice obligations, it is alleged that such payments are not made
in time. The decisions taken by the Regulatory Commissions,
which were considered in appeal by the APTEL and this Court, give
a clear impression that the Regulatory Commission is not able to
take firm decisions. Instead of taking strong decisions on the basis
of the statutory mandate, we see instances where the Regulatory
Commissions manage and manoeuvre to arrive at a tariff by
creating regulatory assets over and above all permissible limits.
This is where the problem lies. Though the Electricity Act envisages
49
functional autonomy for Regulatory Commissions and the
statutory scheme is complete in all respects, the decisions taken
by the Commissions, many a time, have not inspired confidence of
49
Transmission Corporation of Andhra Pradesh Ltd. v. Sai Renewable Power (P) Ltd.
See ,
(2011) 11 SCC 34, para 59; Kerala SEB Ltd. (supra), paras 16 and 17.
60
independence and autonomy. The reasons are not difficult to
conceive as there is an issue about the appointment process. The
assertion of independence, however, comes through individual
volition and that is where the mandate of transparency leads to
accountability. The decisions taken by the Commission, rather the
Regulatory Commissioners, are subject to scrutiny in the appellate
and the review jurisdiction of the APTEL and thereafter by the
Supreme Court. We have dealt with this issue in more detail while
considering accountability of the Regulatory Commissions and
powers of the APTEL. All these factors give rise to a situation where
the tariff for the subsequent years has to be substantially
increased to meet the ARR of the previous years.
66.1 A Regulatory Commission’s power to create a regulatory asset
is part of the tariff fixation process, as long as it is in reasonable
measure. However, in an egregious situation where the regulatory
asset has grown beyond proportion and is also extended from time-
to-time inefficiently, there is a compelling need to deal with it. In
this context, the Regulatory Commissions have twin obligations:
first , the Commission must enable an efficient and effective
recovery of the regulatory asset by the utility, and second , more
importantly, it must manage the regulatory asset in a manner that
61
does not transgress the principles that inform and govern tariff
determination. The regulatory asset cannot be permitted to balloon
into such proportions or continued for such periods, year after
year, that the governance of the sector is set in peril, affecting the
rights of the utilities and at the same time jeopardising the
consumer interest, who eventually end up bearing the burden.
Creation, management and dissolution of regulatory assets are
subject to law and regulation. In performance of these duties, the
orders of the Regulatory Commissions are subject to the orders,
instructions, and directions of the APTEL issued in exercise of its
statutory powers. When they fail to comply with these statutory
and other requirements, one can infer regulatory failure.
10 (vi). Law that governs creation, continuation and
liquidation of regulatory asset .
67. In the context of creation, management and liquidation of a
regulatory asset, the Regulatory Commissions are bound by the
mandate of the Electricity Act, the National Electricity Policy, the
National Tariff Policy, the Electricity Rules, the Tariff
Determination Regulations applicable at the relevant period, and
the precedents of the APTEL. We have already indicated that the
Central Government recently notified the Electricity (Amendment)
62
Rules, 2024 by which it inserted Rule 23 that deals with regulatory
asset. Prior to the notification, the Central Government elicited
comments from various statutory authorities, including the CEA,
the Central and State Commissions, the State Governments,
generating and distribution utilities, etc. The reason for
introduction of this rule is evident from the circulation of the Draft
Rules for stakeholder comments, wherein the Central Government
has expressed the need for a statutory rule on the conditions for
creation and management of a regulatory asset as follows:
“ 3. In order to remove difficulties/challenges faced by various entities
and to facilitate development of the power sector some more reforms
are proposed. The issues and the reforms proposed to resolve them
are mentioned below:
*
iii) To ensure financial sustainability of the power sector, it is
necessary that the tariff is cost reflective and all the prudent cost is
pass through. However, it has been observed that in many States
there is large gap in approved ARR and estimated revenue on
approved tariff. To discourage such practice there is need to make
statutory provisions to avoid such gap. It is also imperative that
liquidation of any such gaps in revenue required and estimated
approved tariff is done in a time bound manner. New rules are
proposed to ensure that revenue gap/regulatory assets is not created
except in extraordinary circumstances and to provide for time bound
liquidation of the same. ”
67.1 In furtherance of this object and purpose, Rule 23 provides
as follows:
“ Rule 23. Gap between approved Annual Revenue Requirement
and estimated annual revenue from approved tariff.– The tariff
shall be cost reflective and there shall not be any gap between
approved Annual Revenue Requirement and estimated annual
revenue from approved tariff except under natural calamity
conditions:
63
Provided that such gap, created if any, shall not be more than three
percent of the approved Annual Revenue Requirement:
Provided further that such gap along with the carrying costs at the
base rate of Late Payment Surcharge as specified in the Electricity
(Late Payment Surcharge and Related Matters) Rules, 2022, as
amended from time to time shall be liquidated in maximum three
numbers of equal yearly installments from the next financial year:
Provided also that any gap between approved Annual Revenue
Requirement and estimated annual revenue from approved tariff
existing on the date of notification of these rules, along with the
carrying costs at the base rate of Late Payment Surcharge as
specified in the Electricity (Late Payment Surcharge and Related
Matters) Rules, 2022, as amended from time to time shall be
liquidated in maximum seven numbers of equal yearly installments
starting from the next financial year. ”
67.2 The rule has come into existence after detailed consultation
with all the stakeholders. It subserves a salutary purpose and sets
a normative principle in motion. Rule 23 is issued in exercise of
powers under Section 176, which enables the Central Government
50
to make rules to carry out the provisions of the Act. Sub-section
(2)(z) of the Section 176 provides that without prejudice to the
generality of the rule-making power, the Central Government may
any other matter which is
also provide for, by way of a rule, “
required to be, or may be, prescribed ”. The expression “prescribed”
is defined in Section 2(52) to mean “ prescribed by rules made by
the Appropriate Government under this Act ”. It may sound
50
The relevant portion of Section 176 of the Electricity Act reads:
“ Section 176. (Power of Central Government to make rules): ---
(1) The Central Government may, by notification, make rules for carrying out the
provisions of this Act.
(2) In particular and without prejudice to the generality of the foregoing power, such
rules may provide for all or any of the following matters, namely: -
*
(z) any other matter which is required to be, or may be, prescribed .”
64
tautological, but the correct way to examine the legal position is to
look at the provisions with respect to which the Central
Government or the State Governments may make rules for
carrying out the provisions of the Act. The province or domain with
respect to which rules can be made is based on the functions that
have been assigned to the Government(s) and the Regulatory
Commissions. Tariff determination is provisioned in Sections 61
and 62 of the Act, and this must be read with the functions of the
Regulatory Commissions under Sections 79 and 86 and the power
of the Central and State Commissions to make regulations under
Sections 178 and 181.
67.3 The creation of a regulatory asset, being a measure
undertaken by the Regulatory Commissions as part of tariff
determination, such exercise is informed by Section 61 read with
Sections 79 and 86. It is also important to note that Rules made
by the Central Government under Section 176 are binding on the
Regulatory Commissions when they make regulations because
Sections 178 and 181 provide that the “ Commission may make
regulations consistent with the Act and the rules ”. In any event of
the matter, the principle that one must adopt is that the adverse
effect of an overbearing regulatory asset extended beyond
65
proportion is an anathema to good governance of the Electricity
Act. It affects every stakeholder, the worst of all being the
consumer who is burdened, rather over-burdened, from time to
time because of the lapses of the regulators or the manipulation of
the utilities or the indifference of the government. Therefore, the
principle formulated in Rule 23, consistent with Clause 8.2.2 of
the National Tariff Policy, 2016 and the scheme of the Act, must
be the normative principle which must invariably be followed.
Wherever Rule 23 is incorporated into the Tariff Determination
Regulations of the State Commission, it shall be complied with.
67.4 We have dealt with the legal regime in detail and have also
extracted the relevant provisions, rules, regulations, policies,
instructions and precedents. A combined effect of these can be
restated as follows: (i) As a first principle, tariff shall be cost-
reflective; (ii) The revenue gap between the approved ARR and the
estimated annual revenue from approved tariff must be only in
exceptional circumstances; (iii) The regulatory asset should not
exceed a reasonable percentage, which can be arrived on the basis
of Rule 23 of the Electricity Rules that prescribes 3% of the ARR
as the guiding principle; (iv) If a regulatory asset is created, it must
be liquidated within a period of 3 years from 01.04.2024, taking
66
Rule 23 as the guiding principle; (v) The existing regulatory asset
must be liquidated in a maximum of 7 years starting from
01.04.2024, taking Rule 23 as the guiding principle; and (vi)
Regulatory Commissions must provide the trajectory and roadmap
for liquidation of the regulatory asset, which will include a
provision for dealing with carrying costs. Regulatory Commissions
must also undertake strict and intensive audit of the
circumstances in which the distribution companies have
continued without recovery of the regulatory asset.
10 (vii). Accountability of the Regulatory Commissions .
68. A Regulatory Commission must perform its functions as per
the provisions of the Electricity Act, the National Electricity Policy,
the National Tariff Policy, the relevant rules and regulations made
51
under the Act, and the APTEL’s directions . In performance of its
functions, the Regulatory Commission’s decisions are subject to
52
appeal before the APTEL as well as the Supreme Court. The
APTEL has also issued directions under Section 121 from time to
time for timely determination of tariff, regular truing up, and
51
Section 121 of the Electricity Act.
52
Sections 111 and 125 of the Electricity Act.
67
53
management of a regulatory asset, as indicated hereinabove . The
Regulatory Commissions must abide by and implement the
directions of the APTEL. That is how accountability can be
ensured. The need for accountability and its dimensions have been
54
explained by this Court in Vijay Rajmohan v. CBI as follows:
“ 34. Accountability in itself is an essential principle of
administrative law. Judicial review of administrative action
will be effective and meaningful by ensuring accountability
of the officer or authority in charge.
35. The principle of accountability is considered as a
cornerstone of the human rights framework. It is a crucial
feature that must govern the relationship between “duty
bearers” in authority and “right holders” affected by their
actions. Accountability of institutions is also one of the
development goals adopted by the United Nations in 2015
and is also recognised as one of the six principles of the
Citizens Charter Movement.
36. Accountability has three essential constituent
dimensions: (i) responsibility, (ii) answerability, and
(iii) enforceability. Responsibility requires the identification
of duties and performance obligations of individuals in
authority and with authorities. Answerability requires
reasoned decision-making so that those affected by their
decisions, including the public, are aware of the
same. Enforceability requires appropriate corrective and
remedial action against lack of responsibility and
accountability to be taken. Accountability has a corrective
function, making it possible to address individual or
collective grievances. It enables action against officials or
institutions for dereliction of duty. It also has a preventive
function that helps to identify the procedure or policy which
has become non-functional and to improve upon it. ”
53
In O.P No. 1/2011 (supra) and O.P. Nos. 1 and 2/2012 (supra).
54
(2023) 1 SCC 329.
68
10 (viii). Powers of the APTEL .
69. Under Section 110 of the Act, the Central Government
establishes the Appellate Tribunal for Electricity to hear appeals
against orders of the Adjudicating Officer or the Appropriate
Commission. Section 111 is the statutory remedy for any person
aggrieved against an order made by the Adjudicating Officer or that
of the Appropriate Commission as it provides for the appellate
power of the Tribunal, which reads as follows:
“ Section 111. Appeal to Appellate Tribunal: --- (1) Any
person aggrieved by an order made by an adjudicating
officer under this Act (except under section 127) or an order
made by the Appropriate Commission under this Act may
prefer an appeal to the Appellate Tribunal for Electricity… ”
69.1 While exercising appellate jurisdiction, the APTEL routinely
interprets the Act and the rules and regulations framed
thereunder, by which process it systematically evolves legal
principles. These very principles are applied consistently for a
structural evolution of sectoral laws. This freedom to evolve and
interpret laws must belong to the APTEL to subserve the regulatory
regime for clarity and consistency. In a similar context, while
interpreting the scope of appellate jurisdiction of the Securities
69
Appellate Tribunal against orders of the regulator, the SEBI, this
55
Court in SEBI v. Mega Corporation held as under;
“ 20. … Being a permanent body, apart from acting as an
appellate Tribunal on fact, the Tribunal routinely interprets
the Act, Rules and Regulations made thereunder and
evolves a legal regime, systematically developed over a
period of time. The advantage and benefit of this process is
consistency and structural evolution of the sectorial laws.
21. … This freedom to evolve and interpret laws must belong
to the Tribunals to subserve the regulatory regime for clarity
and consistency and it is with this perspective that the
Supreme Court will consider appeals against judgment of
the Tribunals on questions of law arising from its orders .
*
23.2 … The Tribunal while exercising jurisdiction under
Section 15-T, apart from acting as an appellate authority on
fact, also interprets the Act, Rules and Regulations made
thereunder and systematically evolves a legal regime.
These very principles are applied consistently for structural
evolution of the sectorial laws…. ”
69.2 The power under Section 111 is that of an appeal and as
such the decision of the APTEL shall be after re-appreciation of
facts and by applying the law on the subject. The APTEL will also
examine the legality, propriety or correctness of the orders made
by the Regulatory Commissions, and it may also on its own motion
make such orders as are appropriate for adjudication and
determination of the case.
69.3 Apart from Section 111 under which the APTEL is granted
appellate jurisdiction, it is significant to note that the Parliament
has also empowered the APTEL with important jurisdiction and
55
(2023) 12 SCC 802.
70
powers under Section 121, which is reproduced hereinunder for
ready reference.
“
Section 121. (Power of Appellate Tribunal): ---
The Appellate Tribunal may, after hearing the Appropriate
Commission or other interested party, if any, from time to
time, issue such orders, instructions or directions as it may
deem fit, to any Appropriate Commission for the
performance of its statutory functions under this Act.”
69.4 We can explain the significance of Section 121 in the context
of the facts of these very writ petitions and civil appeals. The facts
relating to the performance of DERC present a classic case of
‘regulatory failure’. Typically, ‘regulatory failure’ does not come
under scrutiny when the APTEL considers appeals from orders of
the Regulatory Commissions as the focus at that time is on the
merits of the decision made by the Commission. The institutional
failures or the shortcomings of the regulatory bodies are often
ignored and an appellate forum or even constitutional courts
proceed to resolve the issue by addressing the merits of the case.
56
In Lifecare Innovations Pvt. Ltd. v. Union of India this Court had
an occasion to reflect on this problem and held as follows;
“21. Having considered the provisions of the Act and the
MSE Procurement Preference Policy, 2012, we are of the
opinion that there is no mandatory minimum procurement
‘right’ of an individual MSE. However, there is certainly a
statutory foundation for the Procurement Preference Policy,
2012, having force of law as it ‘encapsulates a mandate
56
2025 INSC 269.
71
57
and discloses a specific purpose’. Clause 3 of the policy
mandating procurement of 25 per cent of supply from MSEs
is simply the statutory duty of the bodies constituted under
the Act and the Policy. The significance of creation and
establishment of these statutory and administrative bodies
is not difficult to conceive. If these institutions and bodies
work effectively and efficiently, it is but natural that the
purpose and object of the legislation will be achieved in a
substantial measure. It is, therefore, necessary to ensure
that in the functioning of these bodies, there is efficiency in
administration, expertise through composition, integrity
through human resources, transparency and accountability,
and response-ability through regular review, audits and
assessments.
22. While exercising judicial review of administrative action
in the context of Statutes, laws, rules or policies establishing
statutory or administrative bodies to implement the
provisions of the Act or its policy, the first duty of
constitutional courts is to ensure that these bodies are in a
position to effectively and efficiently perform their
obligations. This approach towards judicial review has
multiple advantages. In the first place, while continually
operating in the field with domain experts, these bodies
acquire domain expertise, the consequence of which would
also be informed decision-making and consistency. Further,
the critical mass of institutional memory acquired by these
bodies will have a direct bearing on the systematic
development of the sector and this will also help handling
polycentric issues. Thirdly, while continuously being on the
field, and having acquired the capability of making real-time
assessments about the working of the policies, these bodies
will be in a position to visualize course correction for future
policymaking.”
69.5 In the above referred matter, this Court was considering the
duty to ensure institutional integrity and efficiency of the
57
Gulf Goans Hotels Co. Ltd v. Union of India, (2014) 10 SCC 673 “…a government policy
may acquire the ‘force of ‘law’ if it conforms to a certain form possessed by other laws in force
and encapsulates a mandate and discloses a specific purpose” ; Bennett Coleman & Co. v.
Union of India (1972) 2 SCC 788 “What is termed ‘policy’ can become justiciable when it
exhibits itself in the shape of even purported ‘law’. According to Article 13(3)(a) of the
Constitution, ‘law’ includes ‘any Ordinance, order, bye-law, rule, regulation, notification,
custom or usage having in the territory of India the force of law’. So long as policy remains in
the realm of even rules framed for the guidance of executive and administrative authorities it
may bind those authorities as declarations of what they are expected to do under it.”
72
regulators under the MSME Act. A similar approach was adopted
58
by this Court in T.N. Godavarman Thirumulpad for reviving and
effectuating the environment regulators, rather than taking over or
routinely reviewing their decision making.
69.6 ‘Regulatory failure’ occurs due to ineffective functioning of
the Regulatory Commissions, excessive governmental interference,
or ‘regulatory capture’. We cannot wish away these real and
imminent dangers that affect effective functioning of the
Regulatory Commissions. These issues could have the effect of
completely eclipsing regulatory functions, thereby losing the very
purpose and object of restructuring the electricity sector by
unbundling the functions of generation, distribution, and
transmission and more importantly, establishing independent
regulatory institutions and granting them the exclusive
jurisdiction over grant of licenses and tariff determination. Section
121 is intended to ensure that in the functioning of the Regulatory
Commissions, there is efficiency in administration, expertise
through human resource, integrity through transparency, and
accountability and responsibility through review audit and
assessment. For enforcing these values, Section 121 empowers the
58
In Re: T.N. Godavarman Thirumulpad v. Union of India , 2024 INSC 78, paras 27-30.
73
APTEL to issue such orders, instructions or directions as it deems
fit, to the Commission for performance of its statutory functions
under the Act.
69.7 The power of the APTEL to issue such orders and directions
takes within its sweep the power to enforce such orders, as
59
provided in Section 120(3) of the Act. The power under Section
121 is extremely important as it is intended by the Parliament that
the APTEL must be the guiding force to ensure that Regulatory
Commissions across the length and breadth of the nation perform
their statutory functions with efficiency and integrity.
69.8 This position is already recognized by the APTEL, as is
evident from its order in O.P. No. 1 of 2011, relevant portion of
which has already been reproduced in this judgment. It is
necessary to restate the directions issued by the Appellate
Tribunal in its orders dated 11.11.2011 and 14.11.2013, as it is
relevant for the present purpose:
i. The APTEL has the power and the duty to issue directions
to Regulatory Commissions when they fail to comply with
the Act, rules or regulations, fail to perform their
59
Section 120(3) of the Electricity Act reads:
“ Section 120. (Procedure and powers of Appellate Tribunal): ---
*
(3) An order made by the Appellate Tribunal under this Act shall be executable by
the Appellate Tribunal as a decree of civil court and, for this purpose, the Appellate
Tribunal shall have all the powers of a civil court .”
74
statutory functions and duties, or perform the same
60
negligently, improperly or poorly. Such directions are
intended to secure compliance with the letter and spirit
of the Electricity Act, and the APTEL can monitor the
same through periodical status reports and by setting
61
timelines for the Regulatory Commissions.
ii. Tariff determination is a statutory function entrusted to
the Regulatory Commissions, and it must be undertaken
62
on a regular, timely, and annual basis.
iii. Regulatory Commissions must undertake truing up on a
regular basis, immediately at the end of the financial year
so that any discrepancies between the ARR and the
revenue realised through tariffs is brought to notice and
63
can be rectified in a timely manner. This is necessary so
that the burden or benefit of present years is not carried
forward to future consumers, and delay in truing up
could lead to imposition of carrying costs and cash-flow
64
problems for the utility.
iv. The tariff determined by the Regulatory Commissions
must be cost-reflective as per Section 61 of the Electricity
65
Act.
v. Regulatory Commissions must not ordinarily leave
revenue gaps or create regulatory assets, and when it
does so in exceptional circumstances, it must comply
60
O.P. No. 1/2011 (supra), para 47-48; O.P. Nos. 1 and 2/2012 (supra), para 15.
61
O.P. No. 1/2011 (supra), para 66.
62
O.P. No. 1/2011 (supra), paras 59, 65(i) and (ii); O.P Nos. 1 and 2/2012 (supra), para 15.
63
O.P. No. 1/2011 (supra), para 65(i) and (iii).
64
ibid, para 57.
65
ibid, para 65(iv).
75
with the provisions of the Act, rules and regulations on
66
the issue;
vi. In case a Regulatory Commission creates a regulatory
asset, it must allow carrying costs to the distribution
utility, time-bound recovery and a liquidation schedule,
and ensure that neither the financial position and
liquidity of the distribution company nor consumer
67
interests are jeopardised.
69.9 We reiterate that the Regulatory Commissions must call for
ARR, ensure that tariffs are determined, and that truing up is
conducted in a timely manner, by exercising suo motu powers if
necessary. In case of non-compliance with these directions, the
APTEL has the power and duty to call for an explanation, ensure
accountability, and monitor compliance by the Regulatory
Commissions. Similarly, the APTEL must exercise its powers
under Section 121 to ensure that the legal principles on regulatory
asset laid down by us in paragraph 67.3 hereinabove are complied
with by the Regulatory Commissions, and it must monitor the
same. In case of non-compliance, the APTEL must issue such
orders, directions, or instructions to the Commissions as may be
necessary to hold them accountable.
66
ibid, paras 62, 65(iv).
67
ibid, para 62(iv); O.P. Nos. 1 and 2/2012, para 38.
76
11. Conclusions.
70. In the following ten sutras , we have examined the issue
relating to regulatory asset , its position in the regulatory regime for
determination of tariff, the duties and accountability of the
regulators - the Regulatory Commissions and then powers of the
Appellate Tribunal for Electricity to avert a regulatory failure.
I. Electricity is a public good. Its generation, transmission, and
distribution are statutorily regulated to ensure access to supply, on
a non-rival and non-exclusive basis.
II. Being a material resource within Article 39 of the Constitution
of India, Part-IV of the Constitution must inform the generation,
transmission, and distribution of electricity.
III. The statutory regulators, i.e. the Central and State Regulatory
Commissions alongwith Union and State Governments and other
stakeholders are equally bound by the mandate under Part-IV of the
Constitution for its equitable distribution. This duty is predicated on
the independent, efficient, objective functioning of the electricity
commissions. They must guard themselves against ‘regulatory
failure’ and in particular ‘regulatory capture’. The interpretation of
the powers and function of the Regulatory Commissions have to be
77
such that there is no regulatory vacuum, in that there is no
unallocated residue of power of regulation.
IV. Tariff determination is a regulatory function and it is the
exclusive province of the Regulatory Commissions. Tariff
determination involves multiple variables requiring the regulators to
act with expertise and also with certain amount of flexibility.
Creation of regulatory asset is a ‘measure’ that the Commission
adopts for good governance of tariff. It is also a recognition of
revenue recoverable by distribution companies, and as such, it is an
enforceable right, though only through tariff determination for later
years. This ‘measure’ gives rise to correlative obligations of the
Regulatory Commissions to manage it efficiently and allow easy
liquidation.
V. Disproportionate increase and long pending regulatory asset
depict a ‘regulatory failure’. It has serious consequences on all
stakeholders and the ultimate burden is only on the consumer.
VI. Laws encompassing the creation, continuation, and liquidation
of a ‘regulatory asset’ are located in the Act, National Tariff Plan and
Policy, Rules, and Regulations made under the Act, as interpreted
78
by the APTEL. The combined effect of this legal regime is the
statutory obligation on the regulator(s).
VII. Ineffective and inefficient functioning of the Regulatory
Commissions, coupled with acting under dictation can lead to
regulatory failure. The commissions are accountable for their
decisions, and they are subject to judicial review.
VIII. Apart from examining the legality and propriety of the orders
of the Commissions in appeal, the APTEL has extraordinary powers
under Section 121 to issue orders, instructions or directions for
effective enforcement of the regulatory regime. This is one of the
most important powers allocated to APTEL by the Parliament.
IX. We have affirmed the limits of creation, continuation and
liquidation of the regulatory asset, recognised the obligations of the
Regulatory Commissions, and directed that they will be accountable
and subject to such orders, instructions or directions as the APTEL
may issue in this regard under Section 121.
X. The regulatory regime under the Act is a complete code
enunciating rights, prescribing obligations, and laying down the
mechanism for course correction. The effectiveness of these laws
will be reflected in the will to enforce them.
79
12. Directions .
71. For the reasons state above, we issue the following directions:
(i) As a first principle, tariff shall be cost-reflective;
(ii) The revenue gap between the approved ARR and the
estimated annual revenue from approved tariff may be in
exceptional circumstances;
(iii) The regulatory asset should not exceed a reasonable
percentage, which percentage can be arrived on the basis
of Rule 23 of the Electricity Rules that prescribes 3% of the
ARR as the guiding principle;
(iv) If a regulatory asset is created, it must be liquidated within
a period of 3 years, taking Rule 23 as the guiding principle;
(v) The existing regulatory asset must be liquidated in a
maximum of 4 years starting from 01.04.2024, taking Rule
23 as the guiding principle;
(vi) Regulatory Commissions must provide the trajectory and
roadmap for liquidation of the existing regulatory asset,
which will include a provision for dealing with carrying
costs. Regulatory Commissions must also undertake strict
and intensive audit of the circumstances in which the
80
distribution companies have continued without recovery of
the regulatory asset;
(vii) Regulatory Commissions shall in general follow the
principles governing creation, continuation and
liquidation of the regulatory asset, as laid down in
paragraph 70, and also abide by the directions of the
APTEL summarised in paragraph 69.8;
(viii) The APTEL shall invoke its powers under Section 121 and
issue such orders, instructions or directions as it may
deem fit to the Regulatory Commissions for performance of
their duties with respect to regulatory asset as enunciated
by us in this judgment and as per the orders of the APTEL
in O.P. No. 1/2011 dated 11.11.2011 and O.P. Nos. 1 and
2/2012 dated 14.11.2013.
(ix) The APTEL shall register a suo moto petition under Section
121 of the Act to monitor implementation of above
directions (v) and (vi) till the conclusion of the period
mentioned therein.
72. With these directions, the present writ petitions in W.P. (C)
No. 104/2014, W.P. (C) No. 105/2014 and W.P. (C) No. 1005/2021
and the present civil appeals in C.A. No. 4010/2014 and
81
C.A. No. 4013/2014 against the APTEL’s order dated 11.03.2014
stand disposed of.
………………………………....J.
[PAMIDIGHANTAM SRI NARASIMHA]
………………………………....J.
[SANDEEP MEHTA]
NEW DELHI;
AUGUST 06, 2025
82