Kiran Raj

The Supreme Court of India Division Bench of Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta delivered a judgment concerning the administration of regulatory assets within the electricity sector. The Court directed that all existing regulatory assets must be liquidated within a stipulated timeline and reinforced that tariff determination by Regulatory Commissions must be cost-reflective. The Bench issued comprehensive directives mandating compliance by all Electricity Regulatory Commissions across the country, while confirming the oversight authority of the Appellate Tribunal for Electricity (APTEL) to monitor and enforce these obligations.

The legal proceedings arose from writ petitions and civil appeals instituted by BSES Rajdhani Power Ltd. (BRPL), BSES Yamuna Power Ltd. (BYPL), and Tata Power Delhi Distribution Ltd. (TPDDL), challenging multiple tariff orders passed by the Delhi Electricity Regulatory Commission (DERC). These petitions were consolidated for adjudication on issues concerning the creation, management, and liquidation of regulatory assets and the legal regime governing them under the Electricity Act, 2003 and allied regulations.

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The petitioners contended that the regulatory assets created by DERC exceeded permissible limits and were in violation of the National Tariff Policy, 2006. They submitted that the recognized regulatory assets had grown to Rs. 27,200 crores by FY 2020–21 due to systematic regulatory failure and delayed recovery. The petitioners asserted that such accumulation adversely affected the financial viability of the distribution licensees and had not been addressed in a time-bound manner.

They further submitted that Clause 8.2.2 of the National Tariff Policy, 2006 mandated that regulatory assets be created only under exceptional circumstances and recovered within three years. The petitioners relied on Sections 61 and 62 of the Electricity Act, 2003 to argue that tariff must be cost-reflective and that the failure to recover these assets within the prescribed time amounted to a breach of statutory duty.

It was also contended that APTEL, in its 2011 decision, had issued explicit directions to DERC for the annual truing-up of accounts and liquidation of regulatory assets in a structured and time-bound manner. The petitioners submitted that DERC had not complied with these directions and that the delays were the result of administrative lapses and external influences.

DERC, in response, acknowledged the accumulation of regulatory assets but cited external factors, including significant increases in power purchase costs and delayed subsidy disbursements by the Government of the National Capital Territory of Delhi (GNCTD). It submitted that tariff shocks to consumers were avoided by deferring cost recovery and that these decisions were necessitated by broader socio-economic considerations.

The Union of India, represented through the Ministry of Power, supported the position that regulatory assets were a valid tool under exceptional circumstances. However, it pointed to the Electricity (Amendment) Rules, 2024, particularly Rule 23, which had since codified the permissible limits for such assets. Rule 23 provided that regulatory assets must not exceed 3% of the Aggregate Revenue Requirement (ARR) and must be liquidated within three years for newly created gaps, and within seven years for pre-existing ones.

Generating companies, represented by the Attorney General, argued that non-payment of power purchase dues by distribution licensees due to delayed recovery of regulatory assets affected the entire sector. They submitted that any failure by Regulatory Commissions to ensure timely recovery directly impacted the financial health of generation and transmission entities.

The respondents further submitted that the COVID-19 pandemic and global energy price fluctuations contributed to the revenue gaps. They also stated that regulatory flexibility was required in light of these unprecedented developments and that DERC had acted within its discretion.

The GNCTD submitted that while it had delayed certain subsidy payments, the overall financial architecture required coordination among all stakeholders. It argued that the complete onus could not be placed on DERC alone.

Statutory provisions examined by the Court included Sections 61, 62, and 121 of the Electricity Act, 2003. Section 61 sets out the guiding principles for tariff determination, while Section 62 confers authority upon Regulatory Commissions to determine tariffs. Section 121 empowers APTEL to issue directions to Regulatory Commissions to ensure performance of their statutory functions.

The Court also examined Clause 8.2.2 of the National Tariff Policy, 2006 and its revised version in the 2016 Policy, both of which state the limited use of regulatory assets and mandate their liquidation within a specific timeframe. The Electricity (Amendment) Rules, 2024, particularly Rule 23, were noted to have codified these principles with stricter caps and timelines.

The Court stated: "A 'regulatory asset' as understood in the electricity sector, is an intangible asset created by the Regulatory Commissions in recognition of an uncovered revenue gap arising out of cost-revenue mismatch, when a distribution licensee could not fully recover the costs reasonably incurred by it through revenue from tariff."

It further recorded: "The rationale behind creation of a regulatory asset is to address the issue of tariff shock on consumers due to sudden increase in cost, by deferring recovery of certain costs to a future date." However, it warned: "The mechanism cannot be permitted to be used as a tool of routine deferral."

On the role of the Regulatory Commissions, the Court observed: "Tariff determination is the exclusive province of the Regulatory Commissions under the Act and they are duty-bound to ensure that tariffs are cost-reflective."

Regarding DERC's functioning, the Court stated: "DERC's regulatory functioning has been inconsistent and its failure to implement the directives of APTEL has contributed to the accumulation of regulatory assets."

It further noted: "The unliquidated regulatory assets have now become a systemic issue affecting the governance of the sector. Such failure is indicative of regulatory capture and an inefficient tariff framework."

On the legal implications of the 2024 Rules, the Court recorded: "Rule 23 of the Electricity (Amendment) Rules, 2024 is binding and codifies the existing policy framework. It stipulates that any uncovered revenue gap shall not exceed 3% of ARR and shall be liquidated within the timeframes prescribed therein."

Regarding APTEL’s jurisdiction, the Court stated: "Section 121 of the Electricity Act empowers APTEL to issue directions for the performance of statutory functions by Regulatory Commissions and to monitor their compliance."

It acknowledged previous APTEL decisions and noted: "The directions issued by APTEL in 2011 for annual truing-up and time-bound liquidation are consistent with the statutory framework and must be treated as binding."

The Court concluded its observations with a caution: "If left unchecked, the ballooning of regulatory assets can render the distribution sector financially unsustainable and erode consumer confidence in the tariff regime."

For the reasons stated above, the Court issued the following directions:

1. As a first principle, tariff shall be cost-reflective;

2. The revenue gap between the approved Aggregate Revenue Requirement (ARR) and the estimated annual revenue from approved tariff may be permitted only in exceptional circumstances;

3. The regulatory asset should not exceed a reasonable percentage, which can be determined based on Rule 23 of the Electricity Rules prescribing 3% of ARR as a guiding principle;

4. If a regulatory asset is created, it must be liquidated within a period of three years, taking Rule 23 as the guiding principle;

5. The existing regulatory asset must be liquidated in a maximum of four years starting from 01.04.2024, taking Rule 23 as the guiding principle;

6. Regulatory Commissions must provide the trajectory and roadmap for liquidation of the existing regulatory asset, including provision for dealing with carrying costs. They must also undertake strict and intensive audit of the circumstances under which distribution companies continued without recovery of the regulatory asset;

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7. Regulatory Commissions shall in general follow the principles governing creation, continuation and liquidation of the regulatory asset as laid down in paragraph 70 and abide by the directions of APTEL summarised in paragraph 69.8;

8. 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, in accordance with this judgment and 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;

9. The APTEL shall register a suo motu petition under Section 121 of the Act to monitor implementation of the directions specified in (v) and (vi) until the conclusion of the period mentioned therein.

With these directions, the writ petitions in W.P. (C) No. 104/2014, W.P. (C) No. 105/2014, and W.P. (C) No. 1005/2021 and the civil appeals in C.A. No. 4010/2014 and C.A. No. 4013/2014 against the APTEL’s order dated 11.03.2014 stand disposed of.

Advocates Representing the Parties:

For the Petitioners: Mr. Kapil Sibal and Dr. Abhishek Manu Singhvi, Senior Advocates; Mr. Amit Kapur, Advocate

For the Respondents: Mr. Nikhil Nayyar, Senior Advocate for DERC; Mr. R. Venkataramani, Attorney General for India for Generating Companies; Mr. K.M. Nataraj, Additional Solicitor General for the Union of India; Mr. Siddharth Dave and Mr. Shadan Farasat, Senior Advocates for GNCTD

Case Title: BSES Rajdhani Power Ltd. & Anr. v. Union of India & Ors.

Neutral Citation: 2025 INSC 937

Case Number: W.P. (C) No. 104/2014, C.A. No. 4010/2014

Bench: Justice Pamidighantam Sri Narasimha, Justice Sandeep Mehta