BSES RAJDHANI POWER LTD. & ANR v. UNION OF INDIA AND ORS

Citation: [2025] 8 S.C.R. 1875, 2025 INSC 937

Court: Supreme Court of India

Bench: Pamidighantam Sri Narasimha and Sandeep Mehta, JJ.

Judgment text

SUPREME COURT OF INDIA BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. [2025] 8 S. C. R. 1875 : 2025 INSC 937 BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. (Writ Petition (C) No. 104 of 2014) 06 August 2025 [Pamidighantam Sri Narasimha and Sandeep Mehta, JJ. ] Issue for Consideration Legal position and status of a regulatory asset; its position in the regulatory regime for determination of tariff; the rights and liabilities of stakeholders; consequences of regulatory failure to manage the regulatory asset as a reasonable measure; the appellate and review powers of the APTEL and this Court to ensure accountability and restitution.

Headnotes† Electricity Law - Electricity Act, 2003 - Electricity Rules, 2005 - "Regulatory asset" - Delhi Electricity Regulatory Commission (DERC) adopted Multi Year Tariff framework in generation, transmission, and distribution businesses to bring certainty regarding tariff - A regulatory asset was first created by the DERC in various tariff orders wherein it introduced the regulatory asset as a mechanism to bridge the revenue gap in the tariff order for FY 2004-05 - Over the years, there was an increase in the quantum of the regulatory asset across all three distribution companies before this Court - DERC also provided for carrying costs on the regulatory asset to each distribution company, which further contributed to its ballooning - Various measures were also introduced by DERC for liquidation of regulatory asset - Challenge by the three distribution companies supplying electricity to consumers in the NCT of Delhi, to the manner in which the DERC has determined the tariff for retail supply of electricity over the years, leading to the creation and continuation of a "regulatory asset" - As on 31.

03. 2024, the regulatory asset including carrying costs totally amounted to Rs. 27,200. 37 crores across all three distribution companies - Directions issued: Held: 1. 1 Tariff shall be cost-reflective - Revenue gap between the approved Annual Revenue Requirement (ARR) and the estimated annual revenue from approved tariff may be in exceptional circumstances - The regulatory asset should not exceed a reasonable percentage, which percentage can be arrived on the basis of r. 23 of the Electricity Rules that prescribes 3% of the ARR as the guiding principle. [Paras 71 (i)-(iii)] 1. 2 If a regulatory asset is created, it must be liquidated within a period of 3 years, taking r. 23 as the guiding principle - The existing regulatory asset must be liquidated in a maximum of 4 years starting from 01. 04. 2024, taking r. 23 as the guiding principle. [Paras 71 (iv)-(v)] 1.

3 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 - They must also undertake strict and intensive audit of the circumstances in which the distribution companies have continued without recovery of the regulatory asset. [Para 71 (vi)] 1. 4 Regulatory Commissions shall in general follow the principles governing creation, continuation and liquidation of the regulatory asset, as laid down in paragraph 70 of the present judgment, and also abide by the directions of the APTEL summarised in paragraph 69. 8. [Para 71 (vii)] 1. 5 APTEL shall invoke its powers u/s. 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 in this judgment and as per the orders of the APTEL in O. P. No. 1/2011 dtd. 11. 11. 2011 and O. P. Nos. 1 and 2/2012 dtd. 14.

11. 2013. [Para 71 (viii)] 1. 6 APTEL shall register a suo moto petition u/s. 121 of the Act to monitor implementation of directions (v) and (vi) till the conclusion of the period mentioned therein. [Para 71 (ix)] Electricity Law - Electricity Act, 2003 - Concept of a regulatory asset, explained - Principles governing creation, continuation and liquidation of the regulatory asset - In the context of creation, management and liquidation of a regulatory asset, the Regulatory Commissions are bound by the mandate of Electricity Act, National Electricity Policy, National Tariff BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors.

Policy, Electricity Rules, the Tariff Determination Regulations applicable at the relevant period, and the precedents of the APTEL: Held: 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 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. [Para 5] 1.

2 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 - Another situation requiring the creation of a regulatory asset is at the time of truing up, if the actual revenue realisation from tariffs is much lesser than the Annual Revenue Requirement (ARR). [Para 6] 1. 3 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. [Para 7] 1.

4 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. [Para 8] 1. 5 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 - Law governing creation, continuation and liquidation of regulatory asset, summarized. [Paras 67-67. 4] 1878 Electricity Law - Electricity Act, 2003 - Constitution of India - Art.

39 - Position of regulatory asset in the regulatory regime for determination of tariff - Duties and accountability of the regulators- the Regulatory Commissions - Powers of the Appellate Tribunal for Electricity to avert a regulatory failure: Held: 1. 1 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 - Being a material resource within Art. 39 of the Constitution of India, Part-IV of the Constitution must inform the generation, transmission, and distribution of electricity. [Paras 70 I-II] 1. 2 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 such that there is no regulatory vacuum, in that there is no unallocated residue of power of regulation. [Para 70 III] 1.

3 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. [Para 70 IV] 1.

4 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 - 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 by the APTEL - The combined effect of this legal regime is the statutory obligation on the regulator(s). [Paras 70 V, VI] BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 1. 5 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 - Apart from examining the legality and propriety of the orders of the Commissions in appeal, the APTEL has extraordinary powers u/s.

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. [Paras 70 VII, VIII] 1. 6 The limits of creation, continuation and liquidation of the regulatory asset have been affirmed, the obligations of the Regulatory Commissions have been recognised and it is directed that they will be accountable and subject to such orders, instructions or directions as the APTEL may issue in this regard u/s. 121 - The regulatory regime under the Act is a complete code enunciating rights, prescribing obligations, and laying down the mechanism for course correction. [Paras 70 IX, X] Electricity Law - Electricity Act, 2003 - ss.

62, 61, 79, 86, 6; Preamble of the Electricity Act - Tariff determination is governed by the Act, which entrusts this function to independent Regulatory Commissions - Multiple stakeholders, the Central Government, the State Governments, Regulatory Commissions, the Appellate Tribunal, statutory policy makers, and the utilities 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 - Tariff fixation takes into account multiple variables and requires flexibility - Regulatory asset is a measure adopted during tariff fixation that recognises right of recovery. [Paras 63. 1-65. 1] Electricity Law - Electricity Act, 2003 - ss.

121, 111, 125 - Accountability of the Regulatory Commissions: Held: 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 under the Act, and the APTEL's directions. [Para 68] Electricity Law - Electricity Act, 2003 - Factors leading to an unmanageable regulatory asset, and consequent 'regulatory failure', enumerated. [Paras 66-66. 1] 1880 Electricity Act, 2003 - ss. 110, 11, 121 - Powers of APTEL - Significance of s.

121 in the context of the facts of the present writ petitions and civil appeals, explained - Performance of DERC, a classic case of 'regulatory failure': Held: 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 u/s. 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 [Paras 69-69.

9] Electricity Law - Electricity Act, 2003 - Salient features - Discussed. [Para 32] Words and Phrases - Electricity Law - Revenue Assets - Meaning of - Discussed: Held: '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. [Para 65] Case Law Cited Tata Power Co. Ltd. v. Reliance Energy Ltd. [2009] 9 SCR 625 : (2009) 16 SCC 659; BSES Rajdhani Power Ltd. v. Delhi Electricity Regulatory Commission [2022] 14 SCR 790 : (2023) 4 SCC 788; PTC India Ltd. v. Central Electricity Regulatory Commission [2010] 3 SCR 609 : (2010) 4 SCC 603; Hindustan Zinc Ltd. v. Rajasthan Electricity Regulatory Commission [2015] 7 SCR 1104 : (2015) 12 SCC 611; West Bengal Electricity Regulatory Commission v. CESC Ltd. (2002) 8 SCC 715; Kerala State Electricity Board Ltd. v. Jhabua Power Ltd. [2024] 9 SCR 971 : 2024 SCC OnLine SC 2819; Tata Power Co. Ltd. v.

Maharashtra Electricity Regulatory Commission [2022] 19 SCR 620 : (2023) 11 SCC 1; K. C. Ninan v. Kerala State Electricity Board [2023] 9 SCR 637 : (2023) 14 SCC 431; Transmission Corporation of Andhra Pradesh Ltd. v. Sai BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. Renewable Power (P) Ltd. [2010] 8 SCR 636 : (2011) 11 SCC 34; Vijay Rajmohan v. CBI [2022] 19 SCR 563 : (2023) 1 SCC 329; SEBI v. Mega Corporation [2022] 2 SCR 546 : (2023) 12 SCC 802; Lifecare Innovations Pvt. Ltd. v. Union of India 2025 INSC 269 : [2025] 2 SCR 727; 7 Gulf Goans Hotels Co. Ltd v. Union of India [2014] 10 SCR 536 : (2014) 10 SCC 673; Bennett Coleman & Co. v. Union of India [1973] 2 SCR 757 : (1972) 2 SCC 788; In Re: T. N. Godavarman Thirumulpad v. Union of India, 2024 INSC 78 : [2024] 1 SCR 1194 - referred to. Tamil Nadu Electricity Consumers' Association v. Tamil Nadu Electricity Board, Appeal Nos. 192 and 206 of 2010, APTEL order dated 28. 07. 2011 - referred to.

List of Acts Electricity Act, 2003; Delhi Electricity Reform Act, 2000 and the Delhi Electricity Reform (Transfer Scheme) Rules, 2001; DERC (Terms and Conditions for Determination of Wheeling Tariff and Retail Supply Tariff) Regulations, 2007; DERC (Terms and Conditions for Determination of Wheeling Tariff and Retail Supply Tariff) Regulations, 2011; Electricity (Amendment) Rules, 2024; Electricity Rules, 2005; CERC (Unscheduled Interchange charges and related matters) (Amendment) Regulations, 2010; Electricity (Late Payment Surcharge) Rules, 2022; Indian Electricity Act, 1910; Electricity (Supply) Act, 1948; Electricity Regulatory Commissions Act, 1998; Delhi Electricity Reforms Act, 2000; DERC (Terms and Conditions for Determination of Tariff) Regulations, 2017; Constitution of India.

List of Keywords Regulatory asset; Electricity; Tariff; Tariff determination; Tariff for retail supply of electricity; Creation, continuation and liquidation of the regulatory asset; Electricity is a public good; Increase in quantum of regulatory asset; Liquidation of regulatory asset; BSES Rajdhani Power Ltd. , BSES Yamuna Power Ltd.

, and Tata Power Delhi Distribution Limited; Distribution companies; DISCOMS; National Tariff Policy, 2006; National Electricity Policy; National Tariff Policy; Electricity Rules; Tariff Determination Regulations; National Electricity Policy, 2005; National Tariff Policy, 2016; Bridging revenue gap; Revenue assets; Regulatory Commissions; Generation, transmission, and distribution of electricity; Statutory regulators; Equitable distribution; Regulatory failure; Regulatory 1882 capture; Regulatory function; Power distribution companies; Rights and liabilities of the stakeholders; Regulatory duties; Good governance of the electricity sector; Intangible asset; Uncovered revenue gap or revenue shortfall; Distribution licensee; Distribution company; Bulk procurement and bulk supply of power; Deficit Recovery Surcharge; Fuel price adjustment charge; Power Purchase Adjustment Charge; Draft RERC (Terms and Conditions for Determination of Tariff) Regulations, 2025; National Electricity Plan.

Case Arising From ORIGINAL/CIVIL APPELLATE JURISDICTION: Writ Petition (C) 104 of 2014 Under Article 32 of The Constitution of India With Civil Appeal No(s). 4010 and 4013 of 2014, Writ Petition (C) No. 105 of 2014 and Writ Petition (C) No. 1005 of 2021 Appearances for Parties Advs. for the Petitioners: Abhishek Manu Singhvi, Kapil Sibal, Buddy A. Ranganadhan, Sr. Advs. , Shri Venkatesh, Ms. Kanika Chugh, Asutosh Kumar Srivastava, Shryeshth Ramesh Sharma, Bharat Gangadhar, Nihal Bhardwaj, Kartikay Trivedi, Aashwyn Singh, Abhishek Nangia, Aadarsh Singh, Nitin Saluja, Amit Kapur, Pukhrambam Ramesh Kumar, Anupam Varma, Rahul Kinra, Aditya Ajay, Ms. Isnain Muzamil, Girdhar Gopal Khattar, Sanjay Nair S, Ms. Manisha Singh, Ms. Shefali Tripathi, Aditya Gupta, Karun Sharma, Ms. Rajkumari Divyasana, Amit Kapur, Anupam Varma, Rahul Kinra, Aditya Gupta, Aditya Ajay, Sanjay Nair S. , Ms. Isnain Muzamil, Ms. Manisha Singh, Girdhar Gopal Khattar, Mrs. Shefali Tripathi, Sanjay Nair S, Ms.

Manish Singh, Ms. Shefali Tripathi, Avinash Das, Sidharth Sethi. Advs. for the Respondent: R. Venkataramani, Attorney General for India, K M Nataraj, A. S. G. , Lokesh Sinhal, Sr. A. A. G. , S. Wasim A. Qadri, Nikhil Nayyar, Mrs. Shirin Khajuria, Sr. Advs. , Gurmeet Singh Makker, Piyush Beriwal, Shyam Gopal, Ms. Shradha Deshmukh, Ms. Chinmayee Chandra, Rajat Nair, K. V. Mohan, Satya Mitra, Vivek Singh, Ritik BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. Dwivedi, Siddhartha Chowdhury, Anand Ganesan, Ms. Swapna Seshadri, Pramod Dayal, Nikunj Dayal, Utkarsh Singh, Lakshmi Raman Singh, Tamim Qadri, Chitvan Singhal, Saeed Qadri, Shraveen Kumar Verma, Saahil Gupta, B. Krishna Prasad, Ms. Prerna Singh, Guntur Pramod Kumar, Samarth Krishan Luthra, Dhruv Yadav, Ms. Pritha Srikumar Iyer, Naveen Hegde, Kshitij Maheshwari, Abhyudaya Shishodia, Saumya Sinha, Ms. Saumya Sinha, Abhishek Vikas, Adarsh Tripathi, Vikram Singh Baid, Ajitesh Garg, Veevak Goel, B. K. Satija, Ms.

Pallavi Langar, Vishnu Sharma, Sujeet Kumar Chaubey, Ravi Sharma, Aryan Chanda, Ms. Bhavana Duhoon, Ms. Swati Tiwari, Naveen Kumar, Ms. Stuti Bisht, Nitesh Bhandari, Maitreya, Shourajeet Chakravarty, Ms. Aprajita Bhardwaj, Prabhat Kumar Rai, Aditya Goyal, Ujjawal Kumar Rai, Ms. Esha Kumar, Ms. Nidhi Singh, Utkarsh Chandra, Ms. K. Enatoli Sema, Amit Kumar Singh, Ms. Chubalemla Chang, Prang Newmai, Harshad V. Hameed, Dileep Poolakkot, Ms. Ashly Harshad, Nitin Gaur, Anshuman Ashok, Anshuman Ashok, Sagar Parashar, Anshul Singh, Shashank Shekhar Singh, Abhinav Singh, Aaditya Aniruddha Pande, Siddharth Dharmadhikari, Sourav Singh, Mayank Sapra, Ms. Lalima Das, Karan Sharma, Ms. Baani Khanna, Sameer Abhyankar, Mrs. Ayushi Bansal, Rahul Kumar, Ms. Yashika Sharma, Krishna Rastogi, Aakash Thakur, M/s. Ag Veritas Law, Gaichangpou Gangmei, Arjun D. Singh, Ms. Nisha Pandey, Yimyanger Longkumer, Maitreya Mahaley, J. Prasad, Kunal Chatterji, Ms.

Maitrayee Banerjee, Rohit Bansal, Pashupathi Nath Razdan, Astik Gupta, Ms. Mandakini Ghosh, Nikilesh Ramachandran, Ms. Suparna Srivastava, Ms. Arshiya Sharma, Akshay Amritanshu, Nikunj Gupta, Ms. Pragya Upadhyay, Ms. Drishti Saraf, Ms. Aakanksha, Pradeep Misra, Daleep Dhyani, Suraj Singh, Aditya Singh-1, Shashi Bhushan Kumar, Dinesh Kumar Prasad, Ms. Advaita Bhushan, Darpan Km, Ms. Amrita Sharma, Rajat Jonathan Shaw, Durgha Prakash, Ms. Easha Chandhok, Ms. Rashi Bansal, M. T. George, C. K. Rai, Mrs. Anuradha Roy, Vinay Kumar Gupta, Sahil Chandra, Rutwik Panda, Ms. Nikhar Berrry, Ms. Anshu Malik, Ms. Nikhar Berry, Ms. Sunieta Ojha, Ms. Gargi Kumar, Rajeev Kumar Panday, Zoheb Hossain, Somanadri Goud Katam, Rajat Srivastava, Sirajuddin, Sriram Krishna, Ms. Anupama Dhurve, B. K. Satija, Subhash Chandran K. R. Ms. Krishna L. R. , Ankit Roy, Chinmoy Sharma, Ms. Diksha Rai, Piyush Vyas, Purvat Wali, Irfan Hasieb, Krishnajyoti Deka, Vijay Deora.

1884 Judgment / Order of the Supreme Court Judgment Table of Contents* 1. Introduction ................................................................................... 4 2. Concept of a Regulatory Asset ..................................................... 7 3. Facts. ............................................................................................. 9 4. Submissions of Parties ................................................................. 11 5. Impleadment of the State Commissions and Governments ......... 20 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 * Ed. Note: Pagination as per the original Judgment.

BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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 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 1886 1. Introduction. 1.

We are entertaining these writ petitions1 and civil appeals2 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 Tribunal of Electricity3. 2. In these writ petitions and civil appeals, the three distribution companies that supply electricity to consumers in the National Capital Territory of Delhi4, namely BSES Rajdhani Power Ltd. 5, BSES Yamuna Power Ltd.

6, and Tata Power Delhi Distribution Limited7, have challenged the manner in which the Delhi Electricity Regulatory Commission8 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) Nos. 104 and 105/2014 by BRPL and BYPL9 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 Sections 61 and 62 of the Electricity Act, 200310 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; 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". 8 Hereinafter "DERC". 9 Hereinafter collectively referred to as "BSES Discoms". 10 Hereinafter "the Electricity Act". BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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: 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. 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 from tariff. 11 This portion of 11 See Tamil Nadu Electricity Consumers' Association v. Tamil Nadu Electricity Board, Appeal Nos. 192 and 206 of 2010, APTEL order dated 28. 07. 2011. 1888 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 creation of a regulatory asset is at the time of truing up, if the actual revenue realisation from tariffs is much lesser than the Annual Revenue Requirement12. 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 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 12 Hereinafter "ARR". BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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 each function. Until 2007, the Delhi Transco Limited13 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. 10. DERC adopted the Multi Year Tariff14 framework in generation, transmission, and distribution businesses so as to bring certainty regarding tariff and its annual basis during each control period. 11. A regulatory asset was first created by the DERC in the tariff order dated 09.

06. 2004 for North Delhi Power Limited15 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 Recovery Surcharge16, fuel price adjustment charge and Power Purchase Adjustment Charge17. These measures are byproducts of the regulatory asset and are intended for its liquidation. 13 Hereinafter "DTL". 14 Hereinafter "MYT". 15 Hereinafter "NDPL", which is now TPDDL. 16 Hereinafter "DRS". 17 Hereinafter "PPAC". 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, 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 BSES Rajdhani Power Ltd. & Anr. v.

Union of India and Ors. by letters dated 15. 12. 2010 and 01. 02. 2013, which we will deal with in more detail at a later stage. 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) Regulations, 200718 and Regulation 5. 40 of the DERC (Terms and Conditions for Determination of Wheeling Tariff and Retail Supply Tariff) Regulations, 201119, 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 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 Surcharge20 @ 18% on late payments to the generating companies; and (vii) the truing-up exercise is not carried out properly.

18 Hereinafter "Tariff Determination Regulations, 2007". 19 Hereinafter "Tariff Determination Regulations, 2011". 20 Hereinafter "LPS". 1892 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 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 FY 2011-15 BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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 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 1894 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 Power Generation Company Limited21, Pragati Power Corporation Limited22, and DTL. He submitted that while the DERC has 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 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 Hereinafter "IPGCL". 22 Hereinafter "PPCL". BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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 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 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.

1896 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 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 BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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.

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 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 1898 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 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. BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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 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 grid system.

It also provided for a Central Electricity Authority23 for planning and development of the national power system. 24 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 the 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. 1900 governments, or investments.

25 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 absence of an independent regulatory authority. 26 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 policies. 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 efficient, commercial, economic, and competitive manner. 28 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 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 ElectricityRegulatory Commissions, rationalization of electricity tariff, transparent policies regarding subsidies, promotion of efficient and environmentally benign policies and 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 electricityindustry (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. " BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors.

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. " 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 governed electricity supply and use;29 ii.

The State Electricity Boards are unbundled into separate utilities for electricity generation, transmission, and distribution,30 and private sector participation is encouraged in these activities;31 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, distribution, and trading of electricity are licensed activities;32 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 as expert and specialised bodies. 33 It also enables dispute resolution through arbitration in specified cases; vii.

The Act established the APTEL as a specialised appellate forum;34 viii. The Act provides for offences as well as their penalties. 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 29 Tata Power Co Ltd (supra), para 76. 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 See West Bengal Electricity Regulatory Commission v. CESC Ltd. , (2002) 8 SCC 715, para 102. BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors.

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. 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 regulationmaking 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 manner of making an application and fee payable under Section 64 (sub-section 1904 (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 Regulatory Commissions, but shall not be binding on them. 35 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 for the Commissions to specify the terms and conditions of tariff determination, of which the following are relevant: "Section 61.

(Tariff regulations): The Appropriate 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; 35 Kerala State Electricity Board Ltd. v. Jhabua Power Ltd. , 2024 SCC OnLine SC 2819. BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors.

(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 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 1906 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%. 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 BSES Rajdhani Power Ltd. & Anr. v.

Union of India and Ors. Court has held that while the Policy does not bind the State Commission, it is a material consideration that must guide tariff determination. 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) 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 36 Tata Power Co. Ltd. v. Maharashtra Electricity Regulatory Commission, (2023) 11 SCC 1, para 122.

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 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 BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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. " 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. 1910 9 (vi). APTEL's Order dated 11. 11. 2011. 45. Pursuant to this letter, the APTEL passed an order dated 11. 11. 201137 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 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 37 In O. P. No. 1/2011, order dated 11. 11. 2011. BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. 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 the