Generating Company And Distribution Licensee Cannot By Private Agreement Stipulate Tariff Without Electricity Regulatory Commission's Approval: Supreme Court

A Division Bench of Justice Sanjay Kumar and Justice N.V. Anjaria observed that the tariff fixation process is not a matter of private negotiation but a statutory function that requires mandatory regulatory oversight. The Bench stated: “A generating company and a distribution licensee cannot, by private agreement, execute a PPA on their own or stipulate tariff therein as per their choice for supply of electricity within a State, without seeking the review and approval of the Electricity Regulatory Commission under Section 86(1)(b) of the Act of 2003.”

Advocate Raju Kumar Mehta represented the petitioner, while Advocate Nikunj Dayal appeared for the respondents.

Background

The case arose from a Power Purchase Agreement executed in 2000 between the appellant, a small hydropower generating company, and the Himachal Pradesh State Electricity Board (HPSEB) for the sale of electricity at a tariff of ₹2.50 per kilowatt-hour (kWh). At the time of execution, the Himachal Pradesh Electricity Regulatory Commission had not yet been constituted.

Subsequently, the project capacity was enhanced from 3 MW to 4.90 MW, and a supplementary Implementation Agreement was signed in 2007, which the Commission approved with the condition that any revision of tariff would require its prior consent.

In 2010, following a tariff revision applicable to other small hydel projects, the appellant and HPSEB entered into a supplementary PPA, enhancing the tariff to ₹2.95 per kWh. Still, this agreement was never placed before the Commission for approval.

The Commission rejected the supplementary PPA, stating that it was executed unilaterally without statutory consent. On appeal, the Appellate Tribunal for Electricity (APTEL) partly allowed the claim, directing the computation of a common weighted average tariff for the entire project, which was fixed at ₹2.60 per kWh.

Aggrieved by APTEL’s findings, the appellant approached the Supreme Court challenging its decision, while HPSEB chose not to contest the order.

Court’s Observations

The Court examined the scope of Section 86(1)(b) of the Electricity Act, 2003, which empowers the State Electricity Regulatory Commissions to regulate the procurement and pricing of electricity by distribution licensees through PPAs.

The Bench held that tariff fixation cannot be left to private negotiations between the parties and that any PPA or supplementary agreement stipulating that the tariff must necessarily be placed before the Commission for approval. The Court declared that the supplementary PPA executed on 10.09.2010 was invalid, as it had bypassed the statutory mandate.

The Court further observed that APTEL erred in upholding the supplementary PPA for the additional 1.90 MW capacity, as such a move undermined the Commission’s exclusive jurisdiction over tariff approvals. However, since the ₹2.60 per kWh tariff determined through the Commission’s weighted-average method had already been implemented and neither party disputed it, the Supreme Court refrained from disturbing the arrangement but clarified the correct legal position for future cases.

Conclusion

Dismissing the appeal, the Supreme Court held that tariff fixation under a Power Purchase Agreement is subject to mandatory regulatory scrutiny and cannot be finalised through private agreements between generating companies and distribution licensees.

It clarified that any tariff so agreed upon must receive prior review and approval from the State Electricity Regulatory Commission under Section 86(1)(b) of the Electricity Act, 2003.

Accordingly, the Supreme Court dismissed the appeal. 

Cause Title: M/s KKK Hydro Power Limited v. Himachal Pradesh State Electricity Board Limited & Ors. (Neutral Citation: 2025 INSC 1057)

Appearances

Appellant: Advocate Raju Kumar Mehta

Respondents: Advocate Nikunj Dayal

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