Electricity Regulatory Commissions Must Call For Annual Revenue Requirement & Ensure That Tariffs Are Determined: Supreme Court

The Supreme Court reiterated that the Electricity Regulatory Commissions (ERCs) must call for Annual Revenue Requirement (ARR) and ensure that tariffs are determined.

The Court reiterated thus in a batch of Writ Petitions and Civil Appeals, challenging the manner in which the Delhi Electricity Regulatory Commission (DERC) determined the tariff for retail supply of electricity over the years, leading to the creation and continuation of a ‘regulatory asset’.

The two-Judge Bench comprising Justice P.S. Narasimha and Justice Sandeep Mehta observed, “We reiterate that the Regulatory Commissions must call for ARR, ensure that tariffs are determined, and that truing up is conducted in a timely manner, by exercising suo motu powers if necessary. In case of non-compliance with these directions, the APTEL has the power and duty to call for an explanation, ensure accountability, and monitor compliance by the Regulatory Commissions. Similarly, the APTEL must exercise its powers under Section 121 to ensure that the legal principles on regulatory asset laid down by us in paragraph 67.3 hereinabove are complied with by the Regulatory Commissions, and it must monitor the same. In case of non-compliance, the APTEL must issue such orders, directions, or instructions to the Commissions as may be necessary to hold them accountable.”

The Bench emphasised that 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 (Appellate Tribunal for Electricity) direction.

Senior Advocates Kapil Sibal, Abhishek Manu Singhvi, and Amit Kapur appeared on behalf of the Petitioners while Attorney General of India (AGI) R. Venkataramani, ASG K.M. Nataraj, Senior Advocates Nikhil Nayyar, Siddharth Dave, and Shadan Farasat appeared on behalf of the Respondents.

Facts of the Case

Initially, the Delhi Vidyut Board was responsible for generation, transmission and distribution of electricity in NCT of Delhi. With the Delhi Electricity Reform Act, 2000 and the Delhi Electricity Reform (Transfer Scheme) Rules, 2001, these functions were unbundled and different entities were made responsible for each function. Until 2007, the Delhi Transco Limited was solely responsible for bulk procurement and bulk supply of power in Delhi, and all distribution companies were required to purchase power from it. Thereafter, the responsibility for power purchase in Delhi was transferred to the distribution companies.

DERC adopted the Multi Year Tariff (MYT) framework in generation, transmission, and distribution businesses so as to bring certainty regarding tariff and its annual basis during each control period. A regulatory asset was first created by DERC in the tariff order for North Delhi Power Limited (NDPL) and orders 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.

Court's Observations

The Supreme Court after hearing the contentions of the counsel, noted, “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 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.”

The Court said that 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”, it added.

The Court enunciated that the creation and continuation of a regulatory asset is neither a statutory concept nor a power granted under the Electricity Act, 2003 and 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”, it further observed.

Principles regarding tariff

The Court restated the following principles regarding tariff –

(i) As a first principle, tariff shall be cost reflective;

(ii) The revenue gap between the approved ARR and the estimated annual revenue from approved tariff must be only in exceptional circumstances;

(iii) The regulatory asset should not exceed a reasonable percentage, which can be arrived on the basis of Rule 23 of the Electricity Rules that prescribes 3% of the ARR as the guiding principle;

(iv) If a regulatory asset is created, it must be liquidated within a period of 3 years from 01.04.2024, taking Rule 23 as the guiding principle;

(v) The existing regulatory asset must be liquidated in a maximum of 7 years starting from 01.04.2024, taking Rule 23 as the guiding principle; and

(vi) Regulatory Commissions must provide the trajectory and roadmap for liquidation of the regulatory asset, which will include a provision for dealing with carrying costs. Regulatory Commissions must also undertake strict and intensive audit of the circumstances in which the distribution companies have continued without recovery of the regulatory asset.

Accountability of the Regulatory Commissions

The Court said that in performance of its functions, the Regulatory Commission’s decisions are subject to Appeal before the APTEL as well as the Supreme Court and the APTEL has also issued directions under Section 121 from time to time for timely determination of tariff, regular truing up, and management of a regulatory asset.

“The Regulatory Commissions must abide by and implement the directions of the APTEL. That is how accountability can be ensured”, it added.

The Court also restated the following directions issued by the Appellate Tribunal in its 2011 orders –

i. The APTEL has the power and the duty to issue directions to Regulatory Commissions when they fail to comply with the Act, rules or regulations, fail to perform their statutory functions and duties, or perform the same negligently, improperly or poorly. Such directions are intended to secure compliance with the letter and spirit of the Electricity Act, and the APTEL can monitor the same through periodical status reports and by setting timelines for the Regulatory Commissions.

ii. Tariff determination is a statutory function entrusted to the Regulatory Commissions, and it must be undertaken on a regular, timely, and annual basis.

iii. Regulatory Commissions must undertake truing up on a regular basis, immediately at the end of the financial year so that any discrepancies between the ARR and the revenue realised through tariffs is brought to notice and can be rectified in a timely manner. This is necessary so that the burden or benefit of present years is not carried forward to future consumers, and delay in truing up could lead to imposition of carrying costs and cash-flow problems for the utility.

iv. The tariff determined by the Regulatory Commissions must be cost-reflective as per Section 61 of the Electricity Act.

v. Regulatory Commissions must not ordinarily leave revenue gaps or create regulatory assets, and when it does so in exceptional circumstances, it must comply with the provisions of the Act, rules and regulations on the issue.

vi. In case a Regulatory Commission creates a regulatory asset, it must allow carrying costs to the distribution utility, time-bound recovery and a liquidation schedule, and ensure that neither the financial position and liquidity of the distribution company nor consumer interests are jeopardised.

Conclusion

The Court, therefore, came to the following points of conclusion (ten sutras) –

I. Electricity is a public good. Its generation, transmission, and distribution are statutorily regulated to ensure access to supply, on a non-rival and non-exclusive basis.

II. Being a material resource within Article 39 of the Constitution of India, Part-IV of the Constitution must inform the generation, transmission, and distribution of electricity.

III. The statutory regulators, i.e. the Central and State Regulatory Commissions along with Union and State Governments and other stakeholders are equally bound by the mandate under Part-IV of the Constitution for its equitable distribution.

IV. Tariff determination is a regulatory function and it is the exclusive province of the Regulatory Commissions.

V. Disproportionate increase and long pending regulatory asset depict a ‘regulatory failure’. It has serious consequences on all stakeholders and the ultimate burden is only on the consumer.

VI. Laws encompassing the creation, continuation, and liquidation of a ‘regulatory asset’ are located in the Act, National Tariff Plan and Policy, Rules, and Regulations made under the Act, as interpreted by the APTEL. The combined effect of this legal regime is the statutory obligation on the regulator(s).

VII. Ineffective and inefficient functioning of the Regulatory Commissions, coupled with acting under dictation can lead to regulatory failure.

VIII. Apart from examining the legality and propriety of the orders of the Commissions in appeal, the APTEL has extraordinary powers under Section 121 to issue orders, instructions or directions for effective enforcement of the regulatory regime.

IX. Regulatory Commissions will be accountable and subject to such orders, instructions or directions as the APTEL may issue in this regard under Section 121.

X. The regulatory regime under the Act is a complete code enunciating rights, prescribing obligations, and laying down the mechanism for course correction.

Accordingly, the Apex Court disposed of the Writ Petitions and Civil Appeals.

Cause Title- BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors. (Neutral Citation: 2025 INSC 937)

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