Supreme Court Clarifies Limits On Regulatory Assets In Electricity Tariff Determination

Introduction

The Supreme Court in BSES Rajdhani Power Ltd. & Anr. v. Union of India & Ors., 2025 INSC 937, examined the legal framework governing the creation, continuation, and liquidation of “regulatory assets” during tariff determination by the Delhi Electricity Regulatory Commission (DERC). The Court analysed the Electricity Act, 2003, National Tariff Policies of 2006 and 2016, the Electricity (Amendment) Rules, 2024, DERC’s tariff regulations, and past orders of the Appellate Tribunal for Electricity (APTEL). The petitions were confined to determining the legal principles applicable to such assets, the duties of Regulatory Commissions, and permissible limits, without adjudicating the specific monetary disputes between the parties.

Facts

Generation, transmission and distribution of power was unbundled from the Delhi Vidyut Board under Delhi Electricity Reform Act, 2000 and private service providers, BSES Rajdhani Power Ltd. (BRPL), BSES Yamuna Power Ltd. (BYPL) and Tata Power Delhi Distribution Limited took over as distribution companies. DERC created the first regulatory asset to bridge a revenue gap in June 2004. With the passage of time, several tariff orders, MYT orders and truing-up exercises expanded the balance sheet since carrying cost was allowed. Measures such as tariff hikes, Deficit Recovery Surcharge (DRS), and Power Purchase Adjustment Charges (PPAC) were introduced to address liquidation. As of 31 March 2024, combined regulatory assets exceeded Rs. 27,200 crores. The petitioners sought recognition of the asset, time-bound liquidation in line with Clause 8.2.2 of the National Tariff Policy, and implementation of APTEL’s prior orders.

Issue

The central issue was whether the Electricity Act, 2003 and related policies, rules, and regulations permit the creation, continuation, and liquidation of regulatory assets, what restrictions apply to such measures, and what statutory duties fall on State Electricity Regulatory Commissions in their management.

Arguments

The petitioners argued that tariff determination must be cost-reflective and that Clause 8.2.2 of the National Tariff Policy, 2006 restricts regulatory assets to exceptional circumstances, with recovery preferably within the control period and not exceeding three years. They pointed out that DERC’s regulations incorporated these limits but had not adhered to them. Causes for the asset’s growth included underestimated power purchase costs, inflated revenue assumptions, delayed or absent subsidy payments under Section 65, and inadequate truing-up. The Electricity (Amendment) Rules, 2024 codified limits under Rule 23, which they argued must be implemented.

DERC submitted that the mechanism was proposed by the distribution companies themselves to avoid tariff shocks. It detailed measures taken for liquidation, such as tariff hikes, DRS, PPAC, and carrying cost provisions. However, sharp increases in power purchase costs between 2007 and 2012, largely uncontrollable, undermined liquidation plans. The asset’s quantum changes annually, making full recovery challenging. It also questioned writ jurisdiction, noting the statutory appeal route to APTEL.

The Union of India contended that regulatory assets are often created without fulfilling National Tariff Policy conditions, and liquidation should involve tariff increases, subsidies, and state financial support. The Government of NCT of Delhi denied that subsidies contributed to the revenue gap. Generating and transmission companies alleged irregular payments from certain licensees. Affidavits from other State Commissions showed varied practices some never creating such assets, others limiting them, and a few with large outstanding balances.

Judgment

The Court stated that regulatory asset is a concept which is not defined in Electricity Act, 2003 and its like measure of tariff determination propounded by Commissions under statutory powers. It has to be created in accordance with the principles of section 61, tariff policies and valid regulations. The 2006 and 2016 National Tariff Policies, Clause 8.2.2; Rule 23 of the Electricity (Amendment) Rules, 2024 limit: use only in exceptional circumstances, prescribed recovery periods, defined under each Policy (three years under the 2006 Policy and seven years under the Policy), avoidance standard repetition.

The Commission must ensure that a clear, time-bound liquidation plan is in place and adjudicate thereafter through monitoring compliance, for it should serve contrary interests of consumer concerns, on the one hand and financial viability of the licensee on the other. When the understanding leads to the reality of nose diving into an escalation then, prolonged accumulation without relief ends up in regulatory failure inviting responsibility. The commissions will also be governed by the directions of APTEL on timely truing-up, fuel and power purchase cost pass-through as well as meeting commitment to fulfillment of other statutory timelines. The petitions were entertained for settlement of legal principles, and monetary disputes are left for adjudication in pending appeals. All State Commissions were directed to fall in line with the statutory and policy orders, comply in a time bound liquidation approach and submit compliance reports.

Analysis

The judgment combines provisions of statutes and policy guidelines in this framework to be implemented as a binding operational mechanism. The Electricity Act has vested the determination of tariffs in independent Commissions under national guidelines. Policies have no binding nature but still it becomes an effective as state has incorporated the same in DERC regulations which are enforceable. Delhi gas ambit expansion without asset liquidation violated clauses 8.2.2 of the policy which had said that LLC will repeatedly create and extend regulatory assets that are left un-liquidated.

The 2016 Policy extended the maximum recovery period to seven years but retained the requirement of exceptional circumstances. Rule 23 of the Electricity (Amendment) Rules, 2024 gives these principles statutory force, mandating time-bound recovery, limits on percentage of ARR, and priority adjustment of surpluses towards liquidation.

However, this turned out to be far from the practical reality with non-cost-reflective tariff, cost pass through deferred for long and surcharge deducted falling short of full carrying costs all led to further mounting liabilities. And this cost was pushed forward to subsequent consumers and boxed licensor budgets. The job of the regulator is to prevent tariff shocks, and never-ending extension. The Court observed divergent practices in the states, with some entirely avoiding the mechanism and others seeing huge longstanding obligations. So, it has an effect on the entire sector.

By affirming regulatory accountability, mandating adherence to statutory and policy limits, and requiring compliance reporting, the Court strengthens governance in tariff determination. It also clarifies that judicial review can settle systemic legal issues even where an appellate remedy exists, leaving fact-specific disputes to APTEL.

Conclusion

The Supreme Court held that use of regulatory assets is to be considered “extraordinary measures which need extraordinary sanction” and under Electricity Act, tariff policies and rules this is permissible. New creation should be made mandatory; recovery must be time bound, and regulators should be accountable to ensure compliance. The determination reminds both of ensuring quality through consumer protection and licensee sustainability, aligns states with national standards, and inhibits the sustained accrual of unrecovered costs, which is a potential destabilizing factor.