Tariff Determination Under the Electricity Act Must Be Approved by State Commission: Supreme Court

Introduction

In M/s KKK Hydro Power Limited v. Himachal Pradesh State Electricity Board Limited & Ors.[1] , the Supreme Court considered if parties can determine electricity tariffs in private agreements under Power Purchase Agreements. The Court held that tariff determination is not a bilateral agreement but is under the jurisdiction of the State Electricity Regulatory Commission under Section 86(1)(b) of the Electricity Act, 2003. It clearly established that any Power Purchase Agreement or any revision thereof should be submitted to the Commission for their scrutiny and approval.

Facts

KKK Hydro Power Limited entered into an Implementation Agreement with the Government of Himachal Pradesh in March 2000 to set up a 3 MW hydro project. A PPA was executed with the Himachal Pradesh State Electricity Board on the same date, fixing a tariff of ₹2.50 per kWh for 40 years. At that time, the Himachal Pradesh Electricity Regulatory Commission had not been constituted. The project was commissioned in August 2004. Later, the project capacity was increased to 4.9 MW. A new PPA dated March 11, 2008, was executed and approved by the Commission. The tariff was again fixed at ₹2.50 per kWh, subject to the 2007 Regulations framed by the Commission.

In February 2010, the Commission revised the tariff for small hydel projects from ₹2.87 to ₹2.95 per kWh. On this basis, the appellant and the Electricity Board executed a supplementary PPA on September 10, 2010, enhancing the tariff to ₹2.95 per kWh. This supplementary agreement was never placed before the Commission for approval. Disputes arose when arrears and applicability of the new rate were questioned.

The Commission, by an order dated July 5, 2013, rejected the supplementary PPA and held that the original tariff of ₹2.50 continued to apply. On appeal, the Appellate Tribunal for Electricity partly modified this position. It ruled that while the original 3 MW plant would remain at ₹2.50, the additional 1.9 MW unit commissioned after the 2007 Regulations would fall under the revised tariff. It therefore fixed a weighted average tariff of ₹2.60 per kWh. Dissatisfied, the appellant approached the Supreme Court.

Issues

The key issue was whether the appellant and the Electricity Board could validly alter the tariff by private agreement without the approval of the Commission under Section 86(1)(b) of the Electricity Act, 2003. A connected issue was whether the appellant was entitled to the full revised tariff of ₹2.95 per kWh for the entire 4.9 MW project, or whether the weighted average tariff devised by the Tribunal was correct.

Analysis

The Supreme Court examined Section 86(1)(b) and found that tariff fixation falls within the powers of the State Commission. It noted that the March 2008 PPA was valid because it had been approved by the Commission, but the September 2010 supplementary PPA lacked such approval. As a result, the increase to ₹2.95 could not be sustained.

The Court further held that the 2010 tariff order applied only to PPAs that had stipulated a tariff of ₹2.87. Since the appellant’s PPA fixed the tariff at ₹2.50, it was outside the scope of the order. By entering into a supplementary agreement without Commission approval, the parties acted outside the statutory scheme.

At the same time, the Court considered that the weighted average tariff of ₹2.60 fixed by the Tribunal had been in place since 2015 and neither the Board nor the Commission had appealed against it. The Court concluded that disturbing this arrangement after more than a decade would create complications. While it left the weighted average tariff undisturbed, the Court clarified the correct legal position for the future.

Judgment

The Supreme Court rejected the appeal. It held that the appellant was not warranted the entire revised tariff of ₹2.95 per kWh since the supplementary PPA was not approved by the Commission. The Court upheld that tariff determination cannot be entrusted to private agreement and is required to obtain prior approval of the Commission under Section 86(1)(b). It permitted the tariff of weighted average of ₹2.60 to persist because it was already implemented but made it clear that arrangements of this nature could not be repeated in the future.

Conclusion

The Supreme Court once again asserted that electricity tariffs cannot be privately determined between distribution licensees and generating companies. Section 86(1)(b) of the Electricity Act mandates prior State Commission approval for the implementation of any tariff or PPA. This guarantees that tariff fixation is a regulated process and not a matter of convenience for the parties. Although the Court permitted the weighted average tariff already in effect to remain in practice for pragmatic considerations, it made it clear that such private agreements lack legal authority. The ruling reinforces the position of regulatory commissions and provides assurance that future tariff adjustments will be pursuant to statute.

[1] (Civil Appeal No. 3005 of 2015, dated August 29, 2025)