Summary
In petitions by the three Delhi distribution companies over the 'regulatory asset' of about Rs. 27,200 crores built up through DERC's tariff orders, the Supreme Court laid down the law on creation, continuation and liquidation of regulatory assets under the Electricity Act, 2003. A regulatory asset is not a statutory concept but a tariff-determination measure recognising an enforceable right of recovery through future tariffs; it must be exceptional, capped (Rule 23 of the Electricity Rules, 2005, 3% of ARR, as the guiding principle) and liquidated in a time-bound manner, and a disproportionate, long-pending regulatory asset is a 'regulatory failure'. Commissions are accountable to the APTEL, whose Section 121 power to direct them was affirmed, and the APTEL was directed to monitor liquidation through a suo motu petition.
Issues
- What law governs the creation of a regulatory asset during tariff determination by Electricity Regulatory Commissions, its impact on stakeholders' rights and liabilities, the limits within which it may be operated, and the regulatory duties it invokes.
- Whether the Electricity Act, policies, rules and regulations create statutory duties regarding regulatory assets whose breach gives rise to an enforceable legal right, and whether the writ petitions are maintainable.
- What is the scope of the APTEL's powers under Sections 111 and 121 of the Electricity Act, 2003 to ensure accountability of Regulatory Commissions and avert regulatory failure.
Provisions considered
- Sections 61 and 62, Electricity Act, 2003Section 61 lays down the guiding principles for tariff regulations (commercial principles, efficiency, safeguarding consumer interest with reasonable cost recovery, multi-year tariff, tariff progressively reflecting cost of supply, the National Electricity Policy and tariff policy); Section 62 vests tariff determination in the Commissions. Creation of a regulatory asset is a measure within tariff determination informed by Section 61 read with Sections 79 and 86, and tariff must as a first principle be cost-reflective. (¶¶ 37, 38, 63.1, 67.3, 67.4, 71)
- Sections 3, 86(1)(a) and 86(4), Electricity Act, 2003The Central Government notifies the National Electricity Policy and tariff policy under Section 3; tariff determination is a mandatory function of the State Commission under Section 86(1)(a), and under Section 86(4) it shall be guided by those policies, which, though not binding, are a material consideration that must guide tariff determination. (¶¶ 33, 35.1, 41.1)
- Section 65, Electricity Act, 2003If the State Government requires a subsidy for any consumer class, it must pay the subsidy in advance; non-payment in time was identified as one factor contributing to an unmanageable regulatory asset, though the Delhi Government denied any link. (¶¶ 38, 21, 22, 66)
- Sections 176, 178 and 181, Electricity Act, 2003Rule 23 was made under the Central Government's rule-making power in Section 176 (with sub-section (2)(z)); since Sections 178 and 181 allow Commissions to make regulations only 'consistent with the Act and the rules', rules made under Section 176 bind the Commissions when framing tariff regulations, and Rule 23 must be complied with wherever incorporated in State tariff regulations. (¶¶ 36, 67.2, 67.3)
- Rule 23 (inserted by the Electricity (Amendment) Rules, 2024), Electricity Rules, 2005Rule 23 requires cost-reflective tariff with no gap between approved ARR and estimated revenue except under natural calamity conditions, caps any such gap at 3% of ARR, requires its liquidation with carrying cost in at most three equal yearly instalments, and requires existing gaps to be liquidated in at most seven equal yearly instalments. The Court treated Rule 23, consistent with Clause 8.2.2 of the National Tariff Policy, 2016, as the normative principle that must invariably be followed and used it as the guiding principle for its directions. (¶¶ 59, 67, 67.1, 67.2, 67.3, 67.4, 71)
- Clause 8.2.2, National Tariff Policy, 2006 and National Tariff Policy, 2016The 2006 Policy permitted a regulatory asset only as an exception, in circumstances defined by regulations limited to natural causes or force majeure, with carrying cost, non-repetitive use and recovery within three years; the 2016 Policy allowed it only as a very rare exception, barred creation under business-as-usual conditions and required recovery with carrying cost within seven years. The Court found nothing clearer than this mandate, which DERC's 2007 and 2011 Regulations incorporated but its 2017 Regulations omitted. (¶¶ 41, 41.2, 42, 46, 55, 56)
- Section 111, Electricity Act, 2003Section 111 is the statutory appellate remedy against orders of the Commissions; on appeal the APTEL re-appreciates facts, applies the law, examines the legality, propriety and correctness of the Commission's orders, and, as a permanent expert body, systematically evolves the legal regime of the sector. (¶¶ 69, 69.1, 69.2)
- Section 121 (with Section 120(3)), Electricity Act, 2003Section 121 empowers the APTEL, after hearing the Commission, to issue such orders, instructions or directions as it deems fit to any Commission for performance of its statutory functions, enforceable as a decree under Section 120(3). The Court held this an extraordinary and most important power intended to ensure efficiency, integrity and accountability of Commissions and to avert regulatory failure, and directed the APTEL to invoke it and to monitor compliance. (¶¶ 69.3, 69.4, 69.6, 69.7, 69.9, 70, 71)
- Article 39 and Part IV, Constitution of IndiaElectricity being a material resource within Article 39, Part IV must inform its generation, transmission and distribution, and the Regulatory Commissions, Union and State Governments are equally bound by the Directive Principles for its equitable distribution. (¶¶ 62, 70)
Held
- A regulatory asset is an intangible asset created by a Regulatory Commission in recognition of an uncovered revenue gap when a distribution licensee cannot fully recover its reasonably incurred costs through tariff in a year; it is deferred for recovery in future years to avoid tariff shock. It is neither a statutory concept nor a power granted by the Act, but a measure adopted by Commissions in exercise of their tariff functions, governed by the Act and the policies, rules, regulations and precedents under it; if created, it must be recovered in a time-bound manner. (¶¶ 5, 6, 7, 8, 65, 65.1)
- Electricity is a public good and a material resource under Article 39; its purchase, sale and distribution are governed by statutory regulation, not market forces. Tariff determination is the exclusive province of the independent Regulatory Commissions, which are the primary duty bearers under the Act, must balance the State's social justice obligations with efficiency in collaboration with other authorities, and must ensure that tariff progressively reflects the cost of supply. (¶¶ 62, 63, 63.1, 64, 70)
- Creation of a regulatory asset within reasonable measure is part of tariff fixation and recognises an enforceable right of recovery, though only through later tariff determinations; it creates correlative obligations on the Commission to enable efficient recovery and to manage the asset without transgressing tariff principles. A regulatory asset that balloons beyond proportion and is extended year after year, imperilling the sector, the utilities and ultimately the consumers who bear the burden, amounts to regulatory failure; the facts relating to the DERC present a classic case of such failure. (¶¶ 66, 66.1, 69.4, 70)
- The combined effect of the Act, the National Tariff Policies, Rule 23 and the Tariff Regulations is: tariff shall be cost-reflective; a revenue gap may arise only in exceptional circumstances; the regulatory asset should not exceed a reasonable percentage, Rule 23's 3% of ARR being the guiding principle; a newly created regulatory asset must be liquidated within three years; the existing regulatory asset must be liquidated within a fixed maximum period starting 01.04.2024; and Commissions must provide a liquidation trajectory and roadmap addressing carrying costs and audit the circumstances in which the distribution companies continued without recovery. Rules under Section 176 bind the Commissions in making regulations. (¶¶ 67.2, 67.3, 67.4, 71)
- Regulatory Commissions must perform their functions as per the Act, the policies, rules and regulations, and the APTEL's directions under Section 121, and must abide by and implement those directions; their decisions are subject to appeal and judicial review, and accountability, comprising responsibility, answerability and enforceability, is an essential principle of administrative law. Commissions must call for ARRs, determine tariff and true up in a timely manner, exercising suo motu powers if necessary. (¶¶ 68, 69.9, 70)
- Under Section 121 the APTEL has the power and duty to issue directions to Commissions that fail to comply with the Act, rules or regulations or perform their functions negligently, and to monitor compliance through status reports and timelines; the directions in its orders of 11.11.2011 and 14.11.2013 (timely annual tariff determination, regular truing up, cost-reflective tariff, no routine creation of regulatory assets, and carrying cost, time-bound recovery and a liquidation schedule where one is created) were restated and must be followed. Regulatory failure from ineffective functioning, excessive governmental interference or regulatory capture cannot be wished away, and Section 121 exists to ensure efficiency, integrity and accountability of the Commissions. (¶¶ 69.4, 69.6, 69.7, 69.8, 69.9)
- The Court summarised its conclusions in ten propositions, including that the regulatory regime under the Act is a complete code of rights, obligations and course-correction mechanisms whose effectiveness depends on the will to enforce it, and that Commissions are accountable and subject to such orders, instructions or directions as the APTEL may issue under Section 121 regarding regulatory assets. (¶ 70)
- The Court clarified that it was not determining the rights and liabilities of the parties, which remain for the pending civil appeals against APTEL orders, and that its directions apply to Regulatory Commissions generally. (¶¶ 1, 71)
Result
Writ petitions and civil appeals disposed of with directions: tariff to be cost-reflective; revenue gaps only in exceptional circumstances; regulatory asset capped by reference to Rule 23's 3% of ARR; new regulatory assets to be liquidated within three years and the existing one within a maximum period from 01.04.2024; Commissions to provide liquidation roadmaps covering carrying costs, audit non-recovery, and follow paragraph 70 and the APTEL directions in paragraph 69.8; APTEL to invoke Section 121 and register a suo motu petition to monitor liquidation.