Electricity A Public Good; Disproportionate Increase In Regulatory Assets Must Be Avoided : Supreme Court

The Supreme Court on Wednesday (Aug. 6) while directing the Electricity Regulatory Commissions (“ERC”) to timely liquidate the regulatory assets, to avoid accumulation of rightful cost due to the DISCOMS, has issued ten points relating to regulatory assets, determination of tariff and accountability of ERCs, and powers of the APTEL to avert regulatory failure.

The bench comprising Justices PS Narasimha and Sandeep Mehta issued the following ten sutras/points:

“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 alongwith Union and State Governments and other stakeholders are equally bound by the mandate under Part-IV of the Constitution for its equitable distribution. This duty is predicated on the independent, efficient, objective functioning of the electricity commissions. They must guard themselves against 'regulatory failure' and in particular 'regulatory capture'. The interpretation of the powers and function of the Regulatory Commissions have to be such that there is no regulatory vacuum, in that there is no unallocated residue of power of regulation.

IV. Tariff determination is a regulatory function and it is the exclusive province of the Regulatory Commissions. Tariff determination involves multiple variables requiring the regulators to act with expertise and also with certain amount of flexibility. Creation of regulatory asset is a 'measure' that the Commission adopts for good governance of tariff. It is also a recognition of revenue recoverable by distribution companies, and as such, it is an enforceable right, though only through tariff determination for later years. This 'measure' gives rise to correlative obligations of the Regulatory Commissions to manage it efficiently and allow easy liquidation.

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 79 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. The commissions are accountable for their decisions, and they are subject to judicial review.

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. This is one of the most important powers allocated to APTEL by the Parliament.

IX. We have affirmed the limits of creation, continuation and liquidation of the regulatory asset, recognised the obligations of the Regulatory Commissions, and directed that they 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. The effectiveness of these laws will be reflected in the will to enforce them.”

Background

The judgment came as a relief for Delhi's power distribution companies (DISCOMs), which had challenged the Delhi Electricity Regulatory Commission (DERC) for repeatedly deferring the liquidation of regulatory assets. These assets, initially created as a temporary measure to shield consumers from tariff hikes, were left unliquidated since 2004, depriving the DISCOMs of cost recovery. This prolonged deferral resulted in a staggering ₹27,200.37 crore in unliquidated regulatory assets across the three DISCOMs, severely hampering their operations and triggering a cash crisis.

Against the ballooning of regulatory assets amount and the need for timely determination of the tariff rates by the ERCs, the court observed :

“A Regulatory Commission's power to create a regulatory asset is part of the tariff fixation process, as long as it is in reasonable measure. However, in an egregious situation where the regulatory asset has grown beyond proportion and is also extended from time to time inefficiently, there is a compelling need to deal with it. In this context, the Regulatory Commissions have twin obligations: first, the Commission must enable an efficient and effective recovery of the regulatory asset by the utility, and second, more importantly, it must manage the regulatory asset in a manner that does not transgress the principles that inform and govern tariff determination. The regulatory asset cannot be permitted to balloon into such proportions or continued for such periods, year after year, that the governance of the sector is set in peril, affecting the rights of the utilities and at the same time jeopardising the consumer interest, who eventually end up bearing the burden. Creation, management and dissolution of regulatory assets are subject to law and regulation. In performance of these duties, the orders of the Regulatory Commissions are subject to the orders, instructions, and directions of the APTEL issued in exercise of its statutory powers. When they fail to comply with these statutory and other requirements, one can infer regulatory failure.”

Cause Title: BSES RAJDHANI POWER LTD. & ANR. VERSUS UNION OF INDIA AND ORS. (and connected matters)

Citation : 2025 LiveLaw (SC) 780

Click here to read/download the judgment

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