BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors.

the CERC and SERCS notified their respective Tariff Regulations from time to time wherein different rates of the LPS were specified and which were exorbitant- as high as 18 percent- whereas Banks are charging an interest of only 6 to 7 percent on their loans. The extortionate rate of LPS lead to higher cost of electricity for the common man; and a heavy burden on the distribution companies putting them virtually into a debt trap.”

9 (viii). Electricity (Amendment) Rules, 2024 introducing Rule 23.

59. On 10.01.2024, the Central Government notified the Electricity (Amendment) Rules, 2024 by which it inserted Rule 23, which deals with regulatory asset, in the Electricity Rules, 2005. This was in exercise of its rule-making powers under Section 176 of the Electricity Act. Rule 23 prescribes as a first principle that tariff shall be cost-reflective and that there shall not be any gap between the ARR and the estimated revenue from approved tariff. The only exception to this rule is natural calamity conditions. Four conditions are formulated for the creation, management, and liquidation of a regulatory asset under Rule 23: First, the regulatory asset shall not be more than 3% of the ARR. Second, the revenue gap shall be liquidated within 3 years. Third, the existing regulatory assets shall be liquidated within 7 years. Fourth, the regulatory asset will have carrying cost as prescribed under the Rules. We will deal with Rule 23 in more detail at a later stage.

9 (xix). DERC’s Order dated 19.07.2024 (true-up till FY 2020-21).

60. Finally, in its orders dated 19.07.2024 for truing-up till FY 2020-21, the DERC implemented various decisions of the APTEL and this Court. Pursuant to this, the regulatory asset including carrying costs is as follows: Rs. 12,993.53 crores for BRPL, Rs. 8419.14 crores for BYPL, and Rs. 5,787.70 crores for TPDDL. This amounts to Rs. 27,200.37 crores across all three distribution companies until the end of FY 2020-21.

10. Analysis.

61. We are considering the legal position and status of a regulatory asset, the rights and liabilities of stakeholders, consequences of regulatory failure to manage the regulatory asset as a reasonable

p. 1921

measure, and the appellate and review powers of the APTEL and this Court to ensure accountability and restitution.

10 (i). Electricity is a public good and is regulated under the Act.

62. Since electricity is a material resource, the State has a public interest in ensuring that its ownership and control is so distributed as best to subserve the common good. Therefore, the public policy that governs purchase, sale and distribution of electricity is not based on market forces of demand and supply but by regulation through statute. The Electricity Act 2003, the policies and plan(s) formulated under Section 3 of the Act, rules made by the Central and State Governments, and more importantly, the regulations formulated by the Regulatory Commissions, followed by the precedents laid down by the APTEL and this Court form the legal regime, by which tariff is determined, restructured, and reviewed from time to time.

10 (ii). Tariff determination is governed by the Act, which entrusts this function to independent Regulatory Commissions.

63. The Electricity Act unbundled generation, distribution and transmission of electricity, and at the same time, institutionalised important functions such as grant of licenses and determination of tariff through the establishment of Regulatory Commissions. These Regulatory Commissions have autonomy as provided in the statute, expertise through human resource, continuation through seal and succession, plurality by composition, and accountability by transparency. With the powers that they are granted, coupled with autonomy that they enjoy, these Commissions are the primary duty bearers to implement the provisions of the Act. 63.1 Tariff determination is the exclusive province of the Regulatory Commissions. In performance of their functions, the Central and State Electricity Regulatory Commissions determine tariff for supply of electricity by generating companies to distribution licensees, for transmission, wheeling, and also for retail sale of electricity.42 Section 61 provides the guiding principles for

42 Section 62 of the Electricity Act, which reads: “Section 62. (Determination of tariff): --- (1) The Appropriate Commission shall determine the tariff in accordance with the provisions of this Act for –

p. 1922

good governance for development, sale, and distribution of power and also emphasises the overarching principle of subserving the interests of consumers. The journey as well as the destination of tariff determination indicates that the Commissions shall adopt commercial principles, encourage competition, promote efficiency, use resources economically, perform efficiently and optimise investments. The purpose of adopting such measures is to “safeguard and protect the interest of the consumers”. Section 61 also recognises the vulnerability of the electricity sector to undue political posturing, and therefore emphasises that the Commission shall ensure that “the tariff progressively reflects the cost of supply of electricity and also, reduce cross-subsidies”.43 In this endeavour the National Electricity Policy and the National Tariff Policy shall also be guiding factors.44

p. 1923

10 (iii). Collaborative effort of the Regulatory Commissions to balance social justice obligations with efficiency.

64. The Electricity Act contemplates multiple stakeholders, in other words, a plurality of collaborators – the Central Government, the State Governments, Regulatory Commissions, the Appellate Tribunal, statutory policy makers, and the utilities. These authorities collaborate to ensure that the purpose of the Act is subserved and, in this endeavour, the Regulatory Commissions share the social justice obligations of the State. Since electricity is a public good,45 Regulatory Commissions must undertake joint and collaborative efforts with the other authorities to enable access to electricity across urban and rural areas46 and affordability through rationalisation of tariffs47. The statutory authorities must work in cohesion towards a common goal of ensuring supply of electricity across regions and terrains, and cheaper and affordable supply of electricity to those sections of society who cannot afford it.48 At the same time the Regulatory Commissions maintain their independence and autonomy and ensure that the final decision with respect to fixation of tariff will be that of the Regulatory Commissions alone.

10 (iv). Tariff fixation takes into account multiple variables and requires flexibility. Regulatory asset is a measure adopted during tariff fixation that recognises right of recovery.

65. A regulatory asset is adopted as a measure by the Regulatory Commissions when the gap between the revenue required by the

45 See K.C. Ninan v. Kerala State Electricity Board, (2023) 14 SCC 431, para 93. 46 See Preamble of the Electricity Act; Section 6 of the Electricity Act that places the responsibility of rural electrification jointly on the Central and State Governments. 47 See Preamble of the Electricity Act. 48 Paul Craig, UK, EU and Global Administrative Law: Foundations and Challenges (Cambridge University Press, 2015), 305-306. The relevant portion is extracted hereinbelow: “Regulation as an enterprise conceives regulators as governments in miniature, in which efficiency and distributive goals are both legitimate regulatory concerns, and anyway are inseparable’. The regulatory goals may include social cohesion, and this function may be shared with government Regulatory independence is not regarded as central, because regulation is conceived as a collaborative project between agencies and other organs of government. Regulation in this mould is seen as delegation by government of its inherent powers to act in the public interest. The emphasis is on different actors working towards a common enterprise, with accountability conceived primarily in terms of public law mechanisms such as proceduralization, judicial review and parliamentary scrutiny. For Prosser this model has the virtue of rendering it easier to understand in areas where regulation has a social rationale, and is not driven by considerations of economic efficiency.”

p. 1924

distribution company to meet its costs and expenditure and the actual revenue realised through immediate tariff is so high that it would not only prejudice the consumer but lead to what is called a tariff shock. By adopting such a measure, the Commission liquidates the revenue required by the utility through future tariff determinations. ‘Revenue assets’ are costs incurred by power distribution companies that are recognised as recoverable from consumers in future tariffs but are not immediately recovered in the current bills. 65.1 The measure adopted by the Commissions in creating a ‘regulatory asset’ can also be seen as an accounting treatment. Regulatory assets are treated as assets in the balance sheet and are liquidated over a defined period of time through tariff adjustments or government subsidies. The regulatory asset is a cost incurred by the utility that the Regulatory Commission allows to be deferred on the balance sheet instead of being immediately expensed. It enables the distribution company to utilise the ‘recognition’ of a regulatory asset to obtain bridge funds from bankers and the financial institutions as they have the confirmation that the said amount will be recovered in the ensuing financial years.

10 (v). Factors leading to an unmanageable regulatory asset, and consequent ‘regulatory failure’.

66. While determining tariff, Regulatory Commissions have to deal with situations where there could be a sudden increase in the fuel cost, infrastructure investments, or some extraordinary expenditure. Further, lack of discipline followed by delays in filing the ARR leads to uncertainties. Equally, not conducting quick and effective truing up multiplies the problem of ascertaining the actual cost incurred. The failure to file ARR in time and the Regulatory Commissions not invoking their suo motu powers to rectify the same are not addressed. There is a lack of accountability here. Further, even though Section 65 provisions that State Governments shall pay in advance the subsidy to subserve social justice obligations, it is alleged that such payments are not made in time. The decisions taken by the Regulatory Commissions, which were considered in appeal by the APTEL and this Court, give a clear impression that the Regulatory Commission is not able to take firm decisions. Instead of taking strong decisions on the basis of the statutory mandate,

p. 1925

we see instances where the Regulatory Commissions manage and manoeuvre to arrive at a tariff by creating regulatory assets over and above all permissible limits. This is where the problem lies. Though the Electricity Act envisages functional autonomy for Regulatory Commissions49 and the statutory scheme is complete in all respects, the decisions taken by the Commissions, many a time, have not inspired confidence of independence and autonomy. The reasons are not difficult to conceive as there is an issue about the appointment process. The assertion of independence, however, comes through individual volition and that is where the mandate of transparency leads to accountability. The decisions taken by the Commission, rather the Regulatory Commissioners, are subject to scrutiny in the appellate and the review jurisdiction of the APTEL and thereafter by the Supreme Court. We have dealt with this issue in more detail while considering accountability of the Regulatory Commissions and powers of the APTEL. All these factors give rise to a situation where the tariff for the subsequent years has to be substantially increased to meet the ARR of the previous years. 66.1 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

49 See Transmission Corporation of Andhra Pradesh Ltd. v. Sai Renewable Power (P) Ltd., (2011) 11 SCC 34, para 59; Kerala SEB Ltd. (supra), paras 16 and 17.

p. 1926

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.

10 (vi). Law that governs creation, continuation and liquidation of regulatory asset.

67. In the context of creation, management and liquidation of a regulatory asset, the Regulatory Commissions are bound by the mandate of the Electricity Act, the National Electricity Policy, the National Tariff Policy, the Electricity Rules, the Tariff Determination Regulations applicable at the relevant period, and the precedents of the APTEL. We have already indicated that the Central Government recently notified the Electricity (Amendment) Rules, 2024 by which it inserted Rule 23 that deals with regulatory asset. Prior to the notification, the Central Government elicited comments from various statutory authorities, including the CEA, the Central and State Commissions, the State Governments, generating and distribution utilities, etc. The reason for introduction of this rule is evident from the circulation of the Draft Rules for stakeholder comments, wherein the Central Government has expressed the need for a statutory rule on the conditions for creation and management of a regulatory asset as follows: “3. In order to remove difficulties/challenges faced by various entities and to facilitate development of the power sector some more reforms are proposed. The issues and the reforms proposed to resolve them are mentioned below: *** iii) To ensure financial sustainability of the power sector, it is necessary that the tariff is cost reflective and all the prudent cost is pass through. However, it has been observed that in many States there is large gap in approved ARR and estimated revenue on approved tariff. To discourage such practice there is need to make statutory provisions to avoid such gap. It is also imperative that liquidation of any such gaps in revenue required and estimated approved tariff is done in a time bound manner. New rules are proposed to

p. 1927

ensure that revenue gap/regulatory assets is not created except in extraordinary circumstances and to provide for time bound liquidation of the same.” 67.1 In furtherance of this object and purpose, Rule 23 provides as follows: “Rule 23. Gap between approved Annual Revenue Requirement and estimated annual revenue from approved tariff.– The tariff shall be cost reflective and there shall not be any gap between approved Annual Revenue Requirement and estimated annual revenue from approved tariff except under natural calamity conditions: Provided that such gap, created if any, shall not be more than three percent of the approved Annual Revenue Requirement: Provided further that such gap along with the carrying costs at the base rate of Late Payment Surcharge as specified in the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, as amended from time to time shall be liquidated in maximum three numbers of equal yearly installments from the next financial year: Provided also that any gap between approved Annual Revenue Requirement and estimated annual revenue from approved tariff existing on the date of notification of these rules, along with the carrying costs at the base rate of Late Payment Surcharge as specified in the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, as amended from time to time shall be liquidated in maximum seven numbers of equal yearly installments starting from the next financial year.” 67.2 The rule has come into existence after detailed consultation with all the stakeholders. It subserves a salutary purpose and sets a normative principle in motion. Rule 23 is issued in exercise of powers under Section 176, which enables the Central Government to make rules to carry out the provisions

p. 1928

of the Act.50 Sub-section (2)(z) of the Section 176 provides that without prejudice to the generality of the rule-making power, the Central Government may also provide for, by way of a rule, “any other matter which is required to be, or may be, prescribed”. The expression “prescribed” is defined in Section 2(52) to mean “prescribed by rules made by the Appropriate Government under this Act”. It may sound tautological, but the correct way to examine the legal position is to look at the provisions with respect to which the Central Government or the State Governments may make rules for carrying out the provisions of the Act. The province or domain with respect to which rules can be made is based on the functions that have been assigned to the Government(s) and the Regulatory Commissions. Tariff determination is provisioned in Sections 61 and 62 of the Act, and this must be read with the functions of the Regulatory Commissions under Sections 79 and 86 and the power of the Central and State Commissions to make regulations under Sections 178 and 181. 67.3 The creation of a regulatory asset, being a measure undertaken by the Regulatory Commissions as part of tariff determination, such exercise is informed by Section 61 read with Sections 79 and 86. It is also important to note that Rules made by the Central Government under Section 176 are binding on the Regulatory Commissions when they make regulations because Sections 178 and 181 provide that the “Commission may make regulations consistent with the Act and the rules”. In any event of the matter, the principle that one must adopt is that the adverse effect of an overbearing regulatory asset extended beyond proportion is an anathema to good governance of the Electricity Act. It affects every stakeholder, the worst of all being the consumer who is burdened, rather over-burdened, from time to time because

50 The relevant portion of Section 176 of the Electricity Act reads: “Section 176. (Power of Central Government to make rules): --- (1) The Central Government may, by notification, make rules for carrying out the provisions of this Act. (2) In particular and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely: - *** (z) any other matter which is required to be, or may be, prescribed.”

p. 1929

of the lapses of the regulators or the manipulation of the utilities or the indifference of the government. Therefore, the principle formulated in Rule 23, consistent with Clause 8.2.2 of the National Tariff Policy, 2016 and the scheme of the Act, must be the normative principle which must invariably be followed. Wherever Rule 23 is incorporated into the Tariff Determination Regulations of the State Commission, it shall be complied with. 67.4 We have dealt with the legal regime in detail and have also extracted the relevant provisions, rules, regulations, policies, instructions and precedents. A combined effect of these can be restated as follows: (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.

10 (vii). Accountability of the Regulatory Commissions.

68. 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 directions51. In performance of its functions, the Regulatory Commission’s decisions are subject to

51 Section 121 of the Electricity Act.

p. 1930

appeal before the APTEL as well as the Supreme Court.52 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, as indicated hereinabove53. The Regulatory Commissions must abide by and implement the directions of the APTEL. That is how accountability can be ensured. The need for accountability and its dimensions have been explained by this Court in Vijay Rajmohan v. CBI54 as follows: “34. Accountability in itself is an essential principle of administrative law. Judicial review of administrative action will be effective and meaningful by ensuring accountability of the officer or authority in charge.

35. The principle of accountability is considered as a cornerstone of the human rights framework. It is a crucial feature that must govern the relationship between “duty bearers” in authority and “right holders” affected by their actions. Accountability of institutions is also one of the development goals adopted by the United Nations in 2015 and is also recognised as one of the six principles of the Citizens Charter Movement.

36. Accountability has three essential constituent dimensions: (i) responsibility, (ii) answerability, and (iii) enforceability. Responsibility requires the identification of duties and performance obligations of individuals in authority and with authorities. Answerability requires reasoned decision-making so that those affected by their decisions, including the public, are aware of the same. Enforceability requires appropriate corrective and remedial action against lack of responsibility and accountability to be taken. Accountability has a corrective function, making it possible to address individual or collective grievances. It enables action against officials or institutions for dereliction of duty. It also has a preventive function that helps to identify the

52 Sections 111 and 125 of the Electricity Act. 53 In O.P No. 1/2011 (supra) and O.P. Nos. 1 and 2/2012 (supra). 54 (2023) 1 SCC 329.

p. 1931

procedure or policy which has become non-functional and to improve upon it.”

10 (viii). Powers of the APTEL.

69. Under Section 110 of the Act, the Central Government establishes the Appellate Tribunal for Electricity to hear appeals against orders of the Adjudicating Officer or the Appropriate Commission. Section 111 is the statutory remedy for any person aggrieved against an order made by the Adjudicating Officer or that of the Appropriate Commission as it provides for the appellate power of the Tribunal, which reads as follows: “Section 111. Appeal to Appellate Tribunal: --- (1) Any person aggrieved by an order made by an adjudicating officer under this Act (except under section 127) or an order made by the Appropriate Commission under this Act may prefer an appeal to the Appellate Tribunal for Electricity…” 69.1 While exercising appellate jurisdiction, the APTEL routinely interprets the Act and the rules and regulations framed thereunder, by which process it systematically evolves legal principles. These very principles are applied consistently for a structural evolution of sectoral laws. This freedom to evolve and interpret laws must belong to the APTEL to subserve the regulatory regime for clarity and consistency. In a similar context, while interpreting the scope of appellate jurisdiction of the Securities Appellate Tribunal against orders of the regulator, the SEBI, this Court in SEBI v. Mega Corporation55 held as under; “20. … Being a permanent body, apart from acting as an appellate Tribunal on fact, the Tribunal routinely interprets the Act, Rules and Regulations made thereunder and evolves a legal regime, systematically developed over a period of time. The advantage and benefit of this process is consistency and structural evolution of the sectorial laws.

55 (2023) 12 SCC 802.

p. 1932

21. … This freedom to evolve and interpret laws must belong to the Tribunals to subserve the regulatory regime for clarity and consistency and it is with this perspective that the Supreme Court will consider appeals against judgment of the Tribunals on questions of law arising from its orders. *** 23.2 … The Tribunal while exercising jurisdiction under Section 15-T, apart from acting as an appellate authority on fact, also interprets the Act, Rules and Regulations made thereunder and systematically evolves a legal regime. These very principles are applied consistently for structural evolution of the sectorial laws….” 69.2 The power under Section 111 is that of an appeal and as such the decision of the APTEL shall be after re-appreciation of facts and by applying the law on the subject. The APTEL will also examine the legality, propriety or correctness of the orders made by the Regulatory Commissions, and it may also on its own motion make such orders as are appropriate for adjudication and determination of the case. 69.3 Apart from Section 111 under which the APTEL is granted appellate jurisdiction, it is significant to note that the Parliament has also empowered the APTEL with important jurisdiction and powers under Section 121, which is reproduced hereinunder for ready reference. “Section 121. (Power of Appellate Tribunal): --- The Appellate Tribunal may, after hearing the Appropriate Commission or other interested party, if any, from time to time, issue such orders, instructions or directions as it may deem fit, to any Appropriate Commission for the performance of its statutory functions under this Act.” 69.4 We can explain the significance of Section 121 in the context of the facts of these very writ petitions and civil appeals. The facts relating to the performance of DERC present a classic case of ‘regulatory failure’. Typically, ‘regulatory failure’ does

p. 1933

not come under scrutiny when the APTEL considers appeals from orders of the Regulatory Commissions as the focus at that time is on the merits of the decision made by the Commission. The institutional failures or the shortcomings of the regulatory bodies are often ignored and an appellate forum or even constitutional courts proceed to resolve the issue by addressing the merits of the case. In Lifecare Innovations Pvt. Ltd. v. Union of India56 this Court had an occasion to reflect on this problem and held as follows; “21. Having considered the provisions of the Act and the MSE Procurement Preference Policy, 2012, we are of the opinion that there is no mandatory minimum procurement ‘right’ of an individual MSE. However, there is certainly a statutory foundation for the Procurement Preference Policy, 2012, having force of law as it ‘encapsulates a mandate and discloses a specific purpose’.57 Clause 3 of the policy mandating procurement of 25 per cent of supply from MSEs is simply the statutory duty of the bodies constituted under the Act and the Policy. The significance of creation and establishment of these statutory and administrative bodies is not difficult to conceive. If these institutions and bodies work effectively and efficiently, it is but natural that the purpose and object of the legislation will be achieved in a substantial measure. It is, therefore, necessary to ensure that in the functioning of these bodies, there is efficiency in administration, expertise through composition, integrity through human resources, transparency and accountability, and response-ability through regular review, audits and assessments.

56 2025 INSC 269. 57 Gulf Goans Hotels Co. Ltd v. Union of India, (2014) 10 SCC 673 “…a government policy may acquire the ‘force of ‘law’ if it conforms to a certain form possessed by other laws in force and encapsulates a mandate and discloses a specific purpose”; Bennett Coleman & Co. v. Union of India (1972) 2 SCC 788 “What is termed ‘policy’ can become justiciable when it exhibits itself in the shape of even purported ‘law’. According to Article 13(3)(a) of the Constitution, ‘law’ includes ‘any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law’. So long as policy remains in the realm of even rules framed for the guidance of executive and administrative authorities it may bind those authorities as declarations of what they are expected to do under it.”

p. 1934

22. While exercising judicial review of administrative action in the context of Statutes, laws, rules or policies establishing statutory or administrative bodies to implement the provisions of the Act or its policy, the first duty of constitutional courts is to ensure that these bodies are in a position to effectively and efficiently perform their obligations. This approach towards judicial review has multiple advantages. In the first place, while continually operating in the field with domain experts, these bodies acquire domain expertise, the consequence of which would also be informed decision-making and consistency. Further, the critical mass of institutional memory acquired by these bodies will have a direct bearing on the systematic development of the sector and this will also help handling polycentric issues. Thirdly, while continuously being on the field, and having acquired the capability of making real-time assessments about the working of the policies, these bodies will be in a position to visualize course correction for future policymaking.” 69.5 In the above referred matter, this Court was considering the duty to ensure institutional integrity and efficiency of the regulators under the MSME Act. A similar approach was adopted by this Court in T.N. Godavarman Thirumulpad58 for reviving and effectuating the environment regulators, rather than taking over or routinely reviewing their decision making. 69.6 ‘Regulatory failure’ occurs due to ineffective functioning of the Regulatory Commissions, excessive governmental interference, or ‘regulatory capture’. We cannot wish away these real and imminent dangers that affect effective functioning of the Regulatory Commissions. These issues could have the effect of completely eclipsing regulatory functions, thereby losing the very purpose and object of

58 In Re: T.N. Godavarman Thirumulpad v. Union of India, 2024 INSC 78, paras 27-30.

p. 1935

restructuring the electricity sector by unbundling the functions of generation, distribution, and transmission and more importantly, establishing independent regulatory institutions and granting them the exclusive jurisdiction over grant of licenses and tariff determination. Section 121 is intended to ensure that in the functioning of the Regulatory Commissions, there is efficiency in administration, expertise through human resource, integrity through transparency, and accountability and responsibility through review audit and assessment. For enforcing these values, Section 121 empowers the APTEL to issue such orders, instructions or directions as it deems fit, to the Commission for performance of its statutory functions under the Act. 69.7 The power of the APTEL to issue such orders and directions takes within its sweep the power to enforce such orders, as provided in Section 120(3) of the Act.59 The power under Section 121 is extremely important as it is intended by the Parliament that the APTEL must be the guiding force to ensure that Regulatory Commissions across the length and breadth of the nation perform their statutory functions with efficiency and integrity. 69.8 This position is already recognized by the APTEL, as is evident from its order in O.P. No. 1 of 2011, relevant portion of which has already been reproduced in this judgment. It is necessary to restate the directions issued by the Appellate Tribunal in its orders dated 11.11.2011 and 14.11.2013, as it is relevant for the present purpose: 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

59 Section 120(3) of the Electricity Act reads: “Section 120. (Procedure and powers of Appellate Tribunal): --- *** (3) An order made by the Appellate Tribunal under this Act shall be executable by the Appellate Tribunal as a decree of civil court and, for this purpose, the Appellate Tribunal shall have all the powers of a civil court.”

p. 1936

negligently, improperly or poorly.60 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.61 ii. Tariff determination is a statutory function entrusted to the Regulatory Commissions, and it must be undertaken on a regular, timely, and annual basis.62 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.63 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.64 iv. The tariff determined by the Regulatory Commissions must be cost-reflective as per Section 61 of the Electricity Act.65 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;66 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

p. 1937

of the distribution company nor consumer interests are jeopardised.67 69.9 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.

11. Conclusions.

70. In the following ten sutras, we have examined the issue relating to regulatory asset, its position in the regulatory regime for determination of tariff, the duties and accountability of the regulators - the Regulatory Commissions and then powers of the Appellate Tribunal for Electricity to avert a regulatory failure. 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’.

67 ibid, para 62(iv); O.P. Nos. 1 and 2/2012, para 38.

p. 1938

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 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

p. 1939

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.

12. Directions.

71. For the reasons state above, we issue the following directions: (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 may be in exceptional circumstances; (iii) The regulatory asset should not exceed a reasonable percentage, which percentage 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, taking Rule 23 as the guiding principle; (v) The existing regulatory asset must be liquidated in a maximum of 4 years starting from 01.04.2024, taking Rule 23 as the guiding principle; (vi) Regulatory Commissions must provide the trajectory and roadmap for liquidation of the existing 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; (vii) Regulatory Commissions shall in general follow the principles governing creation, continuation and liquidation of the regulatory asset, as laid down in paragraph 70, and also abide by the directions of the APTEL summarised in paragraph 69.8; (viii) The APTEL shall invoke its powers under Section 121 and issue such orders, instructions or directions as it may deem fit to the Regulatory Commissions for performance of their

p. 1940

duties with respect to regulatory asset as enunciated by us in this judgment and as per the orders of the APTEL in O.P. No. 1/2011 dated 11.11.2011 and O.P. Nos. 1 and 2/2012 dated 14.11.2013. (ix) The APTEL shall register a suo moto petition under Section 121 of the Act to monitor implementation of above directions (v) and (vi) till the conclusion of the period mentioned therein.

72. With these directions, the present writ petitions in W.P. (C) No. 104/2014, W.P. (C) No. 105/2014 and W.P. (C) No. 1005/2021 and the present civil appeals in C.A. No. 4010/2014 and C.A. No. 4013/2014 against the APTEL’s order dated 11.03.2014 stand disposed of.

Result of the case: Directions issued.