Supreme Court directs States to clear regulatory dues to power discoms within 4 years

The Supreme Court on Wednesday ordered electricity regulators and State governments to clear pending regulatory dues to power distribution companies within four years [BSES Rajdhani Power Ltd & Anr v. Union of India & Ors]

A Bench of Justices PS Narasimha and Sandeep Mehta said that states must ensure liquidation of all outstanding regulatory assets within four years since continued non-recovery burdens consumers and reflects regulatory failure.

The Bench further held that the persistence of regulatory assets across states despite statutory provisions and binding orders represented a failure of oversight by both state commissions and the Appellate Tribunal for Electricity (APTEL).

It clarified that while regulatory assets could be created in exceptional cases, their continuation over decades violated the letter and spirit of the Electricity Act, 2003. Regulatory assets refer to accumulated tariff gaps between the actual cost incurred by a distribution company (DISCOM) and the lower tariff allowed by the regulator. These are carried forward to be recovered in future tariff orders.

The Court noted that such deferment, unless properly accounted for and time-bound, leads to large-scale liabilities that are ultimately borne by consumers through higher future tariffs.

The appeal arose from a batch of petitions concerning tariff orders passed by the Delhi Electricity Regulatory Commission (DERC) between 2011 and 2014, wherein DERC had denied recovery of regulatory assets created in previous years.

The APTEL in 2014 held that DERC was unjustified in doing so and directed reconsideration. Appeals against this decision were filed by certain consumers, while writ petitions were also filed challenging the orders on the grounds of transparency and legality.

During the pendency of these proceedings, the Court was informed that the total outstanding regulatory assets across various states and union territories exceeded ₹1.5 lakh crore. Of this, DERC had recognised around ₹27,200 crore as regulatory assets accrued by distribution companies over the years. It noted that such accumulation, if left unaddressed, would continue to distort tariff design and burden future consumers

Consequently, the Court issued notices to all states and union territories, expanding the scope of the matter to include the issue of unliquidated regulatory assets across the country.

The Court found that the Electricity Act, 2003 conferred wide powers on state commissions and APTEL to prevent unliquidated regulatory dues, but these powers had not been effectively exercised.

It also criticised APTEL for failing to monitor the implementation of its earlier orders on the subject. It observed that APTEL’s lack of supervision had contributed to the unchecked growth of regulatory assets, and directed the Tribunal to now invoke its powers under Section 121 of the Electricity Act to ensure compliance.

It clarified that recovery of regulatory assets is permissible under the law, but must be guided by clear parameters, including Rule 23 of the Electricity Rules of 2005, which prescribes a 3% cap on permissible deviation in annual revenue.

The Bench thus laid down the following binding directions for all State Commissions and APTEL:

(i) As a first principle, tariff shall be cost-reflective;

(ii) The revenue gap between the approved Annual Revenue Requirement (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 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 April 1, 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 duties with respect to regulatory assets.

(ix) The APTEL shall register a suo motu petition under Section 121 of the Act to monitor implementation of above directions (v) and (vi) till the conclusion of the period mentioned therein.

The discoms were represented by Senior Advocates Abhishek Manu Singhvi, Kapil Sibal and Advocate Amit Kapur.

The Central government was represented by Attorney General for India R Venkataramani and Additional Solicitor General KM Nataraj.

Senior Advocates Siddharth Dave and Shadan Farasat argued for the Delhi government.

Senior Advocate Nikhil Nayyar appeared for DERC.

[Read Judgment]