Holding

A regulatory asset must not exceed 3% of the approved ARR, must be cost‑reflective, and any new asset must be liquidated within three years, with existing assets to be cleared within seven years, subject to APTEL’s oversight.

Summary

The three Delhi distribution companies (BSES Rajdhani Power Ltd., BSES Yamuna Power Ltd., and Tata Power Delhi Distribution Ltd.) challenged the Delhi Electricity Regulatory Commission’s (DERC) tariff orders that created and perpetuated a large regulatory asset to bridge revenue gaps, which had ballooned to over Rs 27,200 crore by March 2024. The Court examined the legal nature of a regulatory asset, its permissible limits, and the duties of regulatory commissions under the Electricity Act, 2003, the National Tariff Policy, and the newly introduced Rule 23 of the Electricity (Amendment) Rules, 2024. It held that tariff must be cost‑reflective, a regulatory asset may not exceed 3% of the approved Annual Revenue Requirement, and any new asset must be liquidated within three years, while existing assets must be cleared within seven years. The Court emphasized the accountability of the commissions and the extraordinary powers of the Appellate Tribunal for Electricity (APTEL) under Section 121 to enforce compliance. Accordingly, the Court issued detailed directions for the liquidation roadmap, audit of the asset, and mandated APTEL’s suo motu monitoring, disposing of the writ petitions and related civil appeals.

Issues considered

The legal status and definition of a regulatory asset in tariff determination
Whether the creation and continuation of the regulatory asset by DERC complied with the Electricity Act, National Tariff Policy and Rule 23
The permissible percentage and time‑frame for creation and liquidation of a regulatory asset
The accountability of regulatory commissions and the powers of APTEL under Section 121 to enforce compliance

Legislation cited

Headnote

Issue for Consideration Legal position and status of a regulatory asset; its position in the regulatory regime for determination of tariff; the rights and liabilities of stakeholders; consequences of regulatory failure to manage the regulatory asset as a reasonable measure; powers of the APTEL and this Court to ensure accountability and restitution. Headnotes† Electricity Law – Electricity Act, 2003 – Electricity Rules, 2005 – “Regulatory asset” – Delhi Electricity Regulatory Commission (DERC) adopted Multi Year Tariff

Subjects

Regulatory assetElectricityTariffTariff determinationTariff for retail supply of electricityCreation, continuation and liquidation of the regulatory assetElectricity is a public goodIncrease in quantum of regulatory assetLiquidation of regulatory assetNational Tariff PolicyNational Electricity PolicyElectricity RulesTariff Determination RegulationsRegulatory CommissionsGeneration, transmission, and distribution of electricityStatutory regulatorsEquitable distributionRegulatory failureRegulatory captureRegulatory functionPower distribution companiesRights and liabilities of the stakeholdersRegulatory dutiesGood governance of the electricity sectorIntangible assetUncovered revenue gap or revenue shortfallDistribution licenseeBulk procurement and bulk supply of powerDeficit Recovery SurchargeFuel price adjustment chargePower Purchase Adjustment ChargeDraft RERC (Terms and Conditions for Determination of Tariff) Regulations, 2025National Electricity Plan

Judgment

[2025] 8 S.C.R. 1875 : 2025 INSC 937

BSES Rajdhani Power Ltd. & Anr.
v.
Union of India and Ors.
(Writ Petition (C) No. 104 of 2014)
06 August 2025
[Pamidighantam Sri Narasimha and
Sandeep Mehta, JJ.]

Issue for Consideration
Legal position and status of a regulatory asset; its position in the
regulatory regime for determination of tariff; the rights and liabilities
of stakeholders; consequences of regulatory failure to manage
the regulatory asset as a reasonable measure; the appellate and
review powers of the APTEL and this Court to ensure accountability
and restitution.

Headnotes†
Electricity Law – Electricity Act, 2003 – Electricity Rules,
2005 – “Regulatory asset” – Delhi Electricity Regulatory
Commission (DERC) adopted Multi Year Tariff framework
in generation, transmission, and distribution businesses
to bring certainty regarding tariff – A regulatory asset was
first created by the DERC in various tariff orders wherein it
introduced the regulatory asset as a mechanism to bridge the
revenue gap in the tariff order for FY 2004-05 – Over the years,
there was an increase in the quantum of the regulatory asset
across all three distribution companies before this Court –
DERC also provided for carrying costs on the regulatory
asset to each distribution company, which further contributed
to its ballooning – Various measures were also introduced
by DERC for liquidation of regulatory asset – Challenge by
the three distribution companies supplying electricity to
consumers in the NCT of Delhi, to the manner in which the
DERC has determined the tariff for retail supply of electricity
over the years, leading to the creation and continuation of a
“regulatory asset” – As on 31.03.2024, the regulatory asset
including carrying costs totally amounted to Rs. 27,200.37
crores across all three distribution companies – Directions
issued:
1876 [2025] 8 S.C.R.

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Held: 1.1 Tariff shall be cost-reflective – Revenue gap between the
approved Annual Revenue Requirement (ARR) and the estimated
annual revenue from approved tariff may be in exceptional
circumstances – The regulatory asset should not exceed a
reasonable percentage, which percentage can be arrived on the
basis of r.23 of the Electricity Rules that prescribes 3% of the ARR
as the guiding principle. [Paras 71 (i)-(iii)]
1.2 If a regulatory asset is created, it must be liquidated within
a period of 3 years, taking r.23 as the guiding principle – The
existing regulatory asset must be liquidated in a maximum of 4
years starting from 01.04.2024, taking r.23 as the guiding principle.
[Paras 71 (iv)-(v)]
1.3 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 – They must
also undertake strict and intensive audit of the circumstances in
which the distribution companies have continued without recovery
of the regulatory asset. [Para 71 (vi)]
1.4 Regulatory Commissions shall in general follow the principles
governing creation, continuation and liquidation of the regulatory
asset, as laid down in paragraph 70 of the present judgment, and
also abide by the directions of the APTEL summarised in paragraph
69.8. [Para 71 (vii)]
1.5 APTEL shall invoke its powers u/s.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 asset as enunciated in this judgment and as per the
orders of the APTEL in O.P. No. 1/2011 dtd. 11.11.2011 and O.P.
Nos. 1 and 2/2012 dtd. 14.11.2013. [Para 71 (viii)]
1.6 APTEL shall register a suo moto petition u/s.121 of the Act to
monitor implementation of directions (v) and (vi) till the conclusion
of the period mentioned therein. [Para 71 (ix)]

Electricity Law – Electricity Act, 2003 – Concept of a regulatory
asset, explained – Principles governing creation, continuation
and liquidation of the regulatory asset – In the context of
creation, management and liquidation of a regulatory asset,
the Regulatory Commissions are bound by the mandate
of Electricity Act, National Electricity Policy, National Tariff
[2025] 8 S.C.R. 1877

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

Policy, Electricity Rules, the Tariff Determination Regulations
applicable at the relevant period, and the precedents of the
APTEL:
Held: A “regulatory asset” in the context of tariff determination
for electricity utilities is an intangible asset that is created by the
Regulatory Commissions in recognition of an uncovered revenue
gap or revenue shortfall when a distribution licensee could not
fully recover the costs reasonably incurred by it through revenue
from tariff – This portion of the revenue requirement is not included
while determining the tariff for the particular year – Rather, the
distribution company is entitled to receive or recover such revenue
in the future, over a period of time. [Para 5]
1.2 It is generally created when the projected revenue based on
the determined tariff is significantly lower than the revenue required
by the distribution company to recover reasonably-incurred costs
as well as for return on investment – Another situation requiring
the creation of a regulatory asset is at the time of truing up, if
the actual revenue realisation from tariffs is much lesser than the
Annual Revenue Requirement (ARR). [Para 6]
1.3 This revenue gap can be recovered through government
subsidies or by increasing the tariff – However, the latter may lead
to a tariff shock to consumers in a given year – Hence, to protect
consumer interests, the Regulatory Commission may choose to
direct recovery of only some portion of the gap while creating a
regulatory asset for the remaining portion, which can be recovered
in the subsequent years. [Para 7]
1.4 The creation and continuation of a regulatory asset is neither
a statutory concept nor a power granted under the Electricity Act –
Rather, it is a measure adopted by the Regulatory Commissions,
which are statutory bodies, in exercise of their powers and functions
under the Act. [Para 8]
1.5 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 – Law governing creation, continuation and liquidation
of regulatory asset, summarized. [Paras 67-67.4]
1878 [2025] 8 S.C.R.

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Electricity Law – Electricity Act, 2003 – Constitution of India –
Art.39 – Position of regulatory asset in the regulatory regime
for determination of tariff – Duties and accountability of the
regulators- the Regulatory Commissions – Powers of the
Appellate Tribunal for Electricity to avert a regulatory failure:
Held: 1.1 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 – Being a material resource
within Art.39 of the Constitution of India, Part-IV of the Constitution
must inform the generation, transmission, and distribution of
electricity. [Paras 70 I-II]
1.2 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. [Para 70 III]
1.3 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. [Para 70 IV]
1.4 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 –
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). [Paras 70 V, VI]
[2025] 8 S.C.R. 1879

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

1.5 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 – Apart
from examining the legality and propriety of the orders of the
Commissions in appeal, the APTEL has extraordinary powers
u/s.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.
[Paras 70 VII, VIII]
1.6 The limits of creation, continuation and liquidation of the
regulatory asset have been affirmed, the obligations of the
Regulatory Commissions have been recognised and it is directed
that they will be accountable and subject to such orders, instructions
or directions as the APTEL may issue in this regard u/s.121 – The
regulatory regime under the Act is a complete code enunciating
rights, prescribing obligations, and laying down the mechanism
for course correction. [Paras 70 IX, X]
Electricity Law – Electricity Act, 2003 – ss.62, 61, 79, 86, 6;
Preamble of the Electricity Act – Tariff determination is governed
by the Act, which entrusts this function to independent
Regulatory Commissions – Multiple stakeholders, the Central
Government, the State Governments, Regulatory Commissions,
the Appellate Tribunal, statutory policy makers, and the utilities
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 – Tariff fixation takes into
account multiple variables and requires flexibility – Regulatory
asset is a measure adopted during tariff fixation that recognises
right of recovery. [Paras 63.1-65.1]

Electricity Law – Electricity Act, 2003 – ss.121, 111, 125 –
Accountability of the Regulatory Commissions:
Held: 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 directions. [Para 68]
Electricity Law – Electricity Act, 2003 – Factors leading to an
unmanageable regulatory asset, and consequent ‘regulatory
failure’, enumerated. [Paras 66-66.1]
1880 [2025] 8 S.C.R.

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Electricity Act, 2003 – ss.110, 11, 121 – Powers of APTEL –
Significance of s.121 in the context of the facts of the present
writ petitions and civil appeals, explained – Performance of
DERC, a classic case of ‘regulatory failure’:
Held: 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 u/s.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 [Paras 69-69.9]
Electricity Law – Electricity Act, 2003 – Salient features –
Discussed. [Para 32]

Words and Phrases – Electricity Law – Revenue Assets –
Meaning of – Discussed:
Held: ‘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. [Para 65]

Case Law Cited
Tata Power Co. Ltd. v. Reliance Energy Ltd. [2009] 9 SCR 625 :
(2009) 16 SCC 659; BSES Rajdhani Power Ltd. v. Delhi Electricity
Regulatory Commission [2022] 14 SCR 790 : (2023) 4 SCC 788;
PTC India Ltd. v. Central Electricity Regulatory Commission [2010]
3 SCR 609 : (2010) 4 SCC 603; Hindustan Zinc Ltd. v. Rajasthan
Electricity Regulatory Commission [2015] 7 SCR 1104 : (2015)
12 SCC 611; West Bengal Electricity Regulatory Commission v.
CESC Ltd. (2002) 8 SCC 715; Kerala State Electricity Board Ltd. v.
Jhabua Power Ltd. [2024] 9 SCR 971 : 2024 SCC OnLine SC
2819; Tata Power Co. Ltd. v. Maharashtra Electricity Regulatory
Commission [2022] 19 SCR 620 : (2023) 11 SCC 1; K.C. Ninan v.
Kerala State Electricity Board [2023] 9 SCR 637 : (2023) 14 SCC
431; Transmission Corporation of Andhra Pradesh Ltd. v. Sai
[2025] 8 S.C.R. 1881

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

Renewable Power (P) Ltd. [2010] 8 SCR 636 : (2011) 11 SCC 34;
Vijay Rajmohan v. CBI [2022] 19 SCR 563 : (2023) 1 SCC 329;
SEBI v. Mega Corporation [2022] 2 SCR 546 : (2023) 12 SCC
802; Lifecare Innovations Pvt. Ltd. v. Union of India 2025 INSC
269 : [2025] 2 SCR 727; 7 Gulf Goans Hotels Co. Ltd v. Union of
India [2014] 10 SCR 536 : (2014) 10 SCC 673; Bennett Coleman
& Co. v. Union of India [1973] 2 SCR 757 : (1972) 2 SCC 788; In
Re: T.N. Godavarman Thirumulpad v. Union of India, 2024 INSC
78 : [2024] 1 SCR 1194 – referred to.
Tamil Nadu Electricity Consumers’ Association v. Tamil Nadu
Electricity Board, Appeal Nos. 192 and 206 of 2010, APTEL
order dated 28.07.2011 – referred to.

List of Acts
Electricity Act, 2003; Delhi Electricity Reform Act, 2000 and the Delhi
Electricity Reform (Transfer Scheme) Rules, 2001; DERC (Terms
and Conditions for Determination of Wheeling Tariff and Retail
Supply Tariff) Regulations, 2007; DERC (Terms and Conditions
for Determination of Wheeling Tariff and Retail Supply Tariff)
Regulations, 2011; Electricity (Amendment) Rules, 2024; Electricity
Rules, 2005; CERC (Unscheduled Interchange charges and related
matters) (Amendment) Regulations, 2010; Electricity (Late Payment
Surcharge) Rules, 2022; Indian Electricity Act, 1910; Electricity
(Supply) Act, 1948; Electricity Regulatory Commissions Act, 1998;
Delhi Electricity Reforms Act, 2000; DERC (Terms and Conditions
for Determination of Tariff) Regulations, 2017; Constitution of India.

List of Keywords
Regulatory asset; Electricity; Tariff; Tariff determination; Tariff for
retail supply of electricity; Creation, continuation and liquidation
of the regulatory asset; Electricity is a public good; Increase in
quantum of regulatory asset; Liquidation of regulatory asset; BSES
Rajdhani Power Ltd., BSES Yamuna Power Ltd., and Tata Power
Delhi Distribution Limited; Distribution companies; DISCOMS;
National Tariff Policy, 2006; National Electricity Policy; National
Tariff Policy; Electricity Rules; Tariff Determination Regulations;
National Electricity Policy, 2005; National Tariff Policy, 2016;
Bridging revenue gap; Revenue assets; Regulatory Commissions;
Generation, transmission, and distribution of electricity; Statutory
regulators; Equitable distribution; Regulatory failure; Regulatory
1882 [2025] 8 S.C.R.

Supreme Court Reports

capture; Regulatory function; Power distribution companies;
Rights and liabilities of the stakeholders; Regulatory duties; Good
governance of the electricity sector; Intangible asset; Uncovered
revenue gap or revenue shortfall; Distribution licensee; Distribution
company; Bulk procurement and bulk supply of power; Deficit
Recovery Surcharge; Fuel price adjustment charge; Power
Purchase Adjustment Charge; Draft RERC (Terms and Conditions
for Determination of Tariff) Regulations, 2025; National Electricity
Plan.

Case Arising From
ORIGINAL/CIVIL APPELLATE JURISDICTION: Writ Petition (C)
104 of 2014
Under Article 32 of The Constitution of India
With
Civil Appeal No(s). 4010 and 4013 of 2014, Writ Petition (C) No.
105 of 2014 and Writ Petition (C) No. 1005 of 2021

Appearances for Parties
Advs. for the Petitioners:
Abhishek Manu Singhvi, Kapil Sibal, Buddy A. Ranganadhan,
Sr. Advs., Shri Venkatesh, Ms. Kanika Chugh, Asutosh Kumar
Srivastava, Shryeshth Ramesh Sharma, Bharat Gangadhar, Nihal
Bhardwaj, Kartikay Trivedi, Aashwyn Singh, Abhishek Nangia,
Aadarsh Singh, Nitin Saluja, Amit Kapur, Pukhrambam Ramesh
Kumar, Anupam Varma, Rahul Kinra, Aditya Ajay, Ms. Isnain
Muzamil, Girdhar Gopal Khattar, Sanjay Nair S, Ms. Manisha
Singh, Ms. Shefali Tripathi, Aditya Gupta, Karun Sharma, Ms.
Rajkumari Divyasana, Amit Kapur, Anupam Varma, Rahul Kinra,
Aditya Gupta, Aditya Ajay, Sanjay Nair S., Ms. Isnain Muzamil,
Ms. Manisha Singh, Girdhar Gopal Khattar, Mrs. Shefali Tripathi,
Sanjay Nair S, Ms. Manish Singh, Ms. Shefali Tripathi, Avinash
Das, Sidharth Sethi.
Advs. for the Respondent:
R. Venkataramani, Attorney General for India, K M Nataraj, A.S.G.,
Lokesh Sinhal, Sr. A.A.G., S. Wasim A. Qadri, Nikhil Nayyar,
Mrs. Shirin Khajuria, Sr. Advs., Gurmeet Singh Makker, Piyush
Beriwal, Shyam Gopal, Ms. Shradha Deshmukh, Ms. Chinmayee
Chandra, Rajat Nair, K. V. Mohan, Satya Mitra, Vivek Singh, Ritik
[2025] 8 S.C.R. 1883

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

Dwivedi, Siddhartha Chowdhury, Anand Ganesan, Ms. Swapna
Seshadri, Pramod Dayal, Nikunj Dayal, Utkarsh Singh, Lakshmi
Raman Singh, Tamim Qadri, Chitvan Singhal, Saeed Qadri,
Shraveen Kumar Verma, Saahil Gupta, B. Krishna Prasad, Ms.
Prerna Singh, Guntur Pramod Kumar, Samarth Krishan Luthra,
Dhruv Yadav, Ms. Pritha Srikumar Iyer, Naveen Hegde, Kshitij
Maheshwari, Abhyudaya Shishodia, Saumya Sinha, Ms. Saumya
Sinha, Abhishek Vikas, Adarsh Tripathi, Vikram Singh Baid, Ajitesh
Garg, Veevak Goel, B. K. Satija, Ms. Pallavi Langar, Vishnu
Sharma, Sujeet Kumar Chaubey, Ravi Sharma, Aryan Chanda,
Ms. Bhavana Duhoon, Ms. Swati Tiwari, Naveen Kumar, Ms.
Stuti Bisht, Nitesh Bhandari, Maitreya, Shourajeet Chakravarty,
Ms. Aprajita Bhardwaj, Prabhat Kumar Rai, Aditya Goyal, Ujjawal
Kumar Rai, Ms. Esha Kumar, Ms. Nidhi Singh, Utkarsh Chandra,
Ms. K. Enatoli Sema, Amit Kumar Singh, Ms. Chubalemla Chang,
Prang Newmai, Harshad V. Hameed, Dileep Poolakkot, Ms. Ashly
Harshad, Nitin Gaur, Anshuman Ashok, Anshuman Ashok, Sagar
Parashar, Anshul Singh, Shashank Shekhar Singh, Abhinav Singh,
Aaditya Aniruddha Pande, Siddharth Dharmadhikari, Sourav
Singh, Mayank Sapra, Ms. Lalima Das, Karan Sharma, Ms.
Baani Khanna, Sameer Abhyankar, Mrs. Ayushi Bansal, Rahul
Kumar, Ms. Yashika Sharma, Krishna Rastogi, Aakash Thakur,
M/s. Ag Veritas Law, Gaichangpou Gangmei, Arjun D. Singh,
Ms. Nisha Pandey, Yimyanger Longkumer, Maitreya Mahaley,
J. Prasad, Kunal Chatterji, Ms. Maitrayee Banerjee, Rohit
Bansal, Pashupathi Nath Razdan, Astik Gupta, Ms. Mandakini
Ghosh, Nikilesh Ramachandran, Ms. Suparna Srivastava, Ms.
Arshiya Sharma, Akshay Amritanshu, Nikunj Gupta, Ms. Pragya
Upadhyay, Ms. Drishti Saraf, Ms. Aakanksha, Pradeep Misra,
Daleep Dhyani, Suraj Singh, Aditya Singh-1, Shashi Bhushan
Kumar, Dinesh Kumar Prasad, Ms. Advaita Bhushan, Darpan Km,
Ms. Amrita Sharma, Rajat Jonathan Shaw, Durgha Prakash, Ms.
Easha Chandhok, Ms. Rashi Bansal, M. T. George, C. K. Rai,
Mrs. Anuradha Roy, Vinay Kumar Gupta, Sahil Chandra, Rutwik
Panda, Ms. Nikhar Berrry, Ms. Anshu Malik, Ms. Nikhar Berry, Ms.
Sunieta Ojha, Ms. Gargi Kumar, Rajeev Kumar Panday, Zoheb
Hossain, Somanadri Goud Katam, Rajat Srivastava, Sirajuddin,
Sriram Krishna, Ms. Anupama Dhurve, B. K. Satija, Subhash
Chandran K.R. Ms. Krishna L.R., Ankit Roy, Chinmoy Sharma, Ms.
Diksha Rai, Piyush Vyas, Purvat Wali, Irfan Hasieb, Krishnajyoti
Deka, Vijay Deora.
1884 [2025] 8 S.C.R.

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Judgment / Order of the Supreme Court

Judgment

Table of Contents*

1. Introduction ................................................................................... 4

2. Concept of a Regulatory Asset ..................................................... 7

3. Facts. ............................................................................................. 9

4. Submissions of Parties ................................................................. 11

5. Impleadment of the State Commissions and Governments ......... 20

5(i). Affidavits by State Commissions ................................................... 21

5(ii). Affidavits by State Governments ................................................... 25

6. Law Governing the Electricity Sector Prior to 2003 ..................... 26

7. Electricity Act, 2003 ...................................................................... 28

8. Provisions of the Electricity Act relating to determination of Tariff ... 31

9. Provisions of Act, Policies, Rules, Regulations, and Orders having
a bearing on creation of a Regulatory Asset ................................. 35

9(i). National Electricity Policy, 2005 .................................................... 35

9(ii). National Tariff Policy, 2006 ............................................................ 36

9(iii). DERC Tariff Determination Regulations, 2007 .............................. 37

9(iv). DERC Statutory Advice dated 15.12.2010 .................................... 38

9(v). Ministry of Power’s Letter to the APTEL ....................................... 40

9(vi). APTEL’s Order dated 11.11.2011 .................................................. 40

9(vii). DERC Tariff Determination Regulations, 2011 ............................ 41

9(viii). DERC’s Tariff Order dated 26.08.2011 (FY 2011-12) .................. 42

9(ix). DERC’s MYT Order dated 13.07.2012 (FY 2012-15) .................. 43

* Ed. Note: Pagination as per the original Judgment.
[2025] 8 S.C.R. 1885

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

9(x). DERC’s Statutory Advice dated 01.02.2013 ................................ 43

9(xi). DERC’s Tariff Order dated 31.07.2013 (FY 2013-14) ................. 44

9(xii). APTEL’s Order dated 14.11.2013 ................................................ 45

9(xiii). APTEL’s Order dated 11.03.2014 ............................................... 46

9(xiv). National Tariff Policy, 2016 .......................................................... 47

9(xv). DERC Tariff Determination Regulations, 2017 ............................ 48

9(xvi). Ministry of Power’s Affidavit dated 10.08.2022 ........................... 49

9(xvii). Ministry of Power’s Affidavit dated 12.12.2022 ........................... 51

9(xviii). Electricity (Amendment) Rules, 2024 introducing Rule 23 ........ 52

9(xix). DERC’s Order dated 19.07.2024 (true-up till FY 2020-21) ....... 53

10. Analysis ......................................................................................... 53

10(i). Electricity is a public good and is regulated under the Act ........ 54

10(ii). Tariff determination is governed by the Act, which entrusts this
function to independent Regulatory Commissions ..................... 54

10(iii). Collaborative effort of the Regulatory Commissions to balance
social justice obligations with efficiency ...................................... 57

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 .................................... 58

10(v). Factors leading to an unmanageable regulatory asset, and
consequent ‘regulatory failure’ .................................................... 59

10(vi). Law that governs creation, continuation and liquidation of
regulatory asset .......................................................................... 62

10(vii). Accountability of the Regulatory Commissions .......................... 67

10(viii). Powers of the APTEL ................................................................. 69

11. Conclusions ................................................................................... 77

12. Directions ....................................................................................... 80
1886 [2025] 8 S.C.R.

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1. Introduction.
1. We are entertaining these writ petitions1 and civil appeals2 only for
examining a limited question as to the law that governs the creation
of a “regulatory asset” during the process of tariff determination by
the Electricity Regulatory Commissions, its impact on the rights and
liabilities of the stakeholders, the limits within which it can be operated,
and finally the regulatory duties that it invokes for the Regulatory
Commissions. We also clarify that through these proceedings, we
are not determining the rights and liabilities of the parties, which
will anyways be considered in the pending civil appeals against the
orders of the Appellate Tribunal of Electricity3.
2. In these writ petitions and civil appeals, the three distribution companies
that supply electricity to consumers in the National Capital Territory
of Delhi4, namely BSES Rajdhani Power Ltd.5, BSES Yamuna Power
Ltd.6, and Tata Power Delhi Distribution Limited7, have challenged
the manner in which the Delhi Electricity Regulatory Commission8
has determined the tariff for retail supply of electricity over the years,
leading to the creation and continuation of a “regulatory asset”. The
prayers in W.P. (C) Nos. 104 and 105/2014 by BRPL and BYPL9 are
similar, which we may formulate as follows:
i. To hold and declare that the petitioners are entitled to prudently
incurred cost and allowances in terms of Sections 61 and 62
of the Electricity Act, 200310 and Multi Year Tariff Regulations;
ii. To direct the DERC to give effect to the deferred cost creating
a regulatory asset in accordance with Para 8.2.2 of the National
Tariff Policy;

1 W.P. (C) No. 104/2014, W.P. (C) No. 105/2014 and W.P. (C) No. 1005/2021 under Article 32 of the
Constitution.
2 C.A. No. 4010/2014 and C.A. No. 4013/2014 against the order dated 11.03.2014 passed by the Appellate
Tribunal for Electricity in I.A Nos. 364-365/2013 in Appeal Nos. 265-266/2013.
3 Hereinafter “APTEL”.
4 Hereinafter “NCT of Delhi”.
5 Hereinafter “BRPL”.
6 Hereinafter “BYPL”.
7 Hereinafter “TPDDL”.
8 Hereinafter “DERC”.
9 Hereinafter collectively referred to as “BSES Discoms”.
10 Hereinafter “the Electricity Act”.
[2025] 8 S.C.R. 1887

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

iii. To direct the respondent-generating companies to not disconnect
or discontinue power supply or take any other coercive steps till
this Court determines an appropriate mechanism for adjustment
of dues owed by the distribution companies from the amounts
due and owed to them; and
iv. To protect their investment and assured return from the licensed
business.
3. TPDDL has also filed W.P. (C) No. 1005/2021, where it has prayed
for the following reliefs:
i. To direct DERC to recognise its regulatory asset and formulate
and implement a clear roadmap for the liquidation of the
regulatory asset in a time-bound manner of 3 years;
ii. In the alternative, to direct DERC to increase the Deficit Recovery
Surcharge to 20% to amortise the regulatory asset as per the
National Tariff Policy;
iii. To direct DERC to implement various judgments of the APTEL
in appeals against tariff orders by the DERC.
4. In order to consider these prayers as well as the maintainability of the
writ petitions, which has been contested by the respondents, we will
have to examine the concept of a ‘regulatory asset’ and its creation
and continuation in the context of the law that may govern it. Further,
we will also examine whether the law creates any statutory duties
and whether failure to fulfil the same gives rise to an enforceable
legal right. For this purpose, we will commence with examining
the Electricity Act, and the rules, regulations, and policies framed
thereunder as well as judicial precedents and necessary practices
for good governance of the electricity sector.

2. Concept of a Regulatory Asset.
5. A “regulatory asset” in the context of tariff determination for electricity
utilities is an intangible asset that is created by the Regulatory
Commissions in recognition of an uncovered revenue gap or revenue
shortfall when a distribution licensee could not fully recover the costs
reasonably incurred by it through revenue from tariff.11 This portion of

11 See Tamil Nadu Electricity Consumers’ Association v. Tamil Nadu Electricity Board, Appeal Nos. 192 and
206 of 2010, APTEL order dated 28.07.2011.
1888 [2025] 8 S.C.R.

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the revenue requirement is not included while determining the tariff
for the particular year. Rather, the distribution company is entitled to
receive or recover such revenue in the future, over a period of time.
6. There are several situations and factors leading to the creation of such
a regulatory asset. It is generally created when the projected revenue
based on the determined tariff is significantly lower than the revenue
required by the distribution company to recover reasonably-incurred
costs as well as for return on investment. When it is not feasible to
recover this gap either by increasing tariffs or through other means
such as government subsidy during that year, a regulatory asset
equivalent to the uncovered expenses is created. Another situation
requiring the creation of a regulatory asset is at the time of truing
up, if the actual revenue realisation from tariffs is much lesser than
the Annual Revenue Requirement12.
7. This revenue gap can be recovered through government subsidies or
by increasing the tariff. However, the latter may lead to a tariff shock
to consumers in a given year. Hence, to protect consumer interests,
the Regulatory Commission may choose to direct recovery of only
some portion of the gap while creating a regulatory asset for the
remaining portion, which can be recovered in the subsequent years.
At the same time, the financial health and commercial viability of the
distribution company must be ensured by the Regulatory Commission.
Hence, the Regulatory Commission must ensure that if a regulatory
asset is created, the same is recovered in a time-bound manner.
8. The creation and continuation of a regulatory asset is neither a
statutory concept nor a power granted under the Electricity Act.
Rather, it is a measure adopted by the Regulatory Commissions,
which are statutory bodies, in exercise of their powers and functions
under the Act. It is hence guided by the legal regime of the Electricity
Act and the rules, regulations, and policies framed thereunder, along
with their interpretation in various judicial precedents.

3. Facts.
9. Initially, the Delhi Vidyut Board was responsible for generation,
transmission and distribution of electricity in NCT of Delhi. With the

12 Hereinafter “ARR”.
[2025] 8 S.C.R. 1889

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

Delhi Electricity Reform Act, 2000 and the Delhi Electricity Reform
(Transfer Scheme) Rules, 2001, these functions were unbundled
and different entities were made responsible for each function. Until
2007, the Delhi Transco Limited13 was solely responsible for bulk
procurement and bulk supply of power in Delhi, and all distribution
companies were required to purchase power from it. After 31.03.2007,
the responsibility for power purchase in Delhi was transferred to the
distribution companies.
10. DERC adopted the Multi Year Tariff 14 framework in generation,
transmission, and distribution businesses so as to bring certainty
regarding tariff and its annual basis during each control period.
11. A regulatory asset was first created by the DERC in the tariff order
dated 09.06.2004 for North Delhi Power Limited15 and orders dated
11.06.2004 for BRPL and BYPL. In these orders, the DERC introduced
the regulatory asset as a mechanism to bridge the revenue gap in
the tariff order for FY 2004-05, and it amounted to a total of Rs. 696
crores across BRPL, BYPL, NDPL and DTL.
12. Over the years, various orders of the DERC determining ARR
for each year, MYT orders, and truing-up orders demonstrate an
increase in the quantum of the regulatory asset across all three
distribution companies before us. The DERC also provided for
carrying costs on the regulatory asset to each distribution company,
which further contributed to its ballooning. We are informed that
as on 31.03.2024, the regulatory asset including carrying costs is
Rs. 12,993.53 crores for BRPL, Rs. 8419.14 crores for BYPL, and
Rs. 5,787.70 crores for TPDDL, totally amounting to Rs. 27,200.37
crores across all three distribution companies. During this time,
the DERC has taken note of this increase and introduced various
measures like increasing tariffs, Deficit Recovery Surcharge16, fuel
price adjustment charge and Power Purchase Adjustment Charge17.
These measures are byproducts of the regulatory asset and are
intended for its liquidation.

13 Hereinafter “DTL”.
14 Hereinafter “MYT”.
15 Hereinafter “NDPL”, which is now TPDDL.
16 Hereinafter “DRS”.
17 Hereinafter “PPAC”.
1890 [2025] 8 S.C.R.

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13. After setting out the submissions of the parties as well as views of
various State Commissions and State Governments, we will examine
framework within which the regulatory asset is created, continued, and
liquidated. We will refer to the relevant provisions of the Electricity
Act, National Tariff Policies, the Electricity Rules, DERC’s Tariff
Determination Regulations, and introduction of various measures by
the DERC, either as mitigative or alleviative to deal with the problem.
Following this, we will determine the status of the regulatory asset
and the consequential directions that may be passed in these writ
petitions and civil appeals.

4. Submissions of Parties.
14. We have heard Mr. Kapil Sibal and Dr. Abhishek Manu Singhvi, learned
senior counsels and Mr. Amit Kapur, learned counsel for the three
distribution companies, who are the petitioners and appellants. On
behalf of the respondents, we have heard Mr. Nikhil Nayyar, learned
senior counsel for the DERC, Mr. R. Venkataramani, learned Attorney
General of India for certain generating and transmission companies,
Mr. K.M. Nataraj, learned ASG for the Ministry of Power, Union of
India, and Mr. Siddharth Dave and Mr. Shadan Farasat, learned
senior counsels for the Government of NCT of Delhi.
15. Mr. Sibal made the following submissions:
i. Referring to the Statement of Objects and Reasons of the
Electricity Act, he submitted that the statute intends to distance
the government from tariff regulation and determination by
establishing independent regulators, and it aims to encourage
private sector participation in the electricity sector.
ii. Mr. Sibal then referred us to various provisions of the Electricity
Act, including factors guiding tariff determination under Section
61, tariff determination for retail supply of electricity under
Sections 62 and 64, and advance payment of government
subsidies under Section 65. He also took us through the
mandatory and advisory functions of the State Commission
under Section 86, emphasising that the Commission must be
guided by the policies and plans formulated under the Act in
discharge of its functions.
iii. He then referred us to the relevant portions of the statutory
advice issued by the DERC to the Government of NCT of Delhi
[2025] 8 S.C.R. 1891

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

by letters dated 15.12.2010 and 01.02.2013, which we will deal
with in more detail at a later stage.
iv. Referring to Clause 8.2.2 of the National Tariff Policy, 2006,
he submitted that a regulatory asset must be created only
in exceptional circumstances that are clearly defined in the
regulations and that only include natural causes or force
majeure conditions. Further, that the regulatory asset must be
recovered in a time-bound manner in 3 years, and preferably
within the control period. These conditions are also incorporated
in Regulation 5.42 of the DERC (Terms and Conditions for
Determination of Wheeling Tariff and Retail Supply Tariff)
Regulations, 200718 and Regulation 5.40 of the DERC (Terms
and Conditions for Determination of Wheeling Tariff and Retail
Supply Tariff) Regulations, 201119, which we will deal with at
a later stage. Mr. Sibal submitted that these conditions for
creation of a regulatory asset have not been complied with
by the DERC.
v. He then referred us to the Electricity (Amendment) Rules, 2024
(notified on 10.01.2024) that inserts Rule 23 in the Electricity
Rules, 2005, which stipulates various conditions for creation,
continuation, and recovery of a revenue gap or regulatory
asset.
vi. To conclude, Mr. Sibal submitted that the creation, continuation,
and expansion of the regulatory asset over the years can be
attributed to the following causes: (i) assumed power purchase
cost for tariff determination is lower than the actual cost; (ii)
assumption of inflated revenue; (iii) tariffs determined by the
DERC are not cost-reflective; (iv) the orders of the APTEL and
this Court regarding tariff fixation are not implemented; (v) the
state government has not paid the subsidy amount in advance
as per Section 65; (vi) payment of Late Payment Surcharge20
@ 18% on late payments to the generating companies; and
(vii) the truing-up exercise is not carried out properly.

18 Hereinafter “Tariff Determination Regulations, 2007”.
19 Hereinafter “Tariff Determination Regulations, 2011”.
20 Hereinafter “LPS”.
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16. Mr. Amit Kapur, for the BSES Discoms has submitted that currently,
the regulatory asset is about Rs. 26,000 crores (including the carrying
cost payable to date). The continuation of the revenue gap, without
liquidating it in a time-bound manner undermines the very purpose
of the Electricity Act to promote private sector participation and to
provide for cost-reflective tariffs. He submits that there is a creeping
acquisition of private distribution companies due to this.
17. Dr. Singhvi appearing for TPDDL then addressed us and made the
following submissions:
i. To liquidate the regulatory asset, certain measures may be
taken such as increasing the DRS, increasing tariffs payable
by consumers, and through government support. Further, there
must be a fixed timeline for liquidation as the quantum of the
regulatory asset only increases with the passage of time due
to accumulation of carrying costs.
ii. While the DERC’s roadmap for liquidation submitted before
this Court estimated recovery of the entire regulatory asset by
2022, this has not fructified. In this context, he submitted that
DRS of 8% is wholly inadequate as it is insufficient to even
meet the carrying cost on the regulatory asset.
18. Mr. Nikhil Nayyar, learned senior counsel appearing on behalf of the
DERC then addressed us. He took us through the scheme of the
Electricity Act and its provisions, and also traced the history of the
creation and continuation of a regulatory asset by the DERC. While
doing so, he made the following submissions:
i. The DERC’s tariff order dated 11.06.2004 shows that the BSES
Discoms themselves suggested the creation of a regulatory
asset to enable recovery of the revenue gap over a period of
time through gradual increase in tariffs.
ii. Over the years, the DERC introduced various measures to
liquidate the regulatory asset, including tariff hikes, 8% DRS,
carrying cost, fuel purchase adjustment charge, and PPAC.
Currently, TPDDL, BRPL, and BYPL levy 29.13%, 27.08%,
and 31.60% PPAC respectively and between FY 2018-19
to FY 2022-23, they have earned Rs. 3,230.48 crores, Rs.
4,399.48 crores, and Rs. 2,210 crores through PPAC. The
DERC also increased the tariff by 50% between FY 2011-15
[2025] 8 S.C.R. 1893

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

as follows - 22% by order dated 26.08.2011), 23% by order
dated 13.07.2012, 5% by order dated 31.07.2013, and 8.32%
by order dated 23.07.2014.
iii. However, these measures were not sufficient as between 2007
and 2012, the power purchase cost, which constitutes 80% of
the ARR, increased by more than 80% from Rs. 2.86 to Rs.
5.16 per unit. The regulatory asset ballooned during this period
due to this unprecedented increase in power purchase costs,
which is attributable to the increase in coal and gas prices.
Further, the introduction of CERC (Unscheduled Interchange
charges and related matters) (Amendment) Regulations, 2010
prevented the use of UI mechanism for sale of surplus power
at profitable rates.
iv. While the roadmap submitted by the DERC before this Court
estimated that the regulatory asset would be liquidated by
2022, this did not materialise for several reasons such as the
distribution companies not achieving the estimated 15% growth
rate and carrying cost on the regulatory asset being a compound
interest that itself amounts to Rs. 8,692 crores across BRPL,
BYPL, and TPDDL from FY 2012-13 to FY 2019-20, while DRS
@ 8% led to a collection Rs. 11,073 crores.
v. He submitted that the regulatory asset could not be liquidated
as planned as the amount does not remain static. With each
tariff order, some portion is recovered while other factors lead
to an increase in the regulatory asset. Further, considering that
the roadmap for liquidation was prepared in 2014, it needs to
be revised.
vi. Mr. Nayyar also disputed the maintainability of these writ petitions
as there is a statutory mechanism under the Electricity Act for
tariff determination, which is a quasi-judicial exercise by an
expert body and the scope of judicial review is limited. Further,
the Act also provides for appealing the DERC’s decision before
the APTEL under Section 111. Finally, there is no allegation
regarding violation of any fundamental right for this Court to
exercise writ jurisdiction.
vii. Finally, Mr. Nayyar averred to tariff determination and regulatory
assets created by other State Commissions. He submitted that
1894 [2025] 8 S.C.R.

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15 states have implemented an automatic pass-through for fuel
costs, which means that the distribution companies in these
states can pass on the rise in power purchase costs to the
consumers. He also submitted that other than Delhi, regulatory
assets have been created in Tamil Nadu, Rajasthan, Kerala,
and Maharashtra.
19. We then heard the learned Attorney General for the generating and
transmission companies namely Indraprastha Power Generation
Company Limited21, Pragati Power Corporation Limited22, and DTL.
He submitted that while the DERC has recognised a revenue gap
for all three distribution companies, BRPL and BYPL are not making
regular payments to IGPCL, PPCL and DTL, despite making regular
payments to other power utilities. He also submitted that TPDDL has
been regularly paying the bill amounts. With regard to non-payment
by BRPL and BYPL, he submitted that these dues cannot be set-off/
netted-off/squared off against the unrecovered tariff, which must be
realised by the distribution companies from consumers in accordance
with DERC orders. He also submitted that the adjustment of any
payments against past dues is in accordance with the provisions of
their power purchase agreements and Rule 4 of the Electricity (Late
Payment Surcharge) Rules, 2022.
20. We then heard Mr. K.M. Nataraj, learned ASG appearing for the
Ministry of Power, Union of India. He submitted that a regulatory
asset is created when State Commission determines tariffs while
ignoring the principles laid down in Section 61 of the Electricity
Act, specifically in sub-sections (b), (c), and (d). In such situations,
the approved tariff and revenue generated from it is lower than the
actual ARR of the distribution company. Further, the regulatory asset
is created without following the conditions specified in Clause 8.2.2
of the National Tariff Policy, 2006 and without a specific time period
for liquidation. In order to recover this amount, he submits that the
tariffs may be increased, the state government may provide additional
subsidies to reduce the burden on the consumers due to increased
tariffs, and through financial support by the state government. He
also submitted that liquidation must be in accordance with Rule 23
of the Electricity (Amendment) Rules, 2024.

21 Hereinafter “IPGCL”.
22 Hereinafter “PPCL”.
[2025] 8 S.C.R. 1895

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

21. Finally, Mr. Shadan Farasat and Mr. Siddharth Dave, learned senior
counsels for the Government of NCT of Delhi addressed us. They
submitted that the regulatory asset is not attributable to the subsidies
granted by the Government and its payments under Section 65 of
the Electricity Act.
22. By order dated 23.10.2024, this Court directed the Government of
NCT of Delhi to respond to the subsisting regulatory asset. When
the matters were listed on 20.11.2024, Mr. Shadan Farasat, learned
senior counsel appeared for the Government and expressed that the
Government has not yet taken its decision regarding subsidies and
creation of the regulatory asset, the reasons for which we directed
be placed in an affidavit before us. An affidavit dated 06.01.2025
was filed by the Government of NCT of Delhi indicating that the
Department of Power had prepared a cabinet note for circulation
on 29.10.2024, which was circulated for comments. The same
received concurrence from the Law Department on 01.11.2024
but the comments of the Finance and Planning Departments are
awaited. It was also stated that the Government of NCT of Delhi
is releasing the subsidy amounts without default, and there is no
relation between the grant of electricity subsidy and accumulation of
the revenue gap. The amounts payable to the BSES Discoms are
directly released to IPGCL, PPCL, and DTL for adjustment against
outstanding dues, in accordance with interim orders of this Court in
these writ petitions and civil appeals.

5. Impleadment of the State Commissions and Governments.
23. After hearing the learned counsels for the parties, by this Court’s
order dated 23.10.2024 we directed the impleadment of State
Governments and State Electricity Regulatory Commissions to
gather their views in light of the large-scale and nation-wide
implications of creation and continuation of regulatory assets on
the electricity sector. Subsequently, by order dated 20.11.2024, we
directed the State Governments and State Commissions to express
their views through affidavits. Upon perusing these affidavits, the
position of each state vis-à-vis regulatory assets can be captured
as follows:

5 (i). Affidavits by State Commissions.
24. Following is the gist of the affidavits filed by various Commissions.
1896 [2025] 8 S.C.R.

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i. The State Commissions of Andhra Pradesh, Assam, Haryana,
Himachal Pradesh, Jharkhand, Madhya Pradesh, Odisha,
Punjab, Sikkim, Telangana, and Uttar Pradesh have submitted
that they have not created any regulatory asset at any point
in time.
ii. The Maharashtra Electricity Regulation Commission submits
that in compliance with Clause 8.2.2 of the National Tariff Policy,
2016 and Rule 23 of the Electricity (Amendment) Rules, 2024, it
has not created a regulatory asset since March 2020 in respect
of any distribution licensee in the state.
iii. The Joint Electricity Regulatory Commission for UT of Jammu
and Kashmir and UT of Ladakh also submits that it has not
created any regulatory asset since FY 2019-2020 and tariff
determination is such that the ARR of the distribution companies
is met from the revenue from consumers and grant-in-aid from
the UT Government.
iv. The Chhattisgarh State Electricity Regulatory Commission
submits that there was a revenue gap of Rs. 343 crores in
FY 2011-12, even after tariff increase by 14%, but the same
was fully apportioned in FY 2012-13 with carrying cost. In FY
2012-13, there was a cumulative deficit of Rs. 1752 crores
that was partially apportioned by a 17% tariff increase and the
remaining revenue gap of Rs. 828 crores was carried forward
as a regulatory asset, which was subsequently apportioned in
FY 2013-14 with carrying costs. There was no regulatory asset
between FY 2013-14 and FY 2015-16. Then in FY 2016-17, the
State Commission had to allow Rs. 1130.80 crores over and
above the ARR to comply with an APTEL order. To prevent a
tariff shock, it allowed recovery of Rs. 370 crores in that year,
and created a regulatory asset for Rs. 760.80 crores that
was recovered in FY 2017-18. There was no regulatory asset
created or carried forward between FY 2017-18 to FY 2019-20.
In FY 2020-21, considering the COVID-19 pandemic and to
avoid increasing tariffs, the Commission created a regulatory
asset of Rs. 213 crores that was recovered in FY 2021-22.
Post-COVID, the Commission increased tariff by 6.19% and
2.31%, with no regulatory assets. However, as of FY 2023-24,
there was a cumulative revenue deficit of Rs. 2924.53 crores
[2025] 8 S.C.R. 1897

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

as the tariff hikes were insufficient to meet expenditure. The
Commission implemented various rationalisation measures to
reduce the regulatory asset to Rs. 2528 crores, which would be
recovered with carrying cost during the true-up for FY 2023-24
and tariff determination of FY 2025-26. It also submitted that
no further regulatory asset has been crated in the tariff order
dated 01.06.2024 for ARR of FY 2024-25.
v. Kerala State Electricity Regulatory Commission has submitted
that till FY 2022-23, the regulatory asset is Rs. 7123 crores as
per the Commission’s order dated 25.06.2022. Against this, the
average GPF balance estimated by the Kerala State Electricity
Board at the end of FY 2026-27 is about Rs. 3500 crores, and
the average surplus security deposit at the end of FY 2026-
27 is Rs. 285 crores. Considering these funds available with
the Kerala State Electricity Board, the Commission decided to
amortise the balance gap of about Rs. 3350 crores during the
control period while avoiding tariff shock and financial burden
to the consumers, in the following manner: Rs. 850 crores each
year from FY 2022-23 to FY 2024-25, Rs. 500 crores in FY
2025-26, and Rs. 300 crores in FY 2026-27.
vi. The Rajasthan Electricity Regulatory Commission has submitted
that as per its orders dated 31.03.2023 and 26.07.2024, the
regulatory asset across the three distribution companies in the
state is Rs. 47,578 crores upto FY 2023-24 and Rs. 47,114
crores upto FY 2024-25. Various measures have been taken for
recovery of the accumulated regulatory assets including financial
support from the state government and introduction of monthly
fuel surcharge to account for increasing power purchase costs.
The Commission also noted that decision regarding regulatory
surcharge, tariff increase, and adjustment of regulatory asset
against revenue surplus will be taken in the successive years.
It has also submitted that under the Draft RERC (Terms and
Conditions for Determination of Tariff) Regulations, 2025,
Regulation 91 provides for the creation of a regulatory asset only
in exceptional circumstances under natural calamity conditions.
Even then, it shall not be more than 3% of the approved ARR
and it shall be liquidated with carrying costs in maximum 3
equal yearly instalments. Existing regulatory asset, along with
the carrying costs, shall be liquidated in a maximum of 7 equal
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yearly instalments. In case there is surplus in any financial year,
it shall be adjusted first against regulatory assets. This is exactly
what is prescribed in Rule 23 of the Electricity Rules made by
the Central Government, which we will refer to in further detail
at a later stage.
vii. The Tamil Nadu Electricity Regulatory Commission submits that
the regulatory asset in the State of Tamil Nadu till FY 2021-22,
including carrying cost, is estimated at Rs. 89,375.09 crores.
The Commission submits that this is more than 100% of the
ARR, and hence a tariff-based liquidation would not be feasible
as it would excessively burden consumers. Rather, the same
must be recovered by upgrading transmission infrastructure,
reducing aggregate technical and commercial (AT&C) losses,
and sourcing low-cost renewable energy sources. Essentially,
the cost of procurement must be lowered such that the revenue
requirement of the distribution company is on par with the
consumers’ paying capacity. It further submits that in the
true-up order for FY 2022-23, the Commission directed the
Tamil Nadu Generation and Distribution Corporation to seek
approval from the Government of Tamil Nadu to liquidate the
revenue gap till FY 2021-22 of Rs. 83,000 crores through
government resources. Based on the Government’s decision,
the Commission submits that it will finalise the strategy for
amortisation of the regulatory asset. It also submits that it has
endeavoured to not create any new regulatory asset from FY
2022-23 by proposing a tariff increase in a socially balanced
manner.

5 (ii). Affidavits by State Governments.
25. Following is the gist of the affidavits filed by various State Governments.
i. The State of Nagaland has filed an affidavit stating that it is a
bulk power customer and is allotted power by the Government
of India from generating stations within and outside the state.
The tariff for the same is determined by the Central Electricity
Regulatory Commission.
ii. The State of Odisha submitted that as per its communication with
the Odisha Electricity Regulatory Commission, the Commission
has never created a regulatory asset.
[2025] 8 S.C.R. 1899

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

iii. The Government of Madhya Pradesh also filed its affidavit
through the Madhya Pradesh Power Management Co. Ltd.,
which has submitted that the State Commission has always
followed a cost-reflective tariff and has not created any regulatory
asset.
26. We would have expected the State Governments to take a clear
stand on the social justice obligations of the State in the context of
the power of the Regulatory Commissions to determine tariff. The
Regulatory Commissions are required to balance the interplay of the
obligations of the State to ensure access to electricity on the one
hand, and the right of the utilities to recover cost-based expenses
on the other. We are aware of the autonomy that the Regulatory
Commissions exercise in the context of tariff determination, as well
as of applicability of the National Tariff Policy and Rules formulated
by the Central Government on regulatory asset. We were conscious
of this aspect and the same is reflected in our consideration.

6. Law Governing the Electricity Sector Prior to 2003.
27. The supply and use of electricity was originally governed under the
Indian Electricity Act, 1910, which provided the legal framework
for laying cables and other works. With independence and
industrialisation, the need for electricity in urban as well as rural
areas increased, leading to enactment of the Electricity (Supply)
Act, 1948 that mandated State Governments to constitute separate
State Electricity Boards that would be responsible for arranging
supply of electricity in each state and administering the grid system.
It also provided for a Central Electricity Authority23 for planning
and development of the national power system.24 These were the
regulators, but the governments exercised substantial control on
policy as well as management of the sector.
28. Over time it was noticed that these State Electricity Boards were
unable to respond to the rapidly growing demand of electricity due
to financial losses, low tariffs, lack of budgetary support from the

23 Hereinafter “CEA”.
24 Tata Power Co. Ltd. v. Reliance Energy Ltd., (2009) 16 SCC 659, paras 67-71; BSES Rajdhani Power
Ltd. v. Delhi Electricity Regulatory Commission, (2023) 4 SCC 788, paras 11-13.
1900 [2025] 8 S.C.R.

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governments, or investments.25 Further, various problems plagued
the power sector, namely the lack of rational retail tariffs, high
level of cross-subsidies, poor planning and operation, inadequate
capacity, neglect of consumer interest, limited involvement of
the private sector’s skills and resources, and the absence of an
independent regulatory authority.26 This led to the enactment of the
Electricity Regulatory Commissions Act, 1998 with the objective of
reforming the electricity sector by establishing Central and State
Electricity Regulatory Commissions, rationalising electricity tariffs,
transparent policies regarding subsidies, and promoting efficient and
environmentally benign policies.27
29. In the NCT of Delhi, the Delhi Electricity Reforms Act, 2000
was enacted to restructure the electricity industry by unbundling
generation, transmission and distribution, to increase avenues for
private sector participation, and to take measures conducive to the
development and management of the electricity industry in an efficient,
commercial, economic, and competitive manner.28

7. Electricity Act, 2003.
30. The Electricity Act, 2003 was enacted by the Parliament as a complete
and comprehensive law for regulating the generation, transmission,
distribution, and use of electricity in India. The Preamble of the Act
reads:
“An Act to consolidate the laws relating to generation,
transmission, distribution, trading and use of electricity and
generally for taking measures conducive to development

25 Statement of Objects and Reasons, Electricity Regulatory Commissions Act, 1998.
26 ibid.
27 The Preamble of this Act reads:
“An Act to provide for the establishment of a Central Electricity Regulatory Commission
and State Electricity Regulatory Commissions, rationalization of electricity tariff, transparent
policies regarding subsidies, promotion of efficient and environmentally benign policies and
matters connected therewith or incidental thereto. “
28 BSES Rajdhani Power Ltd (supra), para 15. The Preamble of the Delhi Electricity Reform Act, 2000
reads:
“An Act to provide for the constitution of an Electricity Regulatory Commission, restructuring
of the electricity industry (rationalisation of generation, transmission, distribution and supply of
electricity), increasing avenues for participation of private sector in the electricity industry and
generally for taking measures conducive to the development and management of the electricity
industry in an efficient, commercial, economic and competitive manner in the National Capital
Territory of Delhi and for matters connected therewith or incidental thereto.”
[2025] 8 S.C.R. 1901

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of electricity industry, promoting competition therein,
protecting interest of consumers and supply of electricity
to all areas, rationalization of electricity tariff, ensuring
transparent policies regarding subsidies, promotion of
efficient and environmentally benign policies, constitution
of Central Electricity Authority, Regulatory Commissions
and establishment of Appellate Tribunal and for matters
connected therewith or incidental thereto.”
31. Further, the purpose of the enactment is explained in detail in its
Statement of Objects and Reasons, the relevant portions of which
are extracted hereinbelow:
“3. With the policy of encouraging private sector participation
in generation, transmission and distribution and the
objective of distancing the regulatory responsibilities from
the Government to the Regulatory Commissions, the need
for harmonising and rationalising the provisions in the Indian
Electricity Act, 1910, the Electricity (Supply) Act, 1948 and
the Electricity Regulatory Commissions Act, 1998 in a new
self-contained comprehensive legislation arose. Accordingly
it became necessary to enact a new legislation for regulating
the electricity supply industry in the country which would
replace the existing laws, preserve its core features other
than those relating to the mandatory existence of the
State Electricity Board and the responsibilities of the State
Government and the State Electricity Board with respect
to regulating licensees. There is also need to provide for
newer concepts like power trading and open access. There
is also need to obviate the requirement of each State
Government to pass its own Reforms Act. The Bill has
progressive features and endeavours to strike the right
balance given the current realities of the power sector in
India. It gives the State enough flexibility to develop their
power sector in the manner they consider appropriate.
The Electricity Bill, 2001 has been finalised after extensive
discussions and consultations with the States and all other
stake holders and experts.”
32. Through reading the Statement of Objects and Reasons as well as
the Preamble, the salient features of the Act are:
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i. The Act is a comprehensive code to regulate the generation,
transmission, distribution, trading and use of electricity and
replaces the erstwhile 1910 Act, 1948 Act, and 1998 Act that
governed electricity supply and use;29
ii. The State Electricity Boards are unbundled into separate utilities
for electricity generation, transmission, and distribution,30 and
private sector participation is encouraged in these activities;31
iii. The Act provides for development of the electricity sector
through coordinated efforts of the Central Government, State
Governments, and various statutory authorities and regulators
by institutionalising electricity policies and plans;
iv. While generation has been delicensed, the transmission,
distribution, and trading of electricity are licensed activities;32
v. The Act provides for a price discovery mechanism through
tariff fixation;
vi. The Act entrusts the performance of regulatory and adjudicatory
functions, including licensing and tariff fixation, to permanent,
independent Regulatory Commissions that act as expert and
specialised bodies.33 It also enables dispute resolution through
arbitration in specified cases;
vii. The Act established the APTEL as a specialised appellate
forum;34
viii. The Act provides for offences as well as their penalties.

8. Provisions of the Electricity Act relating to determination
of Tariff.
33. Section 3 of the Electricity Act provides for the preparation, publication,
review, and revision of the National Electricity Policy and tariff policy

29 Tata Power Co Ltd (supra), para 76.
30 PTC India Ltd. v. Central Electricity Regulatory Commission, (2010) 4 SCC 603, para 17.
31 Tata Power Co Ltd (supra), para 80; Hindustan Zinc Ltd. v. Rajasthan Electricity Regulatory Commission,
(2015) 12 SCC 611, para 29.
32 Tata Power Co. Ltd. (supra).
33 Tata Power Co Ltd (supra), para 78; PTC India Ltd (supra), para 17.
34 See West Bengal Electricity Regulatory Commission v. CESC Ltd., (2002) 8 SCC 715, para 102.
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by the Central Government in consultation with the State Governments
and the CEA for development of the power sector through optimal
utilisation of resources. Sub-section (4) also provides for the CEA
to prepare a National Electricity Plan as per the National Electricity
Policy.
34. A distribution licensee is defined under Section 2(17) as a licensee
operating and maintaining a distribution system for supplying
electricity to consumers in its area of supply. Electricity distribution
is a licensed activity as per Section 12, and the license is granted
by the Regulatory Commission under Section 14. Part VI of the Act
deals with distribution of electricity – Sections 42 and 43 set out of
the duties of a distribution licensee and open access, Sections 45
and 46 provide for the power to recover charges and expenditure
for supply of electricity, Section 47 provides for the power to require
security, and Sections 48 and 49 empower the distribution licensee to
impose restrictions and enter into agreements for supply of electricity.
35. The Electricity Act also lays down a regulatory mechanism as follows:
Section 2(4) defines “Appropriate Commission” as meaning the
Central, State, or Joint Electricity Regulatory Commission, as the
case may be. The Central Commission is constituted under Section
76, its functions are stipulated under Section 79, and its regulation-
making powers are provided under Section 178. Sections 80 and 81
deal with the Central Advisory Committee and its objects.
35.1 Similarly, the State Commissions are constituted under Section
82 and their functions are provided in Section 86, which include
both mandatory and advisory functions. The relevant mandatory
function for our purpose is under sub-section (1)(a), which
provides for tariff determination for retail supply of electricity
within the State. Sub-section (4) provides that the State
Commission shall be guided by the National Electricity Policy,
tariff policy, and National Electricity Plan formulated under
Section 3. The State Commission can also make regulations
in exercise of its powers under Section 181, including on the
terms and conditions for determination of tariff under Section
61 (sub-section (2)(zd)), methodologies and procedures for
calculating expected revenue from tariff and charges under
Section 62(5) (sub-section (2)(zf)), the manner of making an
application and fee payable under Section 64 (sub-section
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(2)(zg)), and modifications or conditions under Section 64(3)
(sub-section (zh)). Sections 87 and 88 deal with State Advisory
Committees and their objects.
35.2 The Joint Regulatory Commission is constituted under Section
83, and its functions and powers are under sub-sections (4)
and (5).
35.3 Lastly, it is important to note that Section 142 empowers the
Commissions to punish for non-compliance of their directions,
or any provision of the Act or rules or regulations made
thereunder.
36. The Central and State Governments are also given the power to
make rules under the Act, under Sections 176 and 180 respectively.
Beyond rule-making, the Central and State Governments can issue
policy directions to the Central and State Commissions respectively in
matters involving public interest under Sections 107 and 108. These
directions “shall guide” the Regulatory Commissions, but shall not
be binding on them.35
37. In exercise of their powers and functions, the Central and State
Commissions are required to determine tariff as per Part VII of
the Electricity Act. Section 61 lays down the guiding principles
for the Commissions to specify the terms and conditions of tariff
determination, of which the following are relevant:
“Section 61. (Tariff regulations): The Appropriate
Commission shall, subject to the provisions of this Act,
specify the terms and conditions for the determination of
tariff, and in doing so, shall be guided by the following,
namely:-
***
(b) the generation, transmission, distribution and supply of
electricity are conducted on commercial principles;
(c) the factors which would encourage competition,
efficiency, economical use of the resources, good
performance and optimum investments;

35 Kerala State Electricity Board Ltd. v. Jhabua Power Ltd., 2024 SCC OnLine SC 2819.
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(d) safeguarding of consumers’ interest and at the same
time, recovery of the cost of electricity in a reasonable
manner;
(e) the principles rewarding efficiency in performance;
(f) multi year tariff principles;
(g) that the tariff progressively reflects the cost of supply of
electricity and also, reduces cross-subsidies in the manner
specified by the Appropriate Commission;
***
(i) the National Electricity Policy and tariff policy…”
38. While these principles have a bearing on making the regulations
for tariff determination, tariff is fixed under Section 62, inter alia,
for retail supply of electricity. Sub-section (5) also provides for
compliance with procedures specified for calculating expected
revenues from tariff and charges that can be recovered. Section
63 deals with tariff determination through bidding, and Section
64 provides the procedure for application for tariff determination.
Section 65 mandates that if the State Government requires the
grant of subsidy to any class of consumers in tariff, it shall pay
the amount of such subsidy in advance to compensate the person
affected by the grant of subsidy.

9. Provisions of Act, Policies, Rules, Regulations, and Orders
having a bearing on creation of a Regulatory Asset.

9 (i). National Electricity Policy, 2005.
39. The Central Government notified the National Electricity Policy under
Section 3 of the Electricity Act on 12.02.2005, which laid down
guidelines for development of the power sector, providing electricity
supply to all areas, and protecting consumer and other stakeholders’
interests keeping in view availability of energy resources, technology,
and energy security issues.
40. On 01.01.2006, the DERC issued a Public Awareness Bulletin setting
out the major components of ARR for Delhi’s distribution companies as
well as the approximate ratio of each component in the tariff. Power
purchase costs are 80% of the tariff, operations and maintenance
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expenses are 9-10% of the tariff, depreciation is 3-4%, return on
capital employed is 6-7%, and income tax is 0.5-1%.

9 (ii). National Tariff Policy, 2006.
41. On 06.01.2006, the Central Government notified the National Tariff
Policy, 2006 under Section 3 of the Act. Clause 8.2.2 of the Policy
provides for the creation of a regulatory asset, as well as certain
restrictions on time-period and circumstances. It reads:
“8.2.2. The facility of a regulatory asset has been adopted
by some Regulatory Commissions in the past to limit tariff
impact in a particular year. This should be done only as
exception, and subject to the following guidelines:
a. The circumstances should be clearly defined through
regulations, and should only include natural causes
or force majeure conditions. Under business as usual
conditions, the opening balances of uncovered gap must
be covered through transition financing arrangement or
capital restructuring;
b. Carrying cost of Regulatory Asset should be allowed
to the utilities;
c. Recovery of Regulatory Asset should be time-bound
and within a period not exceeding three years at the
most and preferably within control period;
d. The use of the facility of Regulatory Asset should not
be repetitive.
e. In cases where regulatory asset is proposed to be
adopted, it should be ensured that the return on equity
should not become unreasonably low in any year so that
the capability of the licensee to borrow is not adversely
affected.”
(emphasis supplied)

41.1 As stated above, Section 86(4) provides that the State
Commission shall be guided by the National Tariff Policy in
discharging its functions, and the Policy is also a guiding
principle for tariff determination as per Section 61(1)(i). This
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Court has held that while the Policy does not bind the State
Commission, it is a material consideration that must guide
tariff determination.36
41.2 Nothing can be clearer than the mandate under Clause 8.2.2
of the National Tariff Policy, 2006. The real issue is to examine
the circumstances and the compelling reasons for the creation
and undue extension of the regulatory asset over a period of
time, which we will undertake in our Analysis.

9 (iii). DERC Tariff Determination Regulations, 2007.
42. On 30.05.2007, the DERC framed the Tariff Determination
Regulations, 2007 for the first control period (FY 2007-2011), under
which Regulation 5.42 deals with regulatory asset. It stipulates that
at the time of truing up, if variations on account of uncontrollable
items like energy sales and power purchase costs are large and it
is not feasible to recover them in one year, the Commission can
create a regulatory asset as per Clause 8.2.2 of the National Tariff
Policy, 2006. Regulation 5.42 in fact incorporates the National Tariff
Policy and makes it a part of the enforceable regime. The relevant
portion is extracted below for ready reference:
“5.42 Variations on account of uncontrollable items like
energy sales and power purchase cost shall be trued
up. Truing-up shall be carried out for each year based
on the actual/audited information and prudence check by
the Commission;
Provided that if such variations are large, and it is not feasible
to recover in one year alone, the Commission may take
a view to create a regulatory asset, as per the guidelines
provided in clause 8.2.2 of the National Tariff Policy.”
(emphasis supplied)

9 (iv). DERC Statutory Advice dated 15.12.2010.
43. On 15.12.2010, the DERC issued a statutory advice to the Government
of NCT of Delhi regarding the financial position of BRPL and BYPL

36 Tata Power Co. Ltd. v. Maharashtra Electricity Regulatory Commission, (2023) 11 SCC 1, para 122.
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and whether they are able to meet expenses from tariff revenue and
return on equity. In this letter, the DERC stated that the tariffs for FY
2008-09 to FY 2010-11 are not cost-reflective and they do not account
for the increase in power purchase costs during this period, which
constituted more than 80% of the tariff. While generating companies
recover the increase in cost from the distribution companies, the
latter are unable to recover the same from consumers under the
present tariff. Distribution licensees resorted to extensive borrowing
to sustain operations, resulting in substantial interest costs and a
precarious financial position. The DERC noted that this is against
consumer interests as these costs must ultimately be recovered from
consumers with carrying cost, and would burden future consumers
with previously incurred costs. The relevant portions of the DERC’s
letter are extracted below:
“16. The Commission has analysed the ability of the
distribution licensees to meet their expenses and has
considered the revenue from retail sale of electricity at the
tariffs determined by the Commission. These have been
compared with various heads of expenditure i.e. power
purchase cost, operating expenses including interest and
depreciation, to determine the extent of surplus available
towards the return on equity allowed by the Commission.
18. Power purchase cost should not be exceeding 80%
which was in the range of 73-80% in the year 2008-09,
77-98% in the year 2009-10 and 113-135% in the first six
months of 2010-11.
20. Power purchase and revenue recovered from sale of
energy are not within the control of the distribution licensees.
Power purchase cost is mostly dependent upon the fuel
cost which is market driven. The generating company
recovers the increase in the fuel cost and other variable
expenses every month from the distribution licensees, who
in turn are not able to recover timely from the consumers
under the present dispensation. Thus, the operations of
the distribution companies are dependent on borrowings
over a period of 18-24 months which entails substantial
interest cost. This, in any case, is detrimental to consumer
Interest as all power purchase costs whether short term
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or long term are passed through to the consumers (and
recovered from the consumers along with the carrying cost).
***
Conclusion
The Commission is of the view that the tariff during previous
years has not been cost effective. The distribution licensees
have had to resort to extensive borrowing to sustain their
operations.
***
(3) Accumulation of Revenue gaps beyond sustainable
levels
Analysis of the Audited Accounts of the distribution
licensees in Tables 1-3 would indicate that there is shortfall
in the years 2009-10 and 2010-11 beyond sustainable
levels. Thus, it would be quite obvious that in the absence
of tariff revision there is a growing revenue gap which is
to be funded out of borrowings which are increasing from
year to year.
***
(5) Power purchase cost/quantum
Analysis carried out for the years 2008-09 and 2009-
10 in Tables 1-4 would indicate that there has been a
steep increase in the power purchase cost. These issues
would get addressed while taking the ground realities into
consideration and estimating the quantum and the cost
based upon the current data based upon the latest bills
available from the generating companies, power purchase
rates in the Power Exchange, Ul and bilateral contracts.”

9 (v). Ministry of Power’s Letter to the APTEL.
44. On 21.01.2011, the Minister of Power issued a letter to the APTEL
to take suo motu cognisance and issue necessary directions under
Section 121 of the Electricity Act regarding periodical tariff revisions
for improving the long-term financial health and viability of the
electricity sector.
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9 (vi). APTEL’s Order dated 11.11.2011.
45. Pursuant to this letter, the APTEL passed an order dated 11.11.201137
wherein it issued various directions to Regulatory Commissions
regarding timely tariff determination, truing up, and creation,
continuation, and recovery of the regulatory asset. The directions
issued by the APTEL are as follows:
“65. In view of the analysis and discussion made above,
we deem it fit to issue the following directions to the State
Commissions:
(i) Every State Commission has to ensure that Annual
Performance Review, true-up of past expenses and
Annual Revenue Requirement and tariff determination
is conducted year to year basis as per the time
schedule specified in the Regulations.
(ii) It should be the endeavour of every State Commission
to ensure that the tariff for the financial year is decided
before 1st April of the tariff year. For example, the
ARR & tariff for the financial year 2011- 12 should be
decided before 1st April, 2011. The State Commission
could consider making the tariff applicable only till the
end of the financial year so that the licensees remain
vigilant to follow the time schedule for filing of the
application for determination of ARR/tariff.
(iii) In the event of delay in filing of the ARR, truingup
and Annual Performance Review, one month beyond
the scheduled date of submission of the petition, the
State Commission must initiate suo-moto proceedings
for tariff determination in accordance with Section 64
of the Act read with clause 8.1 (7) of the Tariff Policy.
(iv) In determination of ARR/tariff, the revenue gaps
ought not to be left and Regulatory Asset should
not be created as a matter of course except where
it is justifiable, in accordance with the Tariff Policy
and the Regulations. The recovery of the Regulatory

37 In O.P. No. 1/2011, order dated 11.11.2011.
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Asset should be time bound and within a period not
exceeding three years at the most and preferably
within Control Period. Carrying cost of the Regulatory
Asset should be allowed to the utilities in the ARR of
the year in which the Regulatory Assets are created to
avoid problem of cash flow to the distribution licensee.
(v) Truing up should be carried out regularly and
preferably every year. For example, truing up for the
financial year 2009-10 should be carried out along
with the ARR and tariff determination for the financial
year 2011-12.
(vi) Fuel and Power Purchase cost is a major expense
of the distribution Company which is uncontrollable.
Every State Commission must have in place a
mechanism for Fuel and Power Purchase cost in
terms of Section 62 (4) of the Act. The Fuel and
Power Purchase cost adjustment should preferably
be on monthly basis on the lines of the Central
Commission’s Regulations for the generating
companies but in no case exceeding a quarter. Any
State Commission which does not already have such
formula/mechanism in place must within 6 months of
the date of this order must put in place such formula/
mechanism.
66. We direct all the State Commissions to follow these
directions scrupulously, and send the periodical reports by
1st June of the relevant financial year about the compliance
of these directions to the Secretary, Forum of Regulators,
who in turn will send the status report to this Tribunal and
also place it on its website.”

9 (vii). DERC Tariff Determination Regulations, 2011.
46. The DERC then issued the Tariff Determination Regulations, 2011
for the second control period (FY 2012-2015, later extended till
31.03.2017), under which Regulation 5.40 is relevant and deals with
regulatory asset. Similar to Regulation 5.42 of the Tariff Determination
Regulations, 2007, it provides for creation of a regulatory asset
when the variations at the truing up stage are large and cannot be
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recovered in one year. Further, the regulatory asset must be created
as per the guidelines in Clause 8.2.2 of the National Tariff Policy,
2006. The Regulation reads:
“5.40 Truing-up shall be carried out in accordance with
Regulation 4.21, for each year based on the actual/audited
information and prudence check by the Commission;
Provided that if such variations are large, and it is not
feasible to recover in one year alone, the Commission
may take a view to create a regulatory asset, as per the
guidelines provided in clause 8.2.2 of the National Tariff
Policy.
Provided further that under business as usual conditions,
the Commission, to ensure tariff stability, may include the
opening balances of uncovered gap / trued-up costs in
the subsequent Control Period’s ARR instead of including
in the year succeeding the relevant year of the control
period after providing for transition financing arrangement
or capital restructuring.”

9 (viii). DERC’s Tariff Order dated 26.08.2011 (FY 2011-12).
47. The DERC also passed an order dated 26.08.2011 wherein it
determined the ARR for FY 2011-12 and the true-up for FY 2008-
2010. In this order, it increased the tariff by 22% across the board for
all consumer categories and also introduced a fuel price adjustment
charge.

9 (ix). DERC’s MYT Order dated 13.07.2012 (FY 2012-15).
48. In its subsequent MYT order dated 13.07.2012 determining ARR for
FY 2012-2015 and true-up for FY 2010-11, the DERC approved tariff
increase of 23%, introduced the DRS @ 8%, and the PPAC. The
fuel price adjustment charge was absorbed into these.

9 (x). DERC’s Statutory Advice dated 01.02.2013.
49. On 01.02.2013, the DERC issued another statutory advice to the
Government of NCT of Delhi, wherein it noted that the revenue gap
was Rs. 19,505.04 crores, including carrying costs, across BRPL,
BYPL, and TPDDL since FY 2009-10. The DERC also specified
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various measures taken to recover the revenue gap, including the
23% tariff hike w.e.f. 01.07.2012 and the DRS of 8%, but that these
were insufficient. In this light, the DERC recommended that the
Government of NCT of Delhi may take steps to ensure that benefits
of Central Government sponsored schemes, direct subsidies from
state governments, and additional budgetary support are extended
to the distribution licensees. The relevant recommendations of the
DERC to the Government of NCT are extracted below:
“14. Recommendations:-
***
i) …The Commission recommends that Govt. of NCT of
Delhi may take urgent steps so that the benefits of various
Central Government sponsored schemes are extended to
the Delhi distribution utilities and, in tum, to the electricity
consumers in Delhi. Unless this is done, tariffs in Delhi
could become unsustainable, especially when compared
to other States in the country where State owned utilities
not only avail the benefits of the centrally sponsored
schemes but also avail direct subsidies from the State
Governments as well as additional budgetary support for
lower tariff levels.
ii) In case of APDRP, R-APDRP and JNNURM schemes of
the Central Govt., the view of the Govt. been that privately
managed distribution entities should not be allowed to avail
the benefits of these programmes. The Commission is of
the view that denial of the benefits of these programmes
to the distribution entities of Delhi does not affect the
managements of these distribution companies but, in
fact, denies the benefit of the schemes to the consumers
of electricity of Delhi who are as a result required to pay
higher tariffs than are paid by the electricity consumers in
other States which avail of the benefits of these schemes.
Thus, the Govt. of NCT of Delhi may take up with the
Ministry of Power that these schemes are availed of by the
Delhi distribution utilities for the benefit of the consumers
in the NCT of Delhi.
iii) The financial bailout package introduced by the Central
Govt. for financial restructuring of State distribution entities
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with certain conditions including support from the State
Govt. is also being denied to the distribution entities in
Delhi. Here again, this view does not impact the private
managements of these companies but has a direct impact
on their revenue requirements and consequently, the tariff
required to be paid by electricity consumers in the city.
The Govt. of NCT of Delhi may take up with the Ministry of
Power to sanction the bail-out package for the DISCOMs
of Delhi. This would be the single most important measure
for deferring the incidence of high levels of past revenue
gaps on the tariff determination process.”

9 (xi). DERC’s Tariff Order dated 31.07.2013 (FY 2013-14).
50. In the next tariff order dated 31.07.2013 to determine ARR for FY
2013-14 and true-up for FY 2011-12, the DERC increased the tariff
by 5% and continued the existing DRS @ 8% over and above the
revised tariff. It also allowed carrying cost on the regulatory asset
to all distribution companies. At this stage, the regulatory asset
amounted to Rs. 8060 crores across the BSES Discoms and Rs.
3370 crores for TPDDL.

9 (xii). APTEL’s Order dated 14.11.2013.
51. The APTEL also passed the order dated 14.11.201338, wherein it
reiterated its direction to the DERC to provide for recovery of the
regulatory asset in 3 years as per its order dated 11.11.2011 and
to implement the judgments of the APTEL. The DERC has filed
civil appeals against this order, which have been dismissed by this
Court’s order dated 01.12.2021 as there was no substantial question
of law.39 This Court also directed the DERC to implement the issues
decided by the APTEL, if not already complied, within a period of 3
months and to file a compliance report in 2 weeks thereafter.40 The
relevant portion of the APTEL order is as follows:
“37. As regards recovery of the Regulatory assets/
amortization schedule and fuel and power purchase

38 In O.P. Nos. 1 and 2/2012, order dated 14.11.2013.
39 In C.A. No. 1854-1855/2014, order dated 01.12.2021.
40 ibid.
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adjustment mechanism, this Tribunal in OP No.1 of 2011
dated 11.2011 has given the following directions to the
State Commission…
38. In view of the above, we direct the State Commission to
take immediate steps for recovery of the admitted revenue
gap and decide amortization schedule and also ensure
that the Fuel and Power Purchase costs are passed on
regularly and effectively as per the above directions of this
Tribunal to avert the problems of cash flow experienced
by the Petitioners which may come in the way of smooth
operation of the distribution system and meeting the
requirements of electricity of the consumers in the national
capital in a reliable manner if not remedied in time.
39. In view of the categorical stand taken by the Delhi
Commission now, it is enough for us to direct the Delhi
Commission to implement the directions of this Tribunal
given in the decisions referred to above and pass an order
in terms of those directions in future.”

9 (xiii). APTEL’s Order dated 11.03.2014.
52. The above-referred tariff order dated 31.07.2013 was appealed before
the APTEL by BRPL in Appeal No. 266/2013 and by BYPL in Appeal
No. 265/2013 on the ground that the tariff order did not provide a
roadmap for recovery of the regulatory asset. In these appeals, BRPL
and BYPL filed IA 365/2013 and 364/2013 respectively for an order to
increase the DRS to meet carrying costs upto 31.03.2014, to repay
one-third of the principal component of the regulatory asset, and to
provide a plan for completely recovery of the regulatory asset in 3
years as per the National Tariff Policy, 2006.
53. The APTEL rejected the prayer for liquidating the regulatory asset
in 3 years by order dated 11.03.2014, which has been appealed by
BRPL and BYPL in the present civil appeals. However, the APTEL
directed the DERC to prepare a roadmap for liquidation of the
regulatory asset, both principal amount and carrying cost, keeping
in mind the interests of consumers and the distribution licensees.
54. In the present civil appeals (C.A. No. 4010 and 4013/2014) against
the APTEL’s order dated 11.03.2014, as well as writ petitions by
BRPL and BYPL, this Court by order dated 26.03.2014 directed the
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DERC to submit a roadmap for liquidation of the regulatory asset
and also directed BRPL and BYPL to pay the current dues to the
generating and transmission companies. In compliance with this
order, the DERC submitted a liquidation schedule on 01.05.2014
before this Court, in which it proposed to liquidate the regulatory
asset including carrying cost in 6-7 years (by FY 2020-21) by taking
the average growth rate of distribution companies at 15%.

9 (xiv). National Tariff Policy, 2016.
55. On 28.01.2016, a revised National Tariff Policy, 2016 was notified by
the Central Government, wherein Clause 8.2.2 deals with regulatory
asset. While the other conditions for creation of a regulatory asset
are similar to the National Tariff Policy, 2006, the time-period for
recovery was increased from 3 to 7 years. The relevant portion is
extracted below:
“8.2.2 The facility of a regulatory asset has been adopted
by some Regulatory Commissions in the past to limit tariff
impact in a particular year. This should be done only as
a very rare exception in case of natural calamity or force
majeure conditions and subject to the following:
a. Under business as usual conditions, no creation of
Regulatory Assets shall be allowed;
b. Recovery of outstanding Regulatory Assets along with
carrying cost of Regulatory Assets should be time bound
and within a period not exceeding seven years. The State
Commission may specify the trajectory for the same.”
(emphasis supplied)

9 (v). DERC Tariff Determination Regulations, 2017.
56. The DERC then framed the DERC (Terms and Conditions for
Determination of Tariff) Regulations, 2017, which contains a
separate section on regulatory asset. Regulation 154 provides that
an accumulated revenue gap approved by the Commission in the
relevant tariff order shall be treated as a regulatory asset, and that
such revenue gap shall be computed on the basis of excess of
ARR over revenue approved after truing up for the relevant year.
Regulation 155 provides for carrying cost, and Regulation 156 deals
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with the how the regulatory asset must be shown in the books of
accounts. On a perusal of these regulations, it is clear that Clause
8.2.2 of the National Tariff Policy, 2016 has not been referred, nor
are there any conditions on when a regulatory asset can be created,
its quantum, and the time-period for its recovery.

9 (vi). Ministry of Power’s Affidavit dated 10.08.2022.
57. On 10.08.2022, the Ministry of Power, Union of India submitted an
affidavit before this Court in the present writ petitions. It submitted
that while the DERC created the regulatory asset as an exception, it
is now being continued in a manner inconsistent with the Electricity
Act and its larger objective of a healthy and economical electricity
sector. The affidavit also relied on the APTEL’s judgment dated
11.11.201141 where it was held that the regulatory asset must be
recovered in a time-bound manner within 3 years, and preferably
within the control period. The Ministry of Power prayed that this
Court direct DERC to devise a roadmap or plan for amortisation of
the regulatory asset in a time-bound manner as per the National
Tariff Policies, to direct the State Commissions to determine cost-
reflective tariffs, and that no new regulatory asset be created except
as per the National Tariff Policy, 2016. The relevant portions of the
affidavit are extracted below:
“10. That creation of Regulatory Asset essentially requires
deferment of admitted cost due to a Distribution Company
to a future period in order to avoid tariff shock. This concept
was adopted by the Respondent No. 2 as an exception,
however, gradually the exercise of creation of Regulatory
Asset seems to have become a trend and is now being
done on year to year basis. Such an approach is not only
inconsistent with the Act but is also irreconcilable with the
larger objective to have a healthy and economical electricity
sector in the country.
11. That in order to address this situation, the Answering
Respondent in compliance with section 3 of the Act, notified
the National Tariff Policy (“NTP, 2006”) on 06.01.2006,
wherein the Answering Respondent had directed that

41 In O.P. No. 1/2011 (supra).
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the ‘Regulatory Asset’ should not be created under usual
business condition and the recovery of Regulatory Asset
should be timebound, within a period of three years.
Following are the relevant extracts of the NTP, 2006…
12. That despite the above mandate, it was observed that
the SERCs have failed/or are reluctant to conduct the tariff
determination exercise in consistency with the Act. In this
respect, on 21.01.2011, the Answering Respondent issued
a Letter to the Appellate Tribunal for Electricity (“Appellate
Tribunal”), inter alia, requesting the Appellate Tribunal to
issue necessary directions to the SERCs to revise the
tariff periodically for improving the financial health and
long-term viability of the electricity sector, particularly for
distribution utilities. Basis the letter issued by the Answering
Respondent, the Appellate Tribunal initiated a Suo- Moto
proceeding being O.P. No. 01 of 2011 wherein, various
issues with respect to power of SERCs to determine tariff
were discussed…
14. That the Answering Respondent on 28.01.2016 issued
the National Tariff Policy, 2016 (“NTP, 2016”). Clause 8.2.2
of NTP, 2016, provided that the SERCs cannot continue
to delay the liquidation of Regulatory Assets and the
recovery of outstanding Regulatory Assets along with the
Carrying Cost should be done in a time bound manner
not exceeding 7 years…
15. That it is evident from the above that Answering
Respondent has taken steps and mandated that the SERCs
(including the Respondent No.2) cannot create Regulatory
Asset as a matter of routine and the Regulatory Asset and
directed the SERCs to recover the outstanding Regulatory
Assets in a time bound manner…
18. That in view of the above, it is submitted that the
creation of a Regulatory Asset’ with no mechanism
for recovery is contrary to the Act’s legislative intent,
as it amounts to artificially keeping the tariff low while
prejudicing the efficient recovery of the tariff. Answering
Respondent vide the statutory policies and various
communications have directed the Commissions to
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refrain from creating Regulatory Asset and to amortise the
Regulatory Asset within a time bound manner. However,
as evident in the present case, the Respondent No. 2
has not acted in the compliance of the Act, Statutory
policies issued by the Answering Respondent and the
Judgments/Order of the Appellate Tribunal and deferred
the recovery of recognised revenue gap for 17 years by
creating the Regulatory Asset.
19. That it is therefore submitted that this Hon’ble Court
may be pleased to direct the Respondent No. 2 to devise
a roadmap/plan to amortise the Regulatory Asset in a
time-bound manner as mandated under the Tariff Policies
notified by the Answering Respondent or any other
methodology as this Hon’ble Court may deem fit in the
present situation. Since such problem is also observed in
other State Commissions also, Hon’ble Court may also be
pleased to direct all State Commission for determination
of cost reflective tariff and no new regulatory assets
be created as stipulated in the Tariff Policy 2016. State
Commission may also be directed to devise a roadmap/
plan to amortise the Regulatory Asset in a time-bound
manner as mandated under the Tariff Policies notified by
the Answering Respondent.”

9 (vii). Ministry of Power’s Affidavit dated 12.12.2022.
58. In another affidavit dated 12.12.2022, the Ministry of Power submitted
that the LPS fixed by the State Commissions was 18%, which is
“usurious” as bank lending rates are 6-7%. This higher LPS means
that distribution companies bear a heavy burden in case of delayed
payments, which is subsequently passed on to consumers. Hence,
LPS must be linked to the Bank Lending Rate to make it reasonable.
Though this issue does not directly arise for our consideration, we
are aware that it has a bearing on the tariff, if not for the present
but in future. Eventually, the burden is shifted on the consumer. The
Ministry also submits that taking into account these concerns, it has
notified the Electricity (LPS) Rules, 2022. The relevant portions of
the affidavit are extracted below:
“In the absence of any Rules or directions with regard
to the specific rates for Late Payment Surcharge (LPS),
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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
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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 –
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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

(a) supply of electricity by a generating company to a distribution licensee:
Provided that the Appropriate Commission may, in case of shortage of supply of electricity, fix
the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an
agreement, entered into between a generating company and a licensee or between licensees, for
a period not exceeding one year to ensure reasonable prices of electricity;
(b) transmission of electricity;
(c) wheeling of electricity;
(d) retail sale of electricity:
Provided that in case of distribution of electricity in the same area by two or more distribution
licensees, the Appropriate Commission may, for promoting competition among distribution
licensees, fix only maximum ceiling of tariff for retail sale of electricity.”
Sections 79 sets out the functions of the Central Commission. The relevant portion is as follows:
“Section 79. (Functions of Central Commission): ---
(1) The Central Commission shall discharge the following functions, namely:-
(a) to regulate the tariff of generating companies owned or controlled by the Central
Government;
(b) to regulate the tariff of generating companies other than those owned or controlled by
the Central Government specified in clause (a), if such generating companies enter into
or otherwise have a composite scheme for generation and sale of electricity in more than
one State;
***
(d) to determine tariff for inter-State transmission of electricity;…”
Section 86 sets out the functions of the State Commission. The relevant portion is as follows:
“Section 86. (Functions of State Commission): ---
(1) The State Commission shall discharge the following functions, namely:-
(a) determine the tariff for generation, supply, transmission and wheeling of electricity,
wholesale, bulk or retail, as the case may be, within the State:
(b) regulate electricity purchase and procurement process of distribution licensees
including the price at which electricity shall be procured from the generating companies or
licensees or from other sources through agreements for purchase of power for distribution
and supply within the State;…”
43 Section 61(1)(g) of the Electricity Act.
44 Section 61(1)(i) of the Electricity Act.
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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.”
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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,
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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.
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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
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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
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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.”
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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.
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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.
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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.
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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
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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.”
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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.
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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.”
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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

60 O.P. No. 1/2011 (supra), para 47-48; O.P. Nos. 1 and 2/2012 (supra), para 15.
61 O.P. No. 1/2011 (supra), para 66.
62 O.P. No. 1/2011 (supra), paras 59, 65(i) and (ii); O.P Nos. 1 and 2/2012 (supra), para 15.
63 O.P. No. 1/2011 (supra), para 65(i) and (iii).
64 ibid, para 57.
65 ibid, para 65(iv).
66 ibid, paras 62, 65(iv).
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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.
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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
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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
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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.

†
Headnotes prepared by: Divya Pandey