Supreme Court frames limits on creation and recovery of regulatory assets; directs time‑bound liquidation and APTEL supervision

A bench of Justices Pamidighantam Sri Narasimha and Sandeep Mehta heard challenges to the Delhi Electricity Regulatory Commission’s approach to tariff determination and the creation and continuation of a “regulatory asset” by three distribution licensees supplying power in the National Capital Territory. The matters arose from writ petitions and civil appeals by the distribution companies contesting DERC orders and seeking recognition and a roadmap for recovery of deferred costs.

The Court summarised that a regulatory asset was a non‑statutory but recognised regulatory device and held that its creation must remain exceptional, subject to statutory policies and the recently enacted Rule 23 of the Electricity Rules. The Court directed strict limits on future creation and time‑bound liquidation of existing gaps, and it empowered the Appellate Tribunal for Electricity (APTEL) to monitor compliance. The Court, in its reasoning, observed: The Court also directed the APTEL to invoke Section 121 and to register a suo motu petition to monitor implementation.

Background The dispute arose after successive DERC tariff and true‑up orders since 2004 recognised uncovered revenue gaps as regulatory assets for BRPL, BYPL and TPDDL. Petitioners contended DERC had failed to recognise prudently incurred costs and had not provided a time‑bound liquidating mechanism; they sought directions to recognise deferred costs and a three‑year amortisation. Respondents, including DERC and the Union (Ministry of Power), submitted that DERC had repeatedly taken remedial steps — tariff hikes, an 8% Deficit Recovery Surcharge, fuel and power purchase adjustment mechanisms and carrying costs — and that rises in power purchase costs, exogenous factors and delayed truing‑up had enlarged the gap. The Ministry of Power and APTEL precedents urged periodic truing‑up, cost‑reflective tariffs and limited resort to regulatory assets; Rule 23 (Electricity Amendment Rules, 2024) was notified to prescribe firm limits. The DERC’s truing‑up to FY 2020‑21 recorded regulatory assets (with carrying cost) aggregating about Rs. 27,200.37 crore across the three licensees. The Court reviewed the Electricity Act, National Tariff Policy, DERC regulations and APTEL directions, and concluded that regulatory assets were permissible only as an exceptional regulatory measure, subject to the statutory framework. It disposed of the writ petitions and appeals after issuing binding directions: as a principle, “tariff shall be cost‑reflective”; new revenue gaps were permissible only in extraordinary circumstances; such gaps should not exceed 3% of ARR; any new regulatory asset must be liquidated within three years; existing regulatory assets must be liquidated in a prescribed time frame starting 1 April 2024; and APTEL would oversee compliance and may issue further directions under Section 121.

Case No.: 2025 INSC 937; Writ Petition (C) 104/2014, W.P. (C) 105/2014, W.P. (C) 1005/2021; C.A. Nos. 4010/2014 & 4013/2014 Case Title: BSES Rajdhani Power Ltd. & Anr. v. Union of India & Ors. Appearances: For the Petitioner(s): Mr. Kapil Sibal, Sr. Adv.; Dr. Abhishek Manu Singhvi, Sr. Adv.; Mr. Amit Kapur, Adv. For the Respondent(s): Mr. Nikhil Nayyar, Sr. Adv. (for DERC); Mr. R. Venkataramani, Attorney General of India (for certain generating/transmission companies); Mr. K.M. Nataraj, ASG (for Ministry of Power); Mr. Siddharth Dave, Sr. Adv.; Mr. Shadan Farasat, Sr. Adv. (for Government of NCT of Delhi).