SC delivers key ruling on discom regulatory assets; power bills likely to go up across India

In a ruling that may have huge impact on consumers across the country, the Supreme Court on Wednesday asked all states and Union Territories (UTs) to clear within four years the regulatory assets of the power distribution companies, including BSES companies and Tata Power Delhi Distribution (TPDDL), a decision that is likely to increase electricity bills across India.

Reliance Infra-backed power distribution utilites BSES Rajdhani Power (BRPL) and BSES Yamuna Power (BYPL) and Tata Power TPDDL had sought amortisation of their “undisputed” regulatory assets, which according to industry estimates, has exceeded over Rs 1.5 lakh crore across the country.

As on March 31, 2024, the regulatory asset including carrying costs for BRPL is Rs 12,993.53 crore, Rs 8419.14 crore for BYPL and Rs 5,787.70 crore for TPDDL, totally amounting to Rs 27,200.37 crore across all three distribution companies in Delhi.

Regulatory assets, which are costs incurred by discoms but recovered or recovered over a period of time, have been accumulating for decades.

A bench comprising Justices PS Narasimha and Atul S Chandurkar while issuing notice to all states with pending regulatory assets asked their state electricity regulatory commissions to submit a time-bound roadmap for recovery of these regulatory assets, while also tasking the Appellate Tribunal for Electricity to supervise the implementation of its directions.“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,” Justice Narasimha, writing the judgment for the Bench.“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 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,” the top court said.Existing regulatory asset must be liquidated in a maximum of four years starting from April 1, 2024, it said."As a first principle, tariff shall be cost-reflective; the revenue gap between the approved ARR (Aggregate Revenue Requirement) 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 Rule 23 of the Electricity Rules that prescribes 3% of the ARR as the guiding principle; if a regulatory asset is created, it must be liquidated within a period of 3 years, taking Rule 23 as the guiding principle," the judgement stated while laying the broader outline for the commissions.Stating that all such dues must be amortised over four years, the top court said that 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. 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,” it said.Welcoming the judgment, advocate Shri Venkatesh, appearing for Tata Power Delhi Distribution, told ET that “the Supreme Court’s judgment has decisively unlocked the value chain of electricity regulation while addressing the systemic misuse of the Regulatory Asset mechanism.”“For decades, tariff deferments were used as a political and regulatory crutch, distorting the true cost of supply and pushing discoms into unsustainable debt. By mandating a time-bound liquidation plan and empowering APTEL to supervise compliance, the court has enforced long-ignored statutory discipline under the Electricity Act. This judgment not only restores financial credibility to discoms but also reinforces the principle that consumer tariffs must be cost-reflective and grounded in transparent regulatory processes,” Venkatesh said."However, it is possible that the states may not want to pass it down to the consumers as it will raise tariffs. In that case, they may want to take it over. But if that were the case, they could have done it earlier," a central government official said.Vikram V, Vice President & Co-Group Head, ICRA, too termed it as a "positive development for the sector if implemented in the true spirit."He said that "ideally, there should not have been a large build-up of regulatory assets. However, large delays in issuance of tariff orders and lack of tariff revision in line with the cost structure led to this situation. Going forward, avoiding such build-up of regulatory assets would require timely pass through of cost variations by the discoms to the consumers. This will also enable the discoms to become self-sustaining."Commenting on the judgment, counsel Amit Kapur, who appeared for BSES companies, said, “An accumulated national regulatory asset of over Rs.1.68 lakh crores means a real average tariff shortfall/deferment of virtually Re.1 per unit. A contingent liability forced on unsuspecting consumers of interest (carrying cost) of 15.5% per annum (at times on compounding basis) to be recovered with the regulatory asset over time.""This judgment, if implemented sincerely, can put Indian power sector back on track of creditworthiness and become an attractive destination for investments which will help us achieve our goal of energy transition," the counsel for BSES companies said. The ruling came on a couple of appeals filed by Delhi-based BSES firms and Tata Power seeking a direction to DERC to provide a roadmap for liquidation of the recognised amount of Revenue Gap/Regulatory Asset within a definite time frame and within a period not exceeding three years at the most.Seeking recognition of the Regulatory Asset and amortization of the Regulatory Asset within a period of 3 years, Tata Power Delhi Distribution had alleged that the Commission had consistently deferred the tariff costs legitimately owed to it by creating ‘Regulatory Assets.’The discoms had alleged that the DERC’s creation of Regulatory Assets was not only without a legal sanction but also in grave violation of the settled scheme of the Act, the policies and directives issued by the Central Government and the Judgments passed by the Aptel.In addition, while the power purchase cost had increased, there had been no corresponding increase in the tariff for the last nine year, they alleged.According to Justice Narsimha, ‘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 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.

“We have affirmed the limits of the creation, continuation and liquidation of the regulatory asset, recognised the obligations of the commissions and directed that they will be accountable and subject to such orders, instructions and directions of the Aptel, and the regulatory regime under the Electricity Act,” the apex court said.