Summary and Analysis of BSES Rajdhani Power Ltd. & Anr. vs Union of India & Ors. (2025 INSC 937)

1. Heading of the Judgment

Regulatory Assets in Electricity Tariff Determination: Legality, Limits, and Liquidation Framework
Supreme Court clarifies the legal status, permissible limits, and mandatory liquidation timeline for "regulatory assets" created by Electricity Regulatory Commissions.

2. Relevant Laws & Legal Provisions

The judgment interprets and applies the following legal framework:

• Electricity Act, 2003 (Sections 61, 62, 65, 86, 111, 121):
  Section 61: Guiding principles for tariff determination (cost-reflective tariffs, consumer protection).
  Section 65: Mandates advance payment of subsidies by State Governments.
  Section 121: Empowers APTEL to issue directions to Regulatory Commissions.

• National Tariff Policies:
  2006 Policy (Clause 8.2.2): Permits regulatory assets only in "exceptional circumstances" (natural calamities/force majeure); mandates 3-year liquidation.
  2016 Policy (Clause 8.2.2): Extends liquidation period to 7 years.

• Electricity Rules, 2005 (Rule 23, inserted by 2024 Amendment):
  Caps regulatory assets at 3% of Annual Revenue Requirement (ARR).
  Mandates liquidation of new gaps in 3 years and existing gaps in 7 years (from 01.04.2024).

• DERC Regulations (2007, 2011, 2017): Incorporate National Tariff Policy guidelines.

• Constitutional Principles: Electricity as a "public good" under Article 39(b) of the Constitution.

3. Basic Judgment Details

• Case No.: Writ Petition (C) Nos. 104/2014, 105/2014, 1005/2021 & Civil Appeals 4010/2014, 4013/2014.

• Parties:
  Petitioners: BSES Rajdhani Power Ltd. (BRPL), BSES Yamuna Power Ltd. (BYPL), Tata Power Delhi Distribution Ltd. (TPDDL).
  Respondents: Union of India, Delhi Electricity Regulatory Commission (DERC), Government of NCT Delhi, generating companies.

• Key Issue: Whether DERC’s creation and perpetuation of regulatory assets (totaling ₹27,200 crores by 2024) violated statutory mandates.

• Outcome: The Supreme Court upheld regulatory assets as a valid temporary measure but declared DERC’s 17-year accumulation a "regulatory failure."

4. Explanation of the Judgment

I. Concept of "Regulatory Asset"

• A regulatory asset is an accounting mechanism allowing electricity distribution companies (discoms) to defer recovery of revenue shortfalls. It arises when:
  Tariffs set by Regulatory Commissions (like DERC) are lower than the actual cost of supply.
  Immediate tariff hikes would cause "tariff shock" to consumers.

• It represents a future recovery right for discoms, but must be liquidated swiftly to avoid financial instability.

II. DERC’s Regulatory Failure

• Excessive Accumulation: DERC created regulatory assets starting in 2004, leading to a cumulative gap of ₹27,200 crores by 2024.

• Violation of Policies:
  Created assets under "business as usual" conditions (not "exceptional circumstances").
  Ignored 3-year liquidation mandate (2006 Policy) and 7-year limit (2016 Policy).

• Systemic Lapses:
  Delayed tariff revisions and truing-up exercises.
  Inadequate measures (e.g., 8% Deficit Recovery Surcharge insufficient to cover carrying costs).

III. Legal Principles Laid Down

The Court issued 10 core principles ("sutras"):

1. Cost-Reflective Tariffs: Tariffs must reflect actual supply costs (Section 61).

2. Strict Limits for Regulatory Assets:
   Permissible only in natural calamities/force majeure.
   Capped at 3% of ARR (Rule 23).

3. Time-Bound Liquidation:
   New gaps: 3 years.
   Existing gaps: 7 years (from 01.04.2024).

4. Accountability of Commissions: Regulatory Commissions must:
   Conduct annual truing-up.
   Submit liquidation roadmaps.
   Audit discoms’ financial practices.

5. APTEL’s Enhanced Role: Appellate Tribunal (APTEL) must use Section 121 to:
   Issue directions to non-compliant Commissions.
   Monitor liquidation of regulatory assets.

IV. Directions Issued

1. Liquidation Deadline: All existing regulatory assets must be liquidated by 31.03.2031 (7 years from 01.04.2024).

2. Roadmap Requirement: DERC and other State Commissions must submit liquidation plans within 3 months.

3. APTEL’s Mandate: APTEL to register a suo moto case to monitor compliance nationwide.

4. Consumer Protection: Future tariff hikes must balance discom viability and consumer affordability.

V. Broader Implications

• Regulatory Commissions must avoid "regulatory capture" (undue political/private influence).

• State Governments must pay subsidies in advance (Section 65) to prevent revenue gaps.

• Discoms cannot use regulatory assets as a substitute for operational inefficiencies.

Citation

BSES Rajdhani Power Ltd. & Anr. vs Union of India & Ors., (2025) INSC 937 (Supreme Court of India).