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Question Bank
Question
What is a "regulatory asset" under the Electricity Act, 2003, and under what circumstances can it be created?
Solution
A regulatory asset is an intangible asset recognized by Electricity Regulatory Commissions when a distribution licensee cannot fully recover its prudently incurred costs through tariffs in a given year. It represents a deferred revenue gap, allowing recovery in future tariffs to avoid sudden tariff shocks for consumers.
Under Clause 8.2.2 of the National Tariff Policy, 2006 (incorporated into Regulation 5.42 of DERC Tariff Regulations, 2007), a regulatory asset can only be created in exceptional circumstances, such as natural calamities or force majeure events. The creation must be time-bound (initially 3 years, later extended to 7 years under the National Tariff Policy, 2016), and the carrying cost (interest) must be allowed to the utility.
Question
How does Section 61 of the Electricity Act, 2003 guide tariff determination by Regulatory Commissions?
Solution
Section 61 lays down the guiding principles for tariff determination by Regulatory Commissions. Key principles include:
1. Commercial principles: Ensuring generation, transmission, and distribution operate efficiently.
2. Consumer protection: Safeguarding consumer interests while ensuring cost-reflective tariffs.
3. Competition and efficiency: Encouraging economical resource use and optimal investments.
4. Multi-year tariff (MYT) framework: Providing predictability in tariff adjustments.
5. Progressive cost reflection: Reducing cross-subsidies over time.
The Commission must also align with the National Electricity Policy and National Tariff Policy under Section 61(1)(i).
Question
What role does the Appellate Tribunal for Electricity (APTEL) play in regulating tariff disputes under Section 121 of the Electricity Act?
Solution
Section 121 empowers APTEL to issue orders, instructions, or directions to Regulatory Commissions to ensure compliance with the Act. APTEL acts as an appellate body under Section 111 but also enforces accountability through suo moto interventions. For instance, in cases of regulatory failure (e.g., excessive regulatory assets), APTEL can:
1. Mandate time-bound liquidation of regulatory assets.
2. Direct annual truing-up exercises to reconcile revenue gaps.
3. Ensure cost-reflective tariffs under Section 62.
APTEL’s directions are binding and executable as civil court decrees under Section 120(3).
Question
Explain the significance of Rule 23 of the Electricity (Amendment) Rules, 2024, in managing regulatory assets.
Solution
Rule 23, introduced in 2024, imposes strict conditions on regulatory assets:
1. Cost-reflective tariffs: No gap between Annual Revenue Requirement (ARR) and revenue from tariffs, except during natural calamities.
2. Cap on regulatory assets: Limited to 3% of ARR.
3. Liquidation timeline: Existing gaps must be cleared in 7 years (from 2024), and new gaps in 3 years.
4. Carrying costs: Calculated at the base rate of Late Payment Surcharge (LPS).
This rule prevents indefinite deferral of revenue gaps and ensures financial sustainability of distribution companies.
Question
What are the consequences of "regulatory failure" in tariff determination, and how does the Electricity Act address it?
Solution
Regulatory failure occurs when Commissions:
1. Delay tariff revisions or truing-up, leading to unsustainable revenue gaps.
2. Create excessive regulatory assets beyond permissible limits.
3. Fail to implement APTEL’s directions under Section 121.
The Act addresses this through:
Judicial review: Appeals to APTEL (Section 111) and the Supreme Court.
Accountability: APTEL can enforce compliance via Section 121.
Rule 23: Mandates liquidation of gaps to prevent financial instability.
Failure to comply risks undermining consumer interests and distorting the electricity market.
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