The Supreme Court of India has directed the states to clear the pending dues of approximately ₹1.74 trillion (~$19.72 billion) owed to distribution companies (DISCOMs) within four years. New dues created after April 1, 2024, must be liquidated within three years.

The Court said the practice of creating dues, termed as ‘regulatory assets’ by electricity regulatory commissions, cannot be allowed to continue unchecked. Such regulatory assets, which represent unrecovered costs of distribution licensees deferred to future tariff periods, must only be created in exceptional circumstances and must be liquidated within a specified time.

The judgment enforces Rule 23 of the Electricity (Amendment) Rules 2024, which limits regulatory assets to no more than 3% of the approved annual revenue requirement.

The Court directed the Appellate Tribunal for Electricity (APTEL) to register a suo motu case under Section 121 of the Electricity Act to monitor the liquidation of regulatory assets nationwide, and issue binding orders and directions to ensure compliance by state commissions.

Background

The case emerged from a long-standing dispute between Delhi’s DISCOMs and the Delhi Electricity Regulatory Commission (DERC) over the issue of under-recovery of revenue due to delayed or insufficient tariff revisions.

The petitioners, BSES Rajdhani Power, BSES Yamuna Power, and Tata Power Delhi Distribution, argued that over multiple years, DERC had failed to allow cost-reflective tariffs despite the audited accounts and annual revenue requirement filings submitted by them. As a result, a large volume of revenue shortfall was carried forward each year in the form of regulatory assets.

According to the petitioners, these regulatory assets had grown to over ₹272 billion (~$3.09 billion) by the financial year 2024 and continued to accumulate carrying costs due to the time value of money. They claimed that such deferment was unsustainable and contrary to the provisions of the Electricity Act, 2003, which mandates regular and transparent tariff determination. The petitioner also relied on past judgments of APTEL, which had ruled that the DISCOMs were entitled to cost-reflective tariffs and recovery of carrying costs.

The respondents included DERC, the Delhi Government, and the Union Ministry of Power. DERC countered the claims by asserting that the regulatory assets had been created at the request of the DISCOMs themselves in the early years following the privatization of distribution. It argued that tariff increases and surcharges had already been granted periodically and that the DISCOMs were exaggerating the impact of under-recovery.

The Delhi government submitted that the DISCOMs had received significant financial assistance through loans and subsidies, and that any claims regarding revenue gaps had to be assessed within the broader regulatory framework. It opposed any attempt to shift the burden of past inefficiencies onto consumers.

The Ministry of Power highlighted the importance of following Rule 23 of the Electricity Rules, 2024, which permits regulatory assets only in extraordinary situations such as natural calamities or force majeure events and mandates liquidation within five years.

Given the broader implications of the dispute, the Court had earlier directed all state electricity regulators and state governments to file affidavits detailing the status of regulatory assets across the country. This revealed significant regional disparities, with states like Tamil Nadu, Kerala, Chhattisgarh, and Rajasthan reporting dues of over ₹1.46 trillion (~$16.64 billion). In contrast, others like Assam, Odisha, and Uttar Pradesh had no such liabilities. These disclosures underscored the systemic nature of the problem and the need for judicial clarity.

Supreme Court’s Analysis

The Supreme Court emphasized that Sections 61 and 62 of the Electricity Act place a clear obligation on the regulators to determine tariffs that are cost-reflective and provide a reasonable return to distribution licensees while ensuring consumer interest.

It rejected the argument that political or financial constraints justify prolonged deferment of revenue recovery. It held that the regulatory commissions cannot avoid their statutory duty by deferring legitimate costs under the guise of consumer protection. It also noted that the creation of regulatory assets without timely liquidation leads to accumulated carrying costs, which ultimately burdens consumers more heavily in the long run and destabilizes the financial health of DISCOMs.

On the issue of consumer interest, the Supreme Court observed that true consumer protection lies in ensuring uninterrupted and quality supply of electricity at fair tariffs, not in artificially suppressing tariffs while endangering the viability of the distribution system. It called for a balance between the right of consumers to affordable power and the right of DISCOMs to recover legitimate costs efficiently.

The Court further examined Rule 23 of the Electricity (Amendment) Rules, 2024, which allows for the creation of regulatory assets only in exceptional circumstances such as natural disasters, war, or other force majeure events. It noted that none of the conditions in Rule 23 had been satisfied in the Delhi case, and that the regulatory asset mechanism had been abused as a routine tool to defer tariff increases.

The apex court also addressed the role of state governments in subsidizing electricity tariffs. It held that any subsidy must be provided transparently, in advance, and through budgetary allocations under Section 65 of the Electricity Act. Regulatory commissions cannot reduce tariffs artificially in anticipation of state subsidies unless those amounts are actually received.

The court had recently ruled that the regulatory commissions must be guided by the public interest when approving tariffs for power purchases.

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