The Supreme Court ruled that Regulatory Assets, while a valid regulatory tool, must be created only in exceptional circumstances and liquidated in a time-bound manner. It upheld the legal framework under the Electricity Act, 2003, and directed strict adherence to the newly inserted Rule 23 of the Electricity Rules, which mandates a maximum 3% gap in revenue and a 7-year liquidation period for existing assets. The judgment emphasizes the duty of Regulatory Commissions to ensure cost-reflective tariffs and affirms APTEL’s power under Section 121 to issue directions against regulatory failure.
Facts Of The Case:
The case originated from petitions and appeals filed by three private power distribution companies (Discoms) in Delhi—BSES Rajdhani, BSES Yamuna, and Tata Power Delhi—against the Delhi Electricity Regulatory Commission (DERC) and the Union of India. The core issue was the DERC’s consistent creation and perpetual continuation of “regulatory assets” over many years. A regulatory asset is an accounting mechanism that allows a Discom to defer the recovery of its prudently incurred costs through tariffs to avoid a sudden price shock for consumers in a single year.The Discoms argued that the DERC’s tariff orders were not cost-reflective, failing to fully account for soaring power purchase costs, which constitute nearly 80% of their expenses. This led to a massive, accumulating revenue gap that was recognized as a regulatory asset but without a clear, binding roadmap for its recovery as mandated by the National Tariff Policy. This accumulated regulatory asset, along with carrying costs, ballooned to over ₹27,200 crores by 2024, threatening the financial viability of the Discoms and undermining the very objective of private sector participation in the electricity sector envisioned by the Electricity Act, 2003. The Discoms sought directives for the DERC to liquidate this debt in a time-bound manner.
Procedural History:
The procedural history of this case involves multiple layers of litigation across different judicial forums. The dispute originated from tariff orders passed by the Delhi Electricity Regulatory Commission (DERC), which were appealed before the Appellate Tribunal for Electricity (APTEL) by the distribution companies (Discoms). Dissatisfied with the APTEL’s order dated March 11, 2014, which declined to mandate a strict 3-year liquidation period for the regulatory asset, the Discoms filed civil appeals in the Supreme Court. Concurrently, they also initiated writ petitions under Article 32 of the Constitution directly in the Supreme Court, challenging the DERC’s overall tariff determination process and the mounting regulatory asset. The Supreme Court clubbed these civil appeals and writ petitions. During pendency, it impleaded all State Electricity Regulatory Commissions and State Governments to ascertain the nationwide prevalence of regulatory assets, making the proceeding a unique pan-India consultative exercise. The case culminated in the final judgment by the Supreme Court in 2025.
READ ALSO:Supreme Court Orders End to ‘Forced Labour’ in Matheran, Directs Rehabilitation Scheme
Court Observation:
In its observations, the Court underscored that electricity, as a public good, must be regulated to balance consumer interests with the financial viability of distribution companies. It noted that while the creation of a regulatory asset is a permissible regulatory tool to avoid tariff shock, its perpetual continuation constitutes a serious “regulatory failure.” The Court heavily criticized the Delhi Electricity Regulatory Commission (DERC) for allowing the regulatory asset to balloon to an unmanageable ₹27,200 crores without a effective liquidation plan, thereby jeopardizing the entire financial ecosystem of the power sector. It emphasized that tariff determination must be cost-reflective as a primary principle, and any deviation through a regulatory asset must be an exception, strictly conforming to the guidelines in the National Tariff Policy and the newly introduced Rule 23 of the Electricity Rules, 2024. The judiciary also affirmed the wide-ranging powers of the Appellate Tribunal for Electricity (APTEL) under Section 121 of the Electricity Act to issue directions to commissions to prevent such failures and ensure accountability.
Final Decision & Judgement:
The Supreme Court disposed of the writ petitions and civil appeals by issuing a series of binding directions to rectify the regulatory failure. It mandated that tariffs must be cost-reflective and that any creation of a new regulatory asset must be an exception, strictly limited to a maximum of 3% of the Annual Revenue Requirement (ARR) and liquidated within three years. Critically, for the existing massive regulatory asset of over ₹27,200 crores, the Court ordered its liquidation within a strict, non-negotiable timeframe of four years starting from April 1, 2024. It directed all Regulatory Commissions to formulate a concrete trajectory and roadmap for this recovery. Furthermore, the Court empowered the Appellate Tribunal for Electricity (APTEL) by directing it to invoke its extraordinary authority under Section 121 of the Electricity Act to monitor compliance, issue necessary orders to all State Commissions, and ensure the effective and time-bound implementation of this judgment across the country.
Case Details:
Case Title: BSES Rajdhani Power Ltd. & Anr. vs. Union of India and Ors. Citation: 2025 INSC 937 Case Number: Writ Petition (Civil) No. 104 of 2014 & Civil Appeal No. 4010 of 2014 Date of Judgement: August 06, 2025 Judges/Justice Name: Justice Pamidighantam Sri Narasimha & Justice Sandeep Mehta
Download The Judgement Here