BSES Rajdhani Power Ltd. & Anr. vs Union of India and Ors.

1.4 Regulatory Commissions shall in general follow the principles governing creation, continuation and liquidation of the regulatory asset, as laid down in paragraph 70 of the present judgment, and also abide by the directions of the APTEL summarised in paragraph

69.8. [Para 71 (vii)]

1.5 APTEL shall invoke its powers u/s.121 and issue such orders, instructions or directions as it may deem fit to the Regulatory Commissions for performance of their duties with respect to regulatory asset as enunciated in this judgment and as per the orders of the APTEL in O.P. No. 1/2011 dtd. 11.11.2011 and O.P. Nos. 1 and 2/2012 dtd. 14.11.2013. [Para 71 (viii)]

1.6 APTEL shall register a suo moto petition u/s.121 of the Act to monitor implementation of directions (v) and (vi) till the conclusion of the period mentioned therein. [Para 71 (ix)] Electricity Law – Electricity Act, 2003 – Concept of a regulatory asset, explained – Principles governing creation, continuation and liquidation of the regulatory asset – In the context of creation, management and liquidation of a regulatory asset, the Regulatory Commissions are bound by the mandate of Electricity Act, National Electricity Policy, National Tariff Policy, Electricity Rules, the Tariff Determination Regulations applicable at the relevant period, and the precedents of the APTEL:

Held: A “regulatory asset” in the context of tariff determination for electricity utilities is an intangible asset that is created by the Regulatory Commissions in recognition of an uncovered revenue gap or revenue shortfall when a distribution licensee could not fully recover the costs reasonably incurred by it through revenue from tariff – This portion of the revenue requirement is not included while determining the tariff for the particular year – Rather, the distribution company is entitled to receive or recover such revenue in the future, over a period of time. [Para 5]

1.2 It is generally created when the projected revenue based on the determined tariff is significantly lower than the revenue required by the distribution company to recover reasonably-incurred costs as well as for return on investment – Another situation requiring the creation of a regulatory asset is at the time of truing up, if the actual revenue realisation from tariffs is much lesser than the Annual Revenue Requirement (ARR). [Para 6]

1.3 This revenue gap can be recovered through government subsidies or by increasing the tariff – However, the latter may lead to a tariff shock to consumers in a given year – Hence, to protect consumer interests, the Regulatory Commission may choose to direct recovery of only some portion of the gap while creating a regulatory asset for the remaining portion, which can be recovered in the subsequent years. [Para 7]

1.4 The creation and continuation of a regulatory asset is neither a statutory concept nor a power granted under the Electricity Act – Rather, it is a measure adopted by the Regulatory Commissions, which are statutory bodies, in exercise of their powers and functions under the Act. [Para 8]

1.5 In the context of creation, management and liquidation of a regulatory asset, the Regulatory Commissions are bound by the mandate of the Electricity Act, the National Electricity Policy, the National Tariff Policy, the Electricity Rules, the Tariff Determination Regulations applicable at the relevant period, and the precedents of the APTEL – Law governing creation, continuation and liquidation of regulatory asset, summarized. [Paras 67-67.4] Electricity Law – Electricity Act, 2003 – Constitution of India – Art.39 – Position of regulatory asset in the regulatory regime for determination of tariff – Duties and accountability of the regulators- the Regulatory Commissions – Powers of the Appellate Tribunal for Electricity to avert a regulatory failure: Held: 1.1 Electricity is a public good – Its generation, transmission, and distribution are statutorily regulated to ensure access to supply, on a non-rival and non-exclusive basis – Being a material resource within Art.39 of the Constitution of India, Part-IV of the Constitution must inform the generation, transmission, and distribution of electricity. [Paras 70 I-II]

1.2 The statutory regulators, i.e. the Central and State Regulatory Commissions alongwith Union and State Governments and other stakeholders are equally bound by the mandate under Part-IV of the Constitution for its equitable distribution – This duty is predicated on the independent, efficient, objective functioning of the electricity commissions – They must guard themselves against ‘regulatory failure’ and in particular ‘regulatory capture’– The interpretation of the powers and function of the Regulatory Commissions have to be such that there is no regulatory vacuum, in that there is no unallocated residue of power of regulation. [Para 70 III]

1.3 Tariff determination is a regulatory function and it is the exclusive province of the Regulatory Commissions – Tariff determination involves multiple variables requiring the regulators to act with expertise and also with certain amount of flexibility – Creation of regulatory asset is a ‘measure’ that the Commission adopts for good governance of tariff – It is also a recognition of revenue recoverable by distribution companies, and as such, it is an enforceable right, though only through tariff determination for later years – This ‘measure’ gives rise to correlative obligations of the Regulatory Commissions to manage it efficiently and allow easy liquidation. [Para 70 IV]

1.4 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 – Laws encompassing the creation, continuation, and liquidation of a ‘regulatory asset’ are located in the Act, National Tariff Plan and Policy, Rules, and Regulations made under the Act, as interpreted by the APTEL – The combined effect of this legal regime is the statutory obligation on the regulator(s). [Paras 70 V, VI]

1.5 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 – Apart from examining the legality and propriety of the orders of the Commissions in appeal, the APTEL has extraordinary powers u/s.121 to issue orders, instructions or directions for effective enforcement of the regulatory regime – This is one of the most important powers allocated to APTEL by the Parliament. [Paras 70 VII, VIII]

1.6 The limits of creation, continuation and liquidation of the regulatory asset have been affirmed, the obligations of the Regulatory Commissions have been recognised and it is directed that they will be accountable and subject to such orders, instructions or directions as the APTEL may issue in this regard u/s.121 – The regulatory regime under the Act is a complete code enunciating rights, prescribing obligations, and laying down the mechanism for course correction. [Paras 70 IX, X]

Electricity Law – Electricity Act, 2003 – ss.62, 61, 79, 86, 6; Preamble of the Electricity Act – Tariff determination is governed by the Act, which entrusts this function to independent Regulatory Commissions – Multiple stakeholders, the Central Government, the State Governments, Regulatory Commissions, the Appellate Tribunal, statutory policy makers, and the utilities collaborate to ensure that the purpose of the Act is subserved and, in this endeavour, the Regulatory Commissions share the social justice obligations of the State – Tariff fixation takes into account multiple variables and requires flexibility – Regulatory asset is a measure adopted during tariff fixation that recognises right of recovery. [Paras 63.1-65.1]

Electricity Law – Electricity Act, 2003 – ss.121, 111, 125 – Accountability of the Regulatory Commissions:

Held: A Regulatory Commission must perform its functions as per the provisions of the Electricity Act, the National Electricity Policy, the National Tariff Policy, the relevant rules and regulations made under the Act, and the APTEL’s directions. [Para 68] Electricity Law – Electricity Act, 2003 – Factors leading to an unmanageable regulatory asset, and consequent ‘regulatory failure’, enumerated. [Paras 66-66.1]

Electricity Act, 2003 – ss.110, 11, 121 – Powers of APTEL – Significance of s.121 in the context of the facts of the present writ petitions and civil appeals, explained – Performance of DERC, a classic case of ‘regulatory failure’:

Held: Regulatory Commissions must call for ARR, ensure that tariffs are determined, and that truing up is conducted in a timely manner, by exercising suo motu powers if necessary – 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 u/s.121 to ensure that the legal principles on regulatory asset laid down by us in paragraph 67.3 hereinabove 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 [Paras 69-69.9] Electricity Law – Electricity Act, 2003 – Salient features – Discussed. [Para 32]

Words and Phrases – Electricity Law – Revenue Assets – Meaning of – Discussed:

Held: ‘Revenue assets’ are costs incurred by power distribution companies that are recognised as recoverable from consumers in future tariffs but are not immediately recovered in the current bills. [Para 65]