Electricity, a ‘public good’, must not be vulnerable to ‘undue political posturing’, says Supreme Court

The Supreme Court has expressed a lack of confidence on whether Electricity Regulatory Commissions (ERCs) are living up to the independence and autonomy afforded to them under the law. ERCs have the exclusive authority of tariff determination, play a pivotal role in the promotion of competition, and in ensuring reliable power supply across the country.

The court said electricity is a “public good” and a “material resource”, and is especially vulnerable to “undue political posturing”. The ERCs were meant to serve as a bastion under the Electricity Act of 2003 to ensure that electricity was sold and distributed for the common good, unruffled by the politics of the day, and uninfluenced by the market forces of demand and supply.

In an 82-page judgment, a Bench of Justices P.S. Narasimha and Sandeep Mehta has, however, questioned the very “functional autonomy” of the ERCs, while drawing attention to the “manage and manoeuvre” tactics employed to arrive at tariffs by creating regulatory assets “over and above all permissible limits” prescribed by the electricity laws.

A regulatory asset is adopted as a measure by the Regulatory Commissions when the gap between the revenue required by a power distribution company to meet its costs and expenditure, and the actual revenue realised through immediate tariff, is so high that it would not only prejudice the consumer but lead to what is called a “tariff shock”.

The court noted that, in recent times, ERCs have allowed power distribution companies’ regulatory assets to balloon for decades without liquidating them, much to the detriment of the public, who have to bear the ultimate burden of paying more for electricity.

This is despite the emphasis in the Electricity Act that the tariff fixed by ERCs must progressively reflect the cost of supply of electricity, and reduce cross subsidies.

“This is where the problem lies. Though the Electricity Act envisages functional autonomy for Regulatory Commissions, and the statutory scheme is complete in all respects, the decisions taken by the Commissions, many a time, have not inspired confidence of independence and autonomy. The reasons are not difficult to conceive as there is an issue about the appointment process. The assertion of independence, however, comes through individual volition and that is where the mandate of transparency leads to accountability,” Justice Narasimha, who authored the judgment, pointed out.

The Act requires ERCs to work in cohesion with the State to ensure the supply of affordable power to all sections of society, across regions and terrains.

“But the adverse effect of an overbearing regulatory asset extended beyond proportion is an anathema to good governance of the Electricity Act… The regulatory asset cannot be permitted to balloon into such proportions or continue for such periods, year after year, that the governance of the sector is set in peril, affecting the rights of the utilities and at the same time jeopardising the consumer interest, who eventually end up bearing the burden,” the court noted.

Issuing a series of directions, the apex court ordered that regulatory assets must not exceed the reasonable percentage as envisaged in the Electricity Rules. Existing regulatory assets must be liquidated in a maximum of seven years from April 1, 2024, and those created in future must be liquidated in three years from April 1, 2024.

The court directed ERCs to provide the roadmap for liquidation of regulatory assets in future, and also undertake a strict and intensive audit of the circumstances in which distribution companies have continued without recovery of their regulatory assets.