Key Background and Regulatory Framework

The Supreme Court of India recently delivered a significant judgment clarifying the principles governing depreciation recovery for generating assets under the Electricity Act, 2003. This case arose from an appeal filed by the Delhi Electricity Regulatory Commission (DERC) against an order of the Appellate Tribunal for Electricity (APTEL).

The dispute originated with a temporary 108-megawatt Gas-based Power Plant at Rithala, Delhi, set up by Tata Power Delhi Distribution Limited (TPDDL). Conceived as a short-term measure for the Commonwealth Games 2010, the plant’s operational tenure was expressly limited to 5 to 6 years, following which the land would revert to the Delhi Development Authority (DDA). The DERC had initially approved the Power Purchase Agreement (PPA) for a six-year operational period, concluding in March 2018, and determined the capital cost at ₹197.70 crores. While acknowledging a technical useful life of fifteen years, DERC restricted depreciation allowance only up to March 2018, amounting to ₹83.34 crores, disallowing the recovery of the remaining capital cost of approximately ₹94.59 crores for the period after the plant ceased supply.

The relevant statutory provisions included Section 61(d) of the Electricity Act, 2003, which guides tariff determination by mandating the safeguarding of consumer interests, and Regulations 4.1 and 6.32 of the DERC (Terms and Conditions for Determination of Generation Tariff) Regulations, 2011. Regulation 6.32 states that depreciation shall be calculated annually over the useful life of the asset, while Regulation 4.1 links tariff determination to the PPA's approved period.

Core Legal Issues and Submissions

TPDDL challenged the DERC’s decision before APTEL, which set aside the DERC order. APTEL held that since DERC itself had fixed the useful life at fifteen years, depreciation could not be restricted to six years, citing Regulation 6.32. Aggrieved, the Delhi Electricity Regulatory Commission approached the Supreme Court.

The core substantial questions of law before the Supreme Court were:

  1. Whether depreciation must be allowed over the entire technical useful life of an asset irrespective of its actual utilisation for electricity supply.
  2. Whether Regulation 6.32 confers an absolute right to recover the entire capital cost over the useful life, even when the asset ceases to supply electricity.
  3. Whether APTEL erred in disregarding the regulatory framework and approval conditions which limited the operational and recovery period of the Plant to six years.

Senior counsel for the Commission argued that consumers cannot be burdened with costs for electricity not supplied beyond March 2018, aligning with Section 61(d) of the 2003 Act. They contended that APTEL misapplied Regulation 6.32. Conversely, senior counsel for TPDDL asserted their entitlement to depreciation as per Regulation 6.32, arguing it does not restrict recovery based on operational life or PPA duration.

Supreme Court's Analysis and Ratio Decidendi

The Supreme Court, comprising Justices Pamidighantam Sri Narasimha and Alok Aradhe, emphasised that tariff determination is not merely a mathematical exercise but a “regulatory balancing act” where consumer interest, as enshrined in Section 61(d) of the 2003 Act, is paramount. The Court unequivocally stated: “The consumers cannot be required to pay for a service which they no longer received.”

Addressing the first question, the Court noted that electricity was not supplied beyond March 2018. Since TPDDL was free to operate as a merchant generator or sell the plant, burdening consumers beyond the operational period approved in the PPA was impermissible. This question was answered in the negative.

For the second question, the Court clarified that Regulation 6.32, concerning depreciation over useful life, cannot be read in isolation. It must be harmoniously construed with Regulation 4.1, which confines tariff entitlement to the PPA's approved period, and Section 61(d) of the 2003 Act. Thus, Regulation 6.32 does not grant an absolute right to recover depreciation from consumers for periods when the asset is not supplying electricity. This question was also answered in the negative.

Finally, on the third question, the Court found that APTEL erred by conflating the technical useful life with the regulatory recovery period. The DERC’s order of August 31, 2017, limiting the operational and recovery framework to six years, had attained finality as it was not challenged by TPDDL. True-up proceedings are meant to implement, not reconfigure, the tariff framework. This question was answered in the affirmative.

Consequently, the Supreme Court allowed the appeal, setting aside APTEL’s judgment dated February 10, 2025, and restoring the DERC’s order dated November 11, 2019. The ruling firmly establishes that depreciation recovery in the electricity sector must align with the actual service period and regulatory approvals, with consumer welfare as a guiding principle.