By Shailendra Singh Advocate Founder & Managing Partner, August Attorneys LLP, Advocates, Solicitors & Legal Consultants
Introduction: Unpacking the Cross-Subsidy Conundrum
In a landmark judgment that recalibrates the regulatory landscape governing Cross-Subsidy Surcharges (CSS) under the Electricity Act, 2003, the Supreme Court has decisively overturned the Appellate Tribunal for Electricity’s (APTEL) decision in Jaipur Vidyut Vitaran Nigam Limited v. Rajasthan Textile Mills Association (Civil Appeal Nos. 8862-8868 of 2022). This significant pronouncement, delivered on April 29, 2025, fundamentally reshapes the methodology and timing for determination of Cross-Subsidy Surcharges by State Electricity Regulatory Commissions.
The Factual Matrix
The dispute emerged from the determination of CSS by the Rajasthan Electricity Regulatory Commission (State Commission) through its order dated December 1, 2016. These are statutory appeals under Section 125 of the Electricity Act, 2003 against a common judgment delivered by the APTEL in a group of appeals. The central issue involved the determination of Cross-Subsidy Surcharges by the State Commission under Section 42(2) of the 2003 Act.
The appellants, distribution licensees in Rajasthan, were respondents before APTEL. The respondents (who were appellants before APTEL) comprised industrial units in Rajasthan that were drawing electricity through open access. These units were aggrieved by the determination of CSS applicable from December 1, 2016, as ordered by the State Commission.
APTEL, in its judgment, had set aside the State Commission’s order. However, APTEL clarified that the State Commission would be within its jurisdiction to revisit the subject of CSS vis-à-vis distribution licensees when undertaking future tariff determinations.
The Supreme Court’s Analysis: Deconstructing the Regulatory Framework
Justice Abhay S. Oka’s erudite judgment establishes several pivotal principles that will undoubtedly influence regulatory practice and jurisprudence:
- The Autonomy of CSS Determination: The Court emphatically rejected APTEL’s view, holding that “there is no basis for the opinion expressed by the APTEL that determination of the CSS should coincide with the tariff determination.” This pronouncement liberates regulatory commissions from an artificial constraint and recognizes their discretion in timing such determinations.
- Statutory Architecture: The Court meticulously analyzed Section 42 of the Electricity Act, 2003, which delineates the duties of distribution licensees and open access. The second proviso to Sub-Section (2) specifies that “such surcharge shall be utilised to meet the requirements of current level of cross-subsidy within the area of supply of the distribution licensee.”
- Compensatory Nature of CSS: The Court, drawing from its earlier decision in Sesa Sterlite Ltd. v. Orissa Electricity Regulatory Commission, elucidated that CSS serves dual purposes: compensating licensees for their inability to cross-subsidize vulnerable sections of society and recovering fixed costs incurred as part of the obligation to supply.
- Regulatory Independence: The Court emphasized that “the determination of CSS is not necessarily a part of the tariff determination process. The CSS can be determined along with the tariff. But, it can be determined separately in accordance with Regulation 90 based on the prevailing rate of tariff.” This finding reinforces the functional independence of these regulatory processes.
- The Essence of CSS Calculation: Perhaps most critically, the Court articulated that “the CSS is in the nature of compensation qua the tariff, which the distribution licensees would have received from the open access consumers but for their availing power from other sources. Hence, the CSS must be based on the applicable retail tariff recoverable during the relevant period.”
Implications for the Electricity Regulatory Framework
This judgment carries profound implications that will resonate throughout the electricity regulatory ecosystem:
First, it confers upon regulatory commissions substantial flexibility in timing the determination of CSS, untethering it from the tariff determination cycle.
Second, it reinforces that CSS must be anchored in the prevailing tariff rates for the relevant consumer categories, ensuring adequate compensation for distribution licensees.
Third, it validates the approach of determining CSS based on the most recent available financial data and tariff structures, even when these relate to an earlier financial year.
Fourth, it crystallizes CSS as a compensatory mechanism designed to offset the financial impact on distribution licensees when consumers opt for open access.
The Philosophical Underpinnings of Cross-Subsidization
The Court’s judgment reflects a sophisticated understanding of cross-subsidization in the electricity sector. It recognizes that while open access introduces competition and consumer choice, these benefits must not come at the expense of social objectives embedded in the tariff structure. The CSS thus emerges as a balancing mechanism that reconciles market liberalization with social welfare imperatives.
Conclusion: A Jurisprudential Milestone
The Supreme Court’s judgment in Jaipur Vidyut Vitaran Nigam Limited constitutes a jurisprudential milestone in electricity law. It artfully balances the imperative of promoting competition through open access with the necessity of ensuring financial viability for distribution utilities.
For regulatory commissions, the message is unequivocal: CSS determinations can proceed independently of tariff orders, provided they are grounded in prevailing tariff structures. For open access consumers, the judgment underscores that the freedom to choose suppliers carries with it the responsibility to contribute to cross-subsidization.
For distribution licensees, the judgment offers welcome clarification that they can recover CSS based on current tariff levels, without necessarily awaiting fresh tariff determinations.
This landmark pronouncement thus reinforces the compensatory essence of CSS while providing essential regulatory flexibility. It ensures that the progressive reduction in cross-subsidies envisaged by the Electricity Act occurs in a balanced manner that does not unduly burden any stakeholder in the electricity ecosystem.
Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. For specific legal counsel, please contact the Attorney.