APTEL Sets Aside DERC Disallowances on Other Business Expenses and Water Charges, Remands to State Commission

APTEL found DERC violated natural justice by disallowing Rs 17.43 crore in other business expenses using an undisclosed auditor's report, and set aside a Rs 1.60 crore water charges disallowance, remanding both issues for fresh consideration.

The Appellate Tribunal for Electricity (APTEL) on 18 May 2026 disposed of Appeal No. 213 of 2018 filed by Tata Power Delhi Distribution Limited (TPDDL) against the Delhi Electricity Regulatory Commission (DERC), setting aside two disallowances made in the Tariff Order dated 28 March 2018. The Tribunal found that DERC's disallowance of Rs 17.43 crore claimed as direct expenses under “Other Business” was made on the basis of an auditor's report that was never disclosed to TPDDL, violating settled principles of natural justice. Separately, the Tribunal set aside the disallowance of Rs 1.60 crore in water charges paid by TPDDL to the Delhi Jal Board under a one-time amnesty scheme, holding that the regulatory framework did not bar their consideration at the true-up stage. Both issues were remanded to DERC for fresh consideration, with a direction to pass orders preferably within three months.

The Tariff Dispute and Its Long Journey

TPDDL is a joint venture between Tata Power Delhi Company Limited (TPCL), which holds 51% equity and management control, and Delhi Power Company Limited (DPCL), which holds 49%. It is a distribution licensee under the Delhi Electricity Reforms Act, 2000 and Section 14 of the Electricity Act, 2003.

On 4 December 2017, TPDDL filed Petition No. 67 of 2017 before DERC seeking approval of its Annual Revenue Requirement for FY 2018-19, revised ARR for FY 2017-18, and true-up for FY 2016-17. On 28 March 2018, DERC passed the Tariff Order covering TPDDL and the other two Delhi discoms — BSES Rajdhani Power Limited and BSES Yamuna Power Limited — truing up ARR for FY 2016-17 and approving ARR and tariff for FY 2018-19.

TPDDL filed the present appeal on 1 June 2018 raising 26 issues. Over the course of proceedings, the Tribunal disposed of several issues through earlier orders, including by its order dated 11 March 2020 which covered Issues 1, 9, 12, 13, 14, and 16 by reference to the Tribunal's judgment in Appeal No. 246 of 2014. TPDDL subsequently withdrew several other issues. By the time of the order dated 20 January 2026, only three issues remained: Issue Nos. 18, 20, and 24. On 13 February 2026, TPDDL further withdrew Issue No. 24, stating it was included in Appeal No. 249 of 2021. The present judgment therefore addressed only Issue No. 18 (other business expenses) and Issue No. 20 (water charges).

Issue No. 18: Disallowance of Rs 17.43 Crore in Other Business Expenses

TPDDL claimed total direct Other Business expenses of Rs 39.29 crore, to be deducted from income earned from other business activities before computing the net income to be credited to the ARR. DERC, relying on the findings of a C&AG-empanelled auditor appointed to verify TPDDL's books for FY 2016-17, disallowed Rs 17.43 crore from those direct expenses on the ground that they were already part of the normative Operation and Maintenance (O&M) expenses allowed to TPDDL. This had the effect of increasing the net other business income credited to the ARR, reducing the revenue gap recoverable from consumers.

TPDDL's case was that the MYT Regulations 2011 confine O&M expenses in the ARR strictly to the distribution business, and that expenses incurred to earn other business income are separately recoverable under Section 51 of the Electricity Act read with the DERC (Treatment of Income from Other Business of Transmission and Distribution Licensee) Regulations, 2005. TPDDL also pointed to a DERC communication dated 25 May 2007 expressly providing that costs incurred towards other business are to be allowed separately. It further argued that the auditor's report was never furnished to it, making the disallowance a violation of natural justice.

DERC defended the disallowance on the ground that only expenses incrementally and properly attributable to earning other business income, and not already recovered through normative O&M, can be deducted. It characterised the auditor's report as an internal document used for prudence verification, not required to be shared with the licensee.

APTEL's Reasoning on Natural Justice and Prudence Check

The Tribunal accepted that the statutory scheme requires DERC to conduct a truing-up exercise on the basis of actual audited data subjected to a prudence check. It described the prudence check as a substantive regulatory function, not a mere arithmetical exercise, designed to ensure that only legitimate, reasonable, and efficiently incurred costs are reflected in tariff.

However, the Tribunal found that the Impugned Order failed to disclose the precise basis on which DERC concluded that the disallowed Rs 17.43 crore was already subsumed within normative O&M charges. The Tribunal observed that DERC appeared to have adopted the auditor's observation without any independent analysis or prudence check of its own, and that no opportunity was given to TPDDL to explain whether the disallowed expenses were distinct from normative O&M.

The Tribunal applied the principle laid down by the Supreme Court in Kothari Filaments v. Commr. of Customs (2009) 2 SCC 192 and T. Takano v. SEBI (2022) 8 SCC 162, that a quasi-judicial authority cannot pass an order on the basis of material not disclosed to the affected party. It also relied on its own earlier judgments in Dodson-Lindblom Hydro Power Ltd. v. Maharashtra Electricity Regulatory Commission 2009 SCC OnLine APTEL 134 and Polyplex Corporation Limited v. Uttarakhand Electricity Regulatory Commission 2011 SCC OnLine APTEL 15, both of which had remanded similar disallowances made on the basis of undisclosed expert reports.

DERC had relied on Kerala State Electricity Board & Anr. v. Principal Sir Syed Institute for Technical Studies & Ors. (2021) 14 SCC 118 to argue that tariff determination is a quasi-legislative exercise not requiring detailed reasons. The Tribunal distinguished that precedent, holding that it concerned the fixation of tariff for a category of consumers, whereas the present dispute concerned the disallowance of specific costs claimed by a licensee in a truing-up exercise. In such a situation, the Tribunal held, the State Commission is obliged to disclose the basis of disallowances or at least afford the licensee an opportunity to contest them.

The Tribunal held that DERC's assertion that the disallowed amount was subsumed within normative O&M remained unsubstantiated even before APTEL, with no analytical framework or evidentiary material cited to demonstrate any overlap. It concluded that “disallowance of costs without disclosure of basis thereof and without affording an opportunity of hearing strikes at the root of procedural fairness.”

Issue No. 20: Disallowance of Rs 1.60 Crore in Water Charges

TPDDL paid Rs 1.60 crore to the Delhi Jal Board (DJB) in FY 2016-17 as a one-time settlement of water charges pertaining to connections pending since the Delhi Vidyut Board (DVB) period, i.e., prior to 1 July 2002. The payment was made under an Amnesty Scheme introduced by DJB on 5 September 2016, which waived 100% late payment surcharge on accumulated arrears for commercial connections. TPDDL argued that by availing the scheme, it avoided substantial LPSC liability that would otherwise have accrued.

TPDDL's position was that these charges did not form part of the Base Year A&G expenses on which normative O&M was computed for the second control period (FY 2012-13 to FY 2015-16), and that FY 2016-17 was an extended period for which no separate A&G computation was made. It also relied on Rule 8(3) of the Delhi Electricity Reform (Transfer Scheme) Rules, 2001 (as amended on 26 June 2002), which provides that liabilities arising from events prior to the date of transfer shall be borne by the relevant distribution company subject to a cap of Rs 1 crore per annum, with any excess to the account of the Holding Company if the Commission does not allow it in the ARR.

DERC's position was that water charges fall within the O&M basket, which is a controllable parameter under MYT Regulations 2011. Under those Regulations, O&M is determined on a normative basis, with any surplus or deficit to the account of the licensee and not subject to true-up. DERC relied on the Delhi High Court's judgment in Tata Power Delhi Distribution Ltd. v. Delhi Electricity Regulatory Commission 2016 SCC OnLine Del 4165 and the Supreme Court's judgment in BSES Rajdhani Power Ltd. v. Delhi Electricity Regulatory Commission 2022 SCC OnLine SC 1450, which held that the methodology adopted in the initial tariff determination cannot be altered at the true-up stage.

APTEL's Reasoning on Water Charges

The Tribunal agreed with DERC that it would not be appropriate to alter the normative values of O&M charges determined for FY 2016-17. However, it found that the water charges in question had admittedly not been paid during the relevant base year period, and therefore could not have been included in audited accounts or factored into the base year values. The Tribunal acknowledged that the licensee operating prior to the transfer may have incidentally benefited from normative O&M charges without having discharged the water charges, but held that such a consequence is inherent in the regulatory framework.

The Tribunal distinguished the Supreme Court's judgment in BSES Rajdhani, holding that it dealt with alteration of tariff methodology at the truing-up stage, whereas the present issue involved a one-time pass-through of charges pertaining to a period prior to TPDDL's takeover of distribution functions, paid in FY 2016-17. It held that Rule 8(3) of the Transfer Scheme Rules was relevant: that provision fixes liability for pre-transfer claims on the current discom up to Rs 1 crore per annum, with the balance to the Holding Company if not allowed by the Commission. The Tribunal found no bar to allowing such charges in the Revenue Requirement.

The Tribunal set aside the disallowance and remanded the issue to DERC to undertake a prudence check of the water charges paid under the Amnesty Scheme, with reference to Rule 8(3) of the Transfer Scheme Rules.

Order

APTEL set aside the Impugned Order with respect to Issue No. 18 and Issue No. 20 and remanded both to DERC for fresh consideration.

On Issue No. 18, DERC is directed to provide TPDDL with the details of the auditor's report and findings relating to the disallowance of Rs 17.43 crore as direct expenses under “Other Business,” and to afford TPDDL a reasonable opportunity to explain its case. A reasoned order is to be passed thereafter in accordance with law.

On Issue No. 20, DERC is directed to undertake a prudence check of the Rs 1.60 crore water charges paid under the DJB Amnesty Scheme, with reference to Rule 8(3) of the Electricity Reform (Transfer Scheme) Rules, 2001. TPDDL is to provide further details as required within the time stipulated by DERC.

DERC is also directed to examine TPDDL's claim for carrying cost on the amounts worked out under both remanded issues, in accordance with the extant Regulations. DERC is directed to pass appropriate orders preferably within three months from the date of receipt of the order. The appeal and associated IAs, if any, are disposed of.

The judgment was pronounced in open court on 18 May 2026 by Hon'ble Ms. Seema Gupta, Officiating Chairperson, and Hon'ble Mr. Virender Bhat, Judicial Member.