DISCOMs AND COST-REFLECTIVE TARIFFS

In India, electricity is treated as a public good. Accordingly, tariffs are determined with the objective of ensuring universal access rather than being governed purely by market forces of demand and supply. While determining tariffs, the Central and State Electricity Commissions (“ERCs”) often rely on mechanisms such as the creation of regulatory assets and the extension of financial assistance to distribution licensees (“DISCOMs”) to address revenue shortfalls. However, this approach frequently results in DISCOMs entering debt cycles, which affects service reliability, timely maintenance, and infrastructure upgrades.

On October 9, 2025, the Ministry of Power published the Draft Electricity (Amendment) Bill, 2025 (“Bill”), inviting comments from stakeholders. The Bill places a specific emphasis on tariff determination in the context of the financial viability of DISCOMs, following the judgment of the Supreme Court in BSES Rajdhani Power Limited v Union of India (2025 INSC 937) (“BSES Case”). The BSES Case examined how tariffs in several states (particularly in the National Capital Territory of Delhi) are not cost-reflective and how ERCs have created regulatory assets worth thousands of crores instead of keeping it as a last resort and exploring other realistic cost-reflective approaches. It is noteworthy, however, that some states have refrained from creating regulatory assets, in line with the principles set out in paragraph 8.2.2 of the National Electricity Policy, 2016.

The principle of maintaining cost-reflective tariffs has existed since the Electricity Bill, 2003, and was subsequently incorporated into Section 61 of the Electricity Act, 2003 (“Act”) through the Electricity (Amendment) Act, 2007. In this context, it is relevant to note the recently notified Rule 23 of the Electricity (Amendment) Rules, 2024, which establishes as a guiding principle that tariffs must be cost-reflective, ensuring that there is no gap between the annual revenue requirement and the estimated revenue from the approved tariff.

By way of illustration, the Maharashtra Electricity Regulatory Commission (“MERC”), in its recent order approving tariffs for the financial years 2025–26 to 2029–30, increased (a) demand charges and (b) energy charges for high-end residential, commercial, and industrial consumers to reflect operational costs incurred by the DISCOM. The order, however, faced significant opposition from renewable energy generators, hoteliers, and other affected stakeholders, and is currently under challenge before the Bombay High Court.

The Bill proposes to amend Section 61 of the Act, which sets out the principles for tariff determination. At present, sub-section (g) provides that tariffs should “progressively reflect the cost of supply,” implying a gradual transition toward cost-reflective structures. Based on the findings in the BSES Case—including affidavits filed by state governments and ERCs evidencing their failure to achieve cost-reflective tariffs—the amendment seeks to remove the term “progressively.” The proposed change mandates that tariffs must be cost-reflective as a rule, effectively removing the discretion previously available to ERCs.

This amendment does not introduce a new principle but rather strengthens the implementation of existing tariff determination norms. Taken together with the Bill’s broader objectives to (a) progressively reduce cross-subsidies, (b) eliminate cross-subsidies entirely for manufacturing enterprises, railways, and metro railways, and (c) continue protecting vulnerable groups such as farmers through transparent and budgeted subsidies under Section 65 of the Act, the most significant impact is expected to be on commercial and industrial consumers.

As demonstrated by the MERC order and the ongoing litigation arising from it, the implementation of cost-reflective tariffs will require careful calibration to ensure that commercial and industrial consumers are not disproportionately burdened.