# DELHI ELECTRICITY REGULATORY COMMISSION v. BSES Y AMUNA POWER LIMITED AND OTHERS - **Citation:** [2007] 2 S.C.R. 747 - **Court:** Supreme Court of India - **Decided:** 2007-02-15 - **Case number:** Civil Appeal No. 2733 of2006 - **Bench:** Dr.Arijitpasayat, S.H. Kapadia - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/delhi-electricity-regulatory-commission-v-bses-y-amuna-power-limited-and-others-22607 - **Pages:** 34 ## Headnote B Electricity (Supply) Act, 1948-Depreciation of assets in Electricity Industry-Ministry of Power prescribing straight-line method as distinguished from reducing balance, and rates not to be derived from fair life of asset(s)- Private companies entering into electricity distribution business based on C assurances of government in its policy directions and other documentsThereafter, Commission set up under Delhi Electricity Reforms Act, 2000 reducing rate of depreciation having regard to fair life of assets on the ground that private companies who got into business had not undertaken any loans and were not obliged to redeem debt-Correctness of-Held- D Object of.Ministry of Power in providing for higher rate of depreciation, without nexus to fair life of asset(s), was to reduce Asset Replacement Period (ARP) and fund rapid increase in replacement cost-It was also keeping in view that prior to their privatisation electricity utilities under government were making losses, expenses on replacement was heavy and assets needed replacement in shorter ARP-After privatisation, aforesaid reduction in rate E was not correct as principles of depreciation method prescribed by Ministry of Power were reflected in five years tariff, Policy Directions and other documents of government based on which private companies entered into business-In these circumstances, legitimate expectation of private companies to get lawfal and reasonable recovery of expenditure was built into their F investments and same was infringed as reduction of rate extended ARP by 10.55 years and also made overall actual return illusory-Though the Commission was entitled to depart from principles set out by Ministry of Power, it could not go outside framework of Policy Directions and other documents issued by government under Section I 2 of Act of 2000-Jt was not a case of Advance Against Depreciation wherein loan repayment was relevant, G but case of reduction authorized expenditure viz. depreciation. wherein repayment of loan was irrelevant-However, judgment confined to facts of case and to transition period of five years. 747 H ) 748 SUPREME COURT REPORTS [2007] 2 S.C.R. A Depreciation-Nature of, objects of providing, application of different ,__ methods, and difference between physical life and useful life of assetDiscussed. Delhi Electricity Reforms Act, 2000 was enacted to restructure the electricity industry in Delhi, and appellant was a body established under it. B Thereafter, the Government of National Capital Territory of Delhi (GoNCTD) decided to unbundle DVB, its undertaking dealing with electricity, privatize it and vest its assets in successor companies. In order that the investors could plan their investments, it issued to the prospective bidders a Request for Qualification (RFQ), and Request for Proposal (RFP) accompanied by Policy C Directions wherein reference was made to the transition period of five years and the Tariff Principles framed by appellant. A Transfer Scheme was also notified setting out rules for transfer and vesting of assets, liabilities and obligations of DVB. Policy Directions issued by GoNCTD under Section 12 of the Act of2000 assured the bidders that a Bulk Supply Tariff(BST) Order shall be issued by appellant to facilitate investors to have a full idea of various D elements in tariff fixation, before bidding. It was also clarified that appellant shall be bound by Policy Directions on and from 22.t 1.01 till end of financial year 2006-07. Accordingly appellant issued the BST Order approving Bulk Supply Tariff to be charged by Delhi Power Supply Company Ltd. to the distribution companies on the basis of their paying capacity. Based on this E order, the bidders were expected to bid on the basis of annual reduction of AT&C losses over a 5 year period. Accordingly, respondents, distribution companies (DISCOMs), submitted their bids which were accepted by GoNCTD and majority share-holding and management control of the distribution companies o ## Text _Characters 0–39,921 of 94,965. This is a partial read: ask again with offset=39921 for what follows._ DELHI ELECTRICITY REGULATORY COMMISSION A v. BSES Y AMUNA POWER LIMITED AND OTHERS FEBRUARY 15, 2007 [DR.ARIJITPASAYAT AND S.H. KAPADIA,JJ.] B Electricity (Supply) Act, 1948-Depreciation of assets in Electricity Industry-Ministry of Power prescribing straight-line method as distinguished from reducing balance, and rates not to be derived from fair life of asset(s)- Private companies entering into electricity distribution business based on C assurances of government in its policy directions and other documentsThereafter, Commission set up under Delhi Electricity Reforms Act, 2000 reducing rate of depreciation having regard to fair life of assets on the ground that private companies who got into business had not undertaken any loans and were not obliged to redeem debt-Correctness of-Held- D Object of.Ministry of Power in providing for higher rate of depreciation, without nexus to fair life of asset(s), was to reduce Asset Replacement Period (ARP) and fund rapid increase in replacement cost-It was also keeping in view that prior to their privatisation electricity utilities under government were making losses, expenses on replacement was heavy and assets needed replacement in shorter ARP-After privatisation, aforesaid reduction in rate E was not correct as principles of depreciation method prescribed by Ministry of Power were reflected in five years tariff, Policy Directions and other documents of government based on which private companies entered into business-In these circumstances, legitimate expectation of private companies to get lawfal and reasonable recovery of expenditure was built into their F investments and same was infringed as reduction of rate extended ARP by 10.55 years and also made overall actual return illusory-Though the Commission was entitled to depart from principles set out by Ministry of Power, it could not go outside framework of Policy Directions and other documents issued by government under Section I 2 of Act of 2000-Jt was not a case of Advance Against Depreciation wherein loan repayment was relevant, G but case of reduction authorized expenditure viz. depreciation. wherein repayment of loan was irrelevant-However, judgment confined to facts of case and to transition period of five years. 747 H ) 748 SUPREME COURT REPORTS [2007] 2 S.C.R. A Depreciation-Nature of, objects of providing, application of different ,__ methods, and difference between physical life and useful life of assetDiscussed. Delhi Electricity Reforms Act, 2000 was enacted to restructure the electricity industry in Delhi, and appellant was a body established under it. B Thereafter, the Government of National Capital Territory of Delhi (GoNCTD) decided to unbundle DVB, its undertaking dealing with electricity, privatize it and vest its assets in successor companies. In order that the investors could plan their investments, it issued to the prospective bidders a Request for Qualification (RFQ), and Request for Proposal (RFP) accompanied by Policy C Directions wherein reference was made to the transition period of five years and the Tariff Principles framed by appellant. A Transfer Scheme was also notified setting out rules for transfer and vesting of assets, liabilities and obligations of DVB. Policy Directions issued by GoNCTD under Section 12 of the Act of2000 assured the bidders that a Bulk Supply Tariff(BST) Order shall be issued by appellant to facilitate investors to have a full idea of various D elements in tariff fixation, before bidding. It was also clarified that appellant shall be bound by Policy Directions on and from 22.t 1.01 till end of financial year 2006-07. Accordingly appellant issued the BST Order approving Bulk Supply Tariff to be charged by Delhi Power Supply Company Ltd. to the distribution companies on the basis of their paying capacity. Based on this E order, the bidders were expected to bid on the basis of annual reduction of AT&C losses over a 5 year period. Accordingly, respondents, distribution companies (DISCOMs), submitted their bids which were accepted by GoNCTD and majority share-holding and management control of the distribution companies owned by government was transferred to them. p Ministry of Power (MOP) had issued a notification dated 31.1.92 stating that licens1!e had to provide for depreciation as per straight-line method in respect of asset(s), indicated in column no.I, at the rates indicated in the columns of Schedule VI to the Electricity (Supply) Act, 1948. A note appended to the said Notification stated that the reference to the straight-line method therein was intended to differentiate the same from the concept of reducing G balance method and not to derive rates from the fair life of the asset(s). In . continuation of the above Notificaticn, the Schedule was amended on 29.3.94, wherein there was no linkage between the fair life of an asset and the rate of depreciation. H Appellant had issued Retail Supply Tariff Order on the Annual Revenue DELHI ELECTRICITY REGULATORY COMMISSION''· BSES YAMUNA POWER LID. 749 Requirement (ARR) for the financial year 2001-02 and the Tariff A Determination Principles for the financial years 2002-2003 till 2005-06. Under the said order, appellant computed the depreciation expenditure for DVB in relation to distribution ofasset(s) at Weighted Average Depreciation Rate (W ADR) 6.83%. On unbundling of DVB, the WADR stood reduced to 6.69% for the financial year 2001-02. Vide Tariff Order dated 26.6.03 appellant reduced the rate of depreciation from 6.69% to 3. 75%. Against the above reduction of depreciation, respondent filed a review petition before appellant. While rejecting it appellant held that (i) as the asset is used over its operational life, depreciation was a percentage charged over B the fair life of the asset(s) (ii) depreciation was the source of debt repayment C for a Utility and since no loan repayment was due during the financial years 2002-03 and 2003-04, it accepted the request of respondent to treat depreciation as a source of funding to partly fund Capital Expenditure (iii) since there were serious deficiencies in the Fixed Asset Register it reduced the rate of depreciation from 6.69% to 3.75%. However, appeal of respondents against this order of appellant to Appellate Tribunal for Electricity was allowed. D Hence the present appeal. >- Appellant contended that (i) in Electricity Accounting, it was entitled to adopt a fair rate of depreciation based on fair life of the assets so that the consumer is not overburdened (ii) depreciation was ordinarily based on fair life of the assets, the rate whereof could vary depending upon the object sought E to be achieved, and is often prescribed on different basis, in the case of energy saving devices, pollution control equipments etc (iii) under Section 28 of Act of 2000, though it had to follow the Principles of Schedule VI to the Act of 1948, it also had the power to deviate therefrom for reasons to be recorded; in exercise of that power, it fixed the rate of depreciation at 3. 75% having p regard to the fair life of the assets and claim of 6.69% was rejected on the ground that it could be considered only if there was a debt redemption involved (iv) reliance on Notifications of 1992 and 1994 was misplaced as they were based on the concept of Advance Against Depreciation (AAD) which was limited to the actual loan liability in a given year, and these Notifications admitted higher depreciation in the regulatory mechanism because at the G relevant time the Utility had undertaken loan repayment liabilities (v) in the RFQ, RFP, the Policy Directions or the BST Order, government did not promise either 6.69% as rate of depreciation or that it will remain constant for all live years (vi) depreciation was a non-cash expense, therefore, it could permit only reasonable depreciation which was 3.75% (vii) BST Order was H 750 SUPREME COURT REPORTS [2007) 2 S.C.R. A valid only for two months of February and March 2002 and it had certain variables including items of expenditure which varied from year to year, one such item was depreciation. Respondent contended that (i) the reason given by appellant to depart from the Sixth Schedule that the fair life of the assets was 25 years and B respondent was not required to redeem any debt was contrary to the representations made to the investors and to the MOP Notification dated 23.1.92 which stated that the rate of depreciation shall not be derived from the fair life of the asset (ii) it was bad under Section 28(3) of Act of 2000 as • it resulted in total dismembering of the total 5 year transition mechanism, C rendered 16% ROE illusory and extended the replacement period for assets from 13.45 years to almost 24 years (iii) appellant was not empowered to flout Policy Directions and BST Order as they were binding on them under Section 12 (iv) the amount of depreciation allowed has been reduced by 60% and if the net return is calculated on the principles applicable to the BST Tariff then the said return would stand reduced to less than 0.5%, which was D unjustifiable (v) depreciation was a non-cash charge and reduced the distributable profit without reducing the cash profit; it in a sense was a source of funds only for future investments and not for the current year (vi)_ there was no linkage between depreciation and loan repayment since depreciation ~- is a charge on the income to be kept aside for asset replacement (vii) their E legitimate expectation were not met as the bids were specifically invited on the clear basis that during the transition period their tariff would be fixed in accordance with the principles set out in the BST Order to be issued by appellant pursuant to the Policy Directions of GoNCTD and they acted and altered their position on that basis. F Dismissing the appeal, the Court HELD 1.1. The MOP Notifications have referred to the life of the asset(s) in the Electricity Industry at 25 years. However, the Note appended to the Notification of 1992 clarifies that the Utility shall not derive the rate of depreciati Notifications as reflected in the BST Order dated 22.2.02 and in the Policy Directions of GoNCTD dated 22.11.01. !Para 4211776-F, G, H; 777-B, C, DI 1.2. Conceptually, it is always possible to derive the rate of depreciation E from the fair life of an asset. However, it will depend on the object for which a fund or a reserve is sought to be created. In the privatization process, there is a transition from "no profit organization" to "profit-based organization". The principles of accounting will differ in the case of non-profit organization vis-'a-vis private profit-based organization. That transition is of 5 years in F the present case. The Historical Cost Method in a growing economy on account of price increases (inflation) may not be appropriate in the case of publicprofit enterprises. It will depend on the type of industry with which one is concerned. Electricity is a Capital Intensive Industry. It needs replacement at a quicker rate in terms of time-period as com11ared to a manufacturing G industry. It is for this reason that the above Note was appended to MOP ~ Notification dated 23.1.92. That Notification prescribed the rates of authorized expenditure which was more than the rate of depreciation derived from the life of an asset. It is for this reason that the Note was appended to the said Notification stating that the life of the asset shall not constitute the basis for fixing the rate of depreciation. In view of the above Note, DERC was not entitled H 752 SUPREME COURT REPORTS [2007] 2 S.C.R. A to derive the rate from the fair life of the asset, particularly, when the consequence was to reduce the ARP substantially. In conclusion, it is reiterated that in the present case because of inflation, the Cost of Replacement has to be applied instead of Historical Cost. jPara 43) 1779-F, G, H; 780-A, BJ 1.3. The basic object of providing depreciation is to allocate the amount B of depreciation of an asset over its usefJI life and not actual life so as to exhibit a true and fair view of the financial statements of an enterprise. Useful life is a period over which a depreciable asset is expected to be used. Useful life of an asset in a capital intensive industry is generally shorter than its physical \- life. Useful life is pre-determined by contractual limits or by amount of C extraction or consumption dependent on the extent of use and physical deterioration on account of wear and tear which depends on operational factors such as the number of shifts, repair and maintenance policy of the Utility and reduced by obsolescence arising from technological changes, improvement in production methods etc. In the present case, DERC has not considered the difference between the physical life of an asset and the useful life of the asset. D !Para 44) 1780-C, D, Fl E Ahmedabad Miscellaneous Industrial Workers' Union v. Ahmedabad Electricity Co., ltd., AIR (1962) SC 1255, relied on "The Principles of Auditing" by F.R.M. de Paula, referred to. 2.1.: DERC was certainly entitled to take a departure from the principles set out in the Sixth Schedule to the said 1948 Act. However, that departure, in the facts and circumstances of the case, had to be within the framework of the Policy Directions issued by GoNCTD under Section 12 and based on proper reasoning. DERC was required to consider the effect of its decision. F (Para 43) 1778-C, DJ 2.2. DERC held that since the DISCOMs herein were not obliged to redeem debt (as they had not undertaken any loans), they were not entitled to the higher rate of depreciation. This assumption of DERC is wrong. There is G a differ~nce between the concept of Depreciation and the concept of Advance Against Depreciation (AAD). In the case of AAD, loan repayment may be one of the relevant factors. jPara 4311779-D) . 2.3. The present case is concerned with the reduction in the rate of depreciation from 6.69% to 3.75%. Therefore, in the case of reduction of H authorized expenditure (depreciation) repayment of loan is not the relevant DELHI ELECTRICITY REGULATORY COMMISSION" BSES YAMUNA rOIVER LTD. 753 factor. (Para 43( (779-E( A 3.1 Privatisation and disinvestment were the Policy decisions taken by GoNCTD. The Utilities were incurring losses. The assets of the Utilities were getting depleted. The public-private participation is· the order of the day. Therefore, the Policy Directions invited bids from the private sector on the basis of certain assurances. Under the above circumstances, Legitimate B Expectation was built into the investments made by the DISCOMs herein. The representations were there in the Policy Directions, BST Order laying down Normative Principles for tariff fixation for 5 years and the Transfer Scheme. Drawing up of tariff for 5 years was to impart certainty. The tariff for the financial year 2001-2002 was to be adjusted in the next 4 years, namely, financial years 2002-03, 2003-04, 2004-05 and 2005-06. It is for this reason C that even the RFQ document indicated Tariff Principles in the case of NDPL for the financial years 2002-03 and 2005-06. Even the Tariff Order dated 23.5.01 was based on the higher rate of depreciation without taking into account the fair life of the asset. In short, a package was offered to the prospective investors. The effect of the order of DERC dated 26.6.03 is to D extend the ARP by 10.55 (years), if one goes by the said MOP Notification then the ARP comes to 13.45 years (90% value of asset divided by 6.69%, rate of depreciation). On the other hand, if one goes by the same value divided by 3. 75% rate of depreciation then the ARP comes to 24 years. Similarly, on account of the reduction in the rate of depreciation from 6.69% to 3.75%, the overall actual return from the package becomes illusory. In other words, E what is given by one hand is taken away by the other. In other words, the return on the total package becomes illusory if the rate of depreciation is reduced from 6.69% to 3. 75%. The certainty for 5 years is also obliterated for reducing the rate of depreciation. This violation also infringes the doctrine of Legitimate Expectation of the DISCO Ms to get lawful and reasonable recovery of expenditure. DERC was expected to fix the rate in the context of F the policy of privatization. The object behind fixation of principles for 5 years was to impart certainty and consistency in tariff designing, putting the prospective investors to notice regarding their tariff entitlements for 5 years and to provide Level Playing Field to the DISCOMs to compete with other competitors in th...- Electricity Industry. (Para 43] G (778-D, E, F, G, H; 779-A, B, CJ 4. Present judgment is confined to the facts of the case alone and the reasoning given hereinabove is in the context of the period of 5 years. This judgment should not be construed to apply for all times. It is confined to the transition period only. (Para 43] (780-B, CJ H 754 SUPREME COURT REPORTS [2007] 2 S.C.R. A CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2733 of2006. From the Judgment and final Order dated 24.5.2006 of the Appellate Tribunal for Electricity, New Delhi in Appeal Nos. 38,39 122/2005 and 48/2006. Vikas Singh, A.S.G., S.K. Dholakia, Harish N. Salve, S. Ganesh, J.J. Bhat, B Suresh Chandra Tripathy, Amit Kapoor, Anupam Verma, Vibha Dhatta Makhija, V.P. Singh, Anuj Berry (for M/s. Suresh A. Shroff & Co.), S. Wasim A. Qadri Amrita Narayan, R.C. Kathia and D.S .. Mahra for the appearing parties. The Judgment of the Court was delivered by C KAPADIA, J. I. This is an appeal by special leave concerning tariff fixation by Delhi Electricity Reforms Commission ('DERC' for short). In this appeal, a short point which arises for consideration is : whether on the facts and circumstances of the case DERC was right in reducing the rate of depreciation from 6.69% to 3.75%. D 2. The facts giving rise to this civil appeal are as follows. 3. On 23 .1.92 Ministry of Power ('MOP' for short) issued a notification (which was published in Official Gazette on 3I.1.92) stating that a licensee shall provide for depreciation in its Annual Statement of Accounts commencing on 1.4.92 as per straight-line method in respect of asset(s), indicated in E column no. I, at the rates indicated in the columns of Schedule VI to the Electricity (Supply) Act, 1948 which vests the power to stipulate the principles for depreciation in the said Ministry. A note was appended to the said Notification under whi<;h it was stated that the reference to the straight-line method in the said Notification was intended to differentiate the same from F the concept of reducing balance method and not to derive rates from the fair life of the asset(s ). G 4. On 29.3.94, in continuation of the above Notification, MOP amended the Schedule. A bare reading of the said amendment indicates absence of linkage between the fair life of an asset and the rate of depreciation. 5. On 23.11.2000 the Delhi Electricity Reforms Act, 2000 ('DERA' for short) was enacted by the State Legislature to establish DERC and to restructure the electricity industry in Delhi. 6. On 6.1.200 I the Government of National Capital Territory of Delhi H ('GoNCTD' for short) decided to unbundle Delhi Vidhyut Power ('DVB' for DELHI ELECTRICITY REGULATORY COMMISSION,., BSES YAMUNA POWER LTD. [KAPADIA, J.] 755 short), its undertaking and assets, and vest the same in six successor companies A --4 including three distribution companies ('OJSCOMs' for short). These three DISCOMs are North Delhi Power Limited ('NDPL' for short), BSES Yamuna Power Limited ('BYPL' for short) and BSES Rajdhani Power Limited ('BRPL' for short). On I 5.2.200 I GoNCTD issued the Request for Qualification document ('RFQ' for short) to the prospective bidders. It indicated the period of transition B and stated that tariff principles were being worked out by DERC so that the investors could plan their investments. That, transition period was to be of 5 years. A tariff order would be made available to the bidders before the last date of submission of their Statement of Qualifications. Under RFQ document a chapter titled "Investment Highlights" was incorporated (see: Chapter 5). Under para 5.9 of the RFQ document, DVB referred to Tariff Setting Principles c for 2002-03, 2003-2004, 2004-05 and 2005-06. In the said para it is further stated that for revising the tariffs in 2001-02, DVB has already filed a tariff application with DERC in which DVB has proposed Tariff Setting Principles through which the tariffs of2001-02 would get adjusted in 2002-03, 2003-2004, 200405 and 2005-06. In para 5. 10 oftlle RFQ document, GoNCTD stated that it was D committed to the power sector reforms in Delhi; that this was its commitment which stood reflected in various steps undertaken by it, namely, creation of DERC, appointment of financial advisors for unbundling and for privatization, enactment of DERA, approval to the structure of unbundled DVB on 6. 1.0 I and commencement of the process of inviting RFQ bids through the issuance of RFQ document. At this stage, it may be noted that DERC was created in E March 1999. However, vide para 5.10 of the RFQ document, GoNCTD indicated that by passing DERA its role was restricted to provide directions on policy matters in the process of electricity tariff determination. In the context of future tariffs, the RFQ document further clarified that the order to be passed by DERC on the tariff application of DVB for the year 2001-02 would be made F available to the bidders before the last date of submission of Statement of Qualification ('SOQ' for short) so that the bidders would have a clear idea of the tariff level for the next five years. This was, in order to enable the bidders to prepare an appropriate business strategy [See: para 3.3.6.2]. In para 9.7 of the RFQ document, the Tariff Setting Principles were set out. Vide para 9.7, the Tariff Principles were summarized in the form of a formula which referred G to tariff in any year as equal to tariff in the financial year 2001-02 plus sum total of all expenses such as power purchase cost, salary, O&M, administration .; and general expenses, interest on debt, return on equity minus increase in revenue due to reduction in T&D losses divided by estimated units sold in a year. Vide para 9.7, it was clarified that under the formula, the tariffs H 756 SUPREME COURT REPORTS (2007] 2 S.C.R. A stipulated by DERC for the financial year 2001-02 was to get adjusted in the : financial years 2002-03, 2003-04, 2004-2005 and 2005-06. Vide para 9.7, it was tfurther stated that the above Tariff Setting Principles have been proposed to provide certainty to the tariff determination process. Under para 9.7.2 of the RFQ document, it was further stipulated that the order of DERC on the tariff B proposal of DVB for the financial year 2001-02 shall be made available by 2.4.01 so that the pre-qualified bidders could submit their financial bids for the proposed DlSCOMs. 7. On 23.5.01, DERC issued its Retail Supply Tariff Order on the Annual Revenue Requirement(' ARR' for short) for the financial year 2001-02 and the • c Tariff Determination Principles for the financial years 2002-2003 till 2005-06. This Tariff Order computed the ARR of DVB forthe ensuing year 2001-02. As can be seen from the Tariff Order, DVB had computed the ARR for financial year 2001-02 at Rs.5514 crores. DVB suggested to DERC for framing Tariff Setting Principles in order to develop a long-term business st;·ategy so that tariff levels could be indicated for the next five years [See: para 1.6.6]. Under D the said order, DERC computed the depreciation expenditure for DVB in relation to distribution of asset(s) at 6.83%. Before DERC, DVB had submitted Annual Accounts for the financial year 1998-99 based on Weighted Average Depreciation Rate ('WADR' for short) which was proposed at 6.83% based on the said Notifications issued by MOP. On these projections, DERC held E vide Tariff Order dated 23.5.01, that for want of details regarding assetcomposition at the beginning offinancial year 2001-02, it approved the WADR of 6.83% for computing the depreciation. At this stage it may be noted that on unbundling, the WADR stood reduced to 6.69% for the financial year 2001-02. The said depreciation was chargeable to ARR of DVB. It was quantified at Rs.232 crores for tlie financial year 2000-0 I and at Rs.262 crores for the F financial year 2001-02. 8. On 20.11.01 GoNCTD notified the Transfer Scheme under Section 15, ;. 16 and 60 of DERA setting out rules for transfer and vesting of assets, iiabilities and obligations of DVB in the three DISCOMs herein. Under the G said Scheme DVB was unbundled, the Opening Balance Sheet of each of the three DISCOMs gave the value of the Gross Fixed Asset ('GFA' for short) as also the value of Net Fixed Asset ('NFA' for short) for tariff purposes. The Transfer Scheme was brought into force with effect from I. 7 .02. .;._ 9. On 22.11.01 GoNCTD issued Request for Proposal document ('RFP H document' for short). The said document was accompanied by the Policy DELHI ELECTRICITY REGULATORY COMMISSION"· BSES YAMUNA POWER LID (KAPADIA. l] 757 Directions issued to the prospective bidders referring to the transition period A --+ of 5 years. It also referred to the Tariff Principles framed by DERC in order to enable the bidders to develop their business plans and in order to enable the bidders to make their bids. 10. On 22.11.01, GoNCTD after considering the views expressed by DERC issued Policy Directions under Section 12 of DERA for restructuring B of the Electricity Industry and privatization of Distribution Companies. In the Policy Directions, GoNCTD clarified that the Directions have been issued in public interest to enable restructuring of DVB and to privatize the business of distribution. lt was further clarified that the transition period shall be of 5 years (2002 till 2007) to attract private participati~n in respect of AT &C loss c reduction, tariff structure including return on equity of 16% and 50% additional revenue arising from AT &C loss reduction with inbuilt incentive to DISCO Ms. Under the Policy Directions, GoNCTD assured the bidders that a BST Order shall be issued by DERC to facilitate investors to have a full idea of various elements in tariff fixation, before bidding. Vide para 19 of the Policy Directions, it was clarified that DERC shall be bound by Policy Directions on and from D 22.11.0 I till end of financial year 2006-07. 11. Accordingly on 22.2.2002, DERC issued the BST Order on a Joint Petition filed by GoNCTD owned Distribution Companies (that is before privatization) and Delhi Power Supply Company Ltd. This BST Order, issued E by DERC, approved Bulk Supply Tariff to be charged by Delhi Power Supply Company Ltd. to the said DISCO Ms, on the basis of the paying capacity of the Distribution Companies. The said BST Order issued by DERC also approved the Opening Levels of AT &C losses for each Distribution Company. It also approved the Tariff Determination Principles for the period of 5 years (2002 to 2007). As stated above, this BST Order was issued before bidding F giving certainty to the bidders regarding Tariff Entitlement for the transition -\' period. Based on this order, the bidders were expected to bid. They were expected to bid on the basis of annual reduction of AT &C losses over a 5 year period. 12. Accordingly, M/s. Tata Power Company Limited submitted its bid for G purchase of 51 % equity in the North North-West Delhi Distribution Company Limited on the basis of reduction of AT &C losses which they were to achieve > yearwise over a 5 year period (transition period). This was in April/May 2002. Bids were similarly made by M/s. BSES for purchase of 51 'Yo equity in the other Distribution Companies owned by GoNCTD. H 758 SUPREME COURT REPORTS [2007] 2 S.C.R. A 13. For the sake of convenien~e we are stating the facts concerning the bids submitted by Mis. Tata Power-Go.mpany Limited in the context of purchase tof 51 % equity in the North North~West Delhi Distribution Company. .... 14. On 29.5.02, GoNCTD accepted the bid of Mis. Tata Power Company Ltd. based on the loss reduction profile, RFP documents etc. Accordingly, Ml B s. Tata Power Company Ltd. was invited to sign Share Acquisition Agreement by GoNCTD. This was on 31.5.2002. 15. On 1.7.02, the Transfer Scheme was brought into force by GoNCTD. The majority share-holding (51 %) and management control of the three c Distribution Companies owned by GoNCTD stood transferred to the successful private bidders. Mis. Tata Power Company Ltd. was one of the three DISCOMs. 16. After privatization of Distribution Companies on 1.7.02, the Electricity Act, 2003 was brought into force on and from 10.6.2003. Section 185 of the said 2003 Act saved DERA by stat_hig that all directiv°es issued before ·the commencement of 2003 Act und~r:DE.~ shall stand expressly saved. L D 17. Vide Tariff Order dated 26.6:0~ ·DERC'reduced the rate of depreciation from 6.69%to 3.75%. 18. On 25.7.03 North Delhi Power,Ltd. ('NDPL' for short), a joint venture .... E ~fMls. Tata Power Company Ltd., filed a Review Petition before DERC which ' was dismissed on 25.11.03. The Review Petition was made by NDPL seeking l to challenge the reduction in the rat~ of depreciation. While rejecting the ' ' Review Petition it was held by DERCJhat depreciation is a charge to the Profit and Loss Account and it represents ~.measure of loss in value of an asset arising from use, efflux of time and inarket changes. It was further held that ,, F from a regulatory perspective, depreciation is a small amount of the original cost of the capital asset(s}, built into the tariff computation every year with ;. a view to provide the Utility a source of funding to repay instalments of debt capital. It was further held that since the asset is used over its operational life, depreciation is a percentage charged over the fair life of the asset(s). It G was further held that in the BST Order dated 22.2.2002 the rate of depreciation was based on WADR since the details of the asset(s) a! the beginning of the financial year 2001-02 were not available and, therefore, at that time DERC had taken the view that instead of rejecting the computation of ARR, submitted by DVB, it was better to give directions to DVB to update their data so that in future it could file proper computation concerning ARR. It was further held H that the erstwhile DVB was required to file ARR by 31.12.0 I for the financial ... . ,. > DELHI ELECTRICITY REGULATORY COMMISSION oc BSES YAMUNA POWER LTD [KAPADIA, J.] 759 year 2002-03 which they failed to do so and instead the three Distribution A Companies filed .a Joint Petition for determination of the Opening Levels of AT &C losses and also for determination of BST in order to enable the privatization process to be proceeded further in accordance with the Policy Directions issued by GoNCTD, that accordingly on 22.2.02 DERC had issued a BST Order on the Opening Levels of AT&C losses and the BST applicable to the DISCOMs and, therefore, according to DERC, there was no change in B the principles of tariff fixation as regards treatment of expenses and revenue. According to DERC, the basic principles underlying the approval of various items in ARR remained unchanged across the first Retail Supply Tariff Order ('RST Order' for short) dated 23.5.01 applicable for the financial year 20012002 and the BST Order dated 22.2.2002 applicable for two months ending C .: 3 I .3 .02. It was further held that depreciation is the source of debt repayment •for a Utility and since no loan repayment was due during the financial years 2002-03 and 2003-04, DERC had accepted the request ofNDPL and two others to treat depreciation as a source of funding to partly fund Capital Expenditure. It was further held by DERC that depreciation is a non-cash expenditure and since there was no loan repayment in the financial year 2002-03 and financial D year 2003-04, the allowed depreciation rate of 3.75% will not affect the DISCOMs' operations, cash-flow/returns as all legitimate expenses were duly covered in the d~termination of ARR: Ji was further held that DERA empowered DERC io depart· from the Prindples mentioned in Schedule VI of the said 1948 Act, during the process of tariff determination, by providing in writing the E reasons for such variations. It was held that since there were serious deficiencies in the Fixed Asset Register ('FAR' for short), DERC took the decision to reduce the rate of depreciation from 6.69% to 3.75% in accordance with the power entrusted to DERC vide Section 28(3) of DERA. It was further held that the decision taken by DERC was in public interest since the higher rate of depreciation of 6.69% would cast a heavy burden on the consumers. F It was further he Id that the depreciation expenditure at the rate of 3. 7 5% allowed by DERC was in accordance with the statutory provisions of DERA, the Policy Directions of the GoNCTD and the Regulatory Practices. It was further held that it was the duty of DERC to allow adequate and prudent expenses which fall within the regulation on annual basis. Accordingly, the G Review Petition ofNDPL came to be dismissed as per the order of DERC on 25.11.03. 19. Thereafter on 19.12.03 NDPL filed its petition for determination of ARR for financial year 2004-05 and for determination of Retail Supply Tariff in terms of Section 28 of DERA. Vide Tariff Order dated 9.6.04 DERC denied H 760 SUPREME COURT REPORTS [2007] 2 S. C.R. A to NDPL the assured return on equity at 16% as well as depreciation expenditure at the rate of 6.69%. 20. Vide Review Petition dated 8.7.04, NDPL requested DERC to revise its Tariff Order dated 9 .6.04. B 21. On 23.7.04 NDPL preferred Writ Petition No.15175 of2004 before this c Court. That petition was disposed of on 9.8.05 upon constitution of Appellate Tribunal for Electricity ('ATE' for short). 22. The above Review Petition dated 8.7.04 was dismissed by DERC on 29.10.04. 23. Aggrieved by the above decision of DERC, NDPL preferred Writ Petition No.140 of 2005 in the Delhi High Court challenging the legality and validity of the impugned Tariff Order dated 9.6.04 in respect of creation of Regulatory Asset(s) whereby 53% of the operating expenses of NDPL was deferred without providing a schedule of recovery/amortization. However, in D the meantime in view of the constitution of the ATE, NDPL filed its statutory appeal before the Tribunal (that is ATE). ATE allowed the appeal of NDPL on the question of depreciation vide Order dated 24.5.06 which has been challenged by DERC in this civil appeal. By the said order dated 24.5.06 ATE held that DERC has not given any reasons for deviating from the Principles E mentioned in Schedule VI to the said 1948 Act. By the said order, ATE further hdd that DISCOMs were entitled to 16% ROE, which is accepted as final by DERC. 24. As stated above, aggrieved by the decision of ATE dated 24.5.06, DERC filed the present Civil Appeal No.2733 of2006 before this Court limited F to, the question of depreciation. 25. On 21.7 .06 A TE also allowed another appeal filed by NDPL challenging the Tariff Order dated 9.6.04 concerning creation of Regulatory Asset(s) by DERC. G 26. On 23.8.06 Civil Appeal No.2733 of2006 filed by DERC came for hearing when the following interim order was passed: "After hearing learned counsel for the parties at some length, we feel it would be appropriate for the Appellate Tribunal to consider the conclusions of the Commission as if they were good and sufficient for H the purpose of making a departure from the Schedule VI rates. The - DELHI ELECTRICITY REGULATORY COMMISSION"· BSES YAMUNA POWER LTD. {KAPADIA, J J 76 J basic issue involved in this appeal is whether the Appellate Tribunal A 'f.as justified in its view that the Commission had not indicated any reason for deviating from Schedule VI rates.· This direction is being given because the Commission was of the view that no reasons have been indicated. Without expressing any final opinion, we direct the Tribunal to examine whether the conclusions of the Commission are supportable in facts and in law. Let the parties appear before the B Appellate Tribunal without further notice on 5th September, 2006 so that the Appellate Tribunal can fix a confirmed date of hearing or take up the matter on that very day. The Appellate Tribunal shall decide . the matter after taking into consideration all contentions raised or to be raised by the parties. However, we make it clear that we have not C expressed any opinion on the merits of the case. The exercise to be undertaken by the Appellate Tribunal shall be only on the question of depreciation. It is clarified that ord~r dated 13th June, 2006, we had permitted the process of determination to be continued by the appellant as D directed by the Appellate Tribunal (by mistake recorded as High Court). The final decision may be taken, but the same shall be open to challenge by the affected parties. Thi~ matter shall be placed for further hearing after a period of six weeks. It is, however, made clear that we have not given any interim E protection for any period other than the period to which the present appeal relates to. The determination made by the Appellate Authority shall be indicated to the parties." 27. As per direction of this Court dated 23.8.06, ATE recorded it findings on the rate of depreciation vide its order dated 29.9.06 (hereinafter referred to "the impugned order"). By the impugned order, it was held that depreciation is not a source of fund, it is a process of Allocation of Cost and that funds F are generated by sales and not by depreciation, which is an expenditure incurred in terms of Schedule VI.