The Supreme Court on Thursday issued notice on a writ petition filed by Tamil Nadu Power Distribution Corporation Limited (TNPDCL). The petition challenges Rule 23 of the Electricity (Amendment) Rules, 2024.
A Bench comprising Chief Justice of India Surya Kant, Justice Joymalya Bagchi and Justice Vipul Pancholi heard the matter. During the hearing, the Court raised concerns about the fiscal policy adopted by States that absorb losses of electricity distribution utilities.
While issuing notice, the Court asked counsel to assist it in understanding how other States manage financial losses in power distribution. “We are issuing notice. We would like you to help us in understanding that what is the fiscal policy of other states about this power distribution,” the Court said.
What Rule 23 Provides
Rule 23 mandates that electricity tariffs must be cost-reflective. It states that the gap between the approved Annual Revenue Requirement (ARR) of a distribution licensee and the estimated annual revenue from the approved tariff cannot exceed 3 percent of the ARR.
The Rule further requires that this gap, along with carrying costs calculated at the base rate of Late Payment Surcharge under the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, must be liquidated within a fixed timeline.
For new gaps, the liquidation must occur in three equal yearly instalments. For regulatory assets existing at the time of notification of the Amendment Rules, the liquidation period is capped at seven equal yearly instalments.
TNPDCL has sought a declaration that Rule 23 is unconstitutional and violative of Article 14 of the Constitution. It also seeks a direction quashing the provision.
Submissions On Financial Impact
Senior Advocate Gopal Subramanium, appearing for TNPDCL, submitted that the Tamil Nadu government has undertaken to absorb the financial losses of the distribution utility.
According to the petition, implementation of Rule 23 would lead to a steep tariff increase and impose a heavy burden on both consumers and the public exchequer. TNPDCL contends that applying the base rate of Late Payment Surcharge for carrying costs would significantly inflate liabilities.
The Tamil Nadu Electricity Regulatory Commission has determined a cumulative revenue gap up to FY 2021–2022 at approximately Rs 83,000 crore. After restructuring TANGEDCO into separate generation and distribution entities, 71 percent of this liability—around Rs 59,038 crore—was allocated to TNPDCL.
The utility submits that applying the Late Payment Surcharge base rate would add approximately Rs 11,601 crore in carrying costs. This would increase the total liability to around Rs 70,639 crore. It argues that mandatory liquidation within seven years could result in an estimated tariff increase of nearly 50 percent.
Bench’s Concerns On Subsidy And Fiscal Discipline
Justice Joymalya Bagchi observed that financial concessions must fall within the framework of Section 65 of the Electricity Act, 2003. That provision requires subsidy to be granted in advance.
He stated that if a State intends to provide subsidy, it must do so beforehand. This allows the Electricity Regulatory Commission to factor it into the approved revenue requirement. Otherwise, deviation from the statutory tariff framework may not be permissible. He also referred to the earlier judgment in BSES Rajdhani Power Ltd v. Union of India.
Justice Bagchi noted that if subsidy is not provided in advance, it may create arbitrariness in fiscal administration. He cautioned that ad hoc measures could interfere with the statutory scheme of tariff determination.
The Bench also questioned how States can absorb distribution losses while continuing large-scale welfare schemes.
Chief Justice Surya Kant remarked that consumers should ordinarily pay for the cost of generating and supplying electricity. “Whatever you are incurring the expenditure in generating and supplying that electricity, please ask them to pay that much only,” he said, adding that fiscal discipline is important.
The Chief Justice also asked how States plan to finance such expenditures. He sought clarity through an affidavit indicating the source of funds. At the same time, he clarified that the Court does not intend to interfere in welfare policies. However, it remains concerned about States operating under fiscal deficits.
Grounds Of Constitutional Challenge
TNPDCL argues that Rule 23 is manifestly arbitrary. It contends that mandating application of the base rate under the Late Payment Surcharge Rules—described as penal in nature—for calculating carrying costs is unjustified.
The petition also challenges the third proviso to Rule 23. It argues that the provision operates retrospectively by requiring liquidation, with carrying costs, of regulatory assets that existed before notification of the Amendment Rules.
TNPDCL submits that Section 176 of the Electricity Act, 2003 does not authorise the Union Government to frame subordinate legislation with retrospective effect. It argues that delegated legislation cannot operate retrospectively without express statutory authority.
Further, TNPDCL contends that Rule 23 encroaches upon the statutory powers of State Electricity Regulatory Commissions under Sections 61, 62 and 63 of the Electricity Act. It argues that the mandatory 3 percent cap and fixed timelines restrict the discretion of SERCs to balance consumer interest, financial viability and State policy directions under Section 108 of the Act.
According to the petition, the Union Government has effectively issued binding directions to SERCs and State utilities through Rule 23, which is not contemplated under the parent statute.
Earlier Supreme Court Directions
The petition notes that in August 2025, the Supreme Court in BSES Rajdhani Power Ltd v. Union of India issued directions regarding liquidation of regulatory assets. The Court referred to Rule 23 as a guiding principle.
In October 2025, the Supreme Court modified its directions to align with the seven-year liquidation timeline under Rule 23.
TNPDCL also states that the Appellate Tribunal for Electricity (APTEL) has directed State Commissions, including the Tamil Nadu Commission, to factor in carrying costs in accordance with Rule 23.
Citing the pan-India implications of the issue and its impact on proceedings pending before APTEL under Section 121 of the Electricity Act, TNPDCL has urged the Supreme Court to examine the constitutional validity of Rule 23.
The petition was drawn by Advocates Richardson Wilson and Apoorv Malhotra. It was settled by Senior Advocate P. Wilson and filed through Advocate-on-Record T. Harish Kumar.
Case Title: Tamil Nadu Power Distribution Corporation Limited v. Union of India.
