Case: Delhi Electricity Regulatory Commission Vs. M/S Bses Yamuna Power Ltd.


Decision reasoning: 0[ds]Conceptually, it is always possible to derive the rate of depreciation from the fair life of an asset. However, as stated above, it will depend on the object for which a fund or a reserve is sought to be created. We have already indicated that 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-à-vis private profit-based organization. That transition is of 5 years in 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 public-profit 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 compared to a manufacturing 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, we are of the view that DERC was not entitled to derive the rate from the fair life of the asset, particularly, when the consequence was to reduce the ARP substantially. In conclusion, we reiterate that in the present case because of inflation, we have to go by the Cost of Replacement instead of Historical Costt is confined to the facts of the present 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 onlyc object of providing depreciation is to allocate the amount of depreciation of an asset over its useful 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 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.