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

The facts giving rise to this civil appeal are as follows. On 23.1.92 Ministry of Power (MOP for short) issued a notification (which was published in Official Gazette on 31.1.92) 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 column no.1, 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 which it was stated that the reference to the straight-line method in the said Notification was intended to differentiate the same from the concept of reducing balance method and not to derive rates from the fair life of the asset(s).3. 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. 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.4. On 6.1.2001 the Government of National Capital Territory of Delhi (GoNCTD for short) decided to unbundle Delhi Vidhyut Power (DVB for short), its undertaking and assets, and vest the same in six successor companies including three distribution companies (DISCOMs 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 15.2.2001 GoNCTD issued the Request for Qualification document (RFQ for short) to the prospective bidders. It indicated the period of transition 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 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 of 2001-02 would get adjusted in 2002-03, 2003-2004, 2004-05 and 2005-06. In para 5.10 of the RFQ document, GoNCTD stated that it was 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 6.1.01 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 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 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 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 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 further 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 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 DISCOMs.5. 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 Tariff Determination Principles for the financial years 2002-2003 till 2005-06. This Tariff Order computed the ARR of DVB for the 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 strategy so that tariff levels could be indicated for the next five years [See: para 1.6.6]. Under 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 vide Tariff Order dated 23.5.01, that for want of details regarding asset-composition at the beginning of financial 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 the financial year 2000-01 and at Rs.262 crores for the financial year 2001-02.6. 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, liabilities and obligations of DVB in the three DISCOMs herein. Under the 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 1.7.02.7. On 22.11.01 GoNCTD issued Request for Proposal document (RFP document for short). The said document was accompanied by the Policy Directions issued to the prospective bidders referring to the transition period 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.8. On 22.11.01, GoNCTD after considering the views expressed by DERC issued Policy Directions under Section 12 of DERA for restructuring 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. It was further clarified that the transition period shall be of 5 years (2002 till 2007) to attract private participation in respect of AT&C loss reduction, tariff structure including return on equity of 16% and 50% additional revenue arising from AT&C loss reduction with inbuilt incentive to DISCOMs. 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 22.11.01 till end of financial year 2006-07.9. 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 by DERC, approved Bulk Supply Tariff to be charged by Delhi Power Supply Company Ltd. to the said DISCOMs, 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 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.10. Accordingly, M/s. Tata Power Company Limited submitted its bid for 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% equity in the other Distribution Companies owned by GoNCTD.11. For the sake of convenience we are stating the facts concerning the bids submitted by M/s. Tata Power Company Limited in the context of purchase of 51% equity in the North North-West Delhi Distribution Company.12. On 29.5.02, GoNCTD accepted the bid of M/s. Tata Power Company Ltd. based on the loss reduction profile, RFP documents etc. Accordingly, M/s. Tata Power Company Ltd. was invited to sign Share Acquisition Agreement by GoNCTD. This was on 31.5.2002.13. On 1.7.02, the Transfer Scheme was brought into force by GoNCTD. The majority share-holding (51%) and management control of the three Distribution Companies owned by GoNCTD stood transferred to the successful private bidders. M/s. Tata Power Company Ltd. was one of the three DISCOMs.14. 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 stating that all directives issued before the commencement of 2003 Act under DERA shall stand expressly saved.15. Vide Tariff Order dated 26.6.03 DERC reduced the rate of depreciation from 6.69% to 3.75%.16. On 25.7.03 North Delhi Power Ltd. (NDPL for short), a joint venture of M/s. 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 to challenge the reduction in the rate of depreciation. While rejecting the Review Petition it was held by DERC that depreciation is a charge to the Profit and Loss Account and it represents a measure of loss in value of an asset arising from use, efflux of time and market changes. It was further held that 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 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) at 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 that the erstwhile DVB was required to file ARR by 31.12.01 for the financial year 2002-03 which they failed to do so and instead the three Distribution 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 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 2001-2002 and the BST Order dated 22.2.2002 applicable for two months ending 31.3.02. 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 of NDPL 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 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 determination of ARR. It was further held that DERA empowered DERC to depart from the Principles mentioned in Schedule VI of the said 1948 Act, during the process of tariff determination, by providing in writing the 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. It was further held that the depreciation expenditure at the rate of 3.75% 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 Review Petition of NDPL came to be dismissed as per the order of DERC on 25.11.03.17. 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 to NDPL the assured return on equity at 16% as well as depreciation expenditure at the rate of 6.69%.18. Vide Review Petition dated 8.7.04, NDPL requested DERC to revise its Tariff Order dated 9.6.04.19. On 23.7.04 NDPL preferred Writ Petition No.15175 of 2004 before this Court. That petition was disposed of on 9.8.05 upon constitution of Appellate Tribunal for Electricity (ATE for short).20. The above Review Petition dated 8.7.04 was dismissed by DERC on 29.10.04.21. 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 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 mentioned in Schedule VI to the said 1948 Act. By the said order, ATE further held that DISCOMs were entitled to 16% ROE, which is accepted as final by DERC.22. As stated above, aggrieved by the decision of ATE dated 24.5.06, DERC filed the present Civil Appeal No.2733 of 2006 before this Court limited to the question of depreciation.23. On 21.7.06 ATE also allowed another appeal filed by NDPL challenging the Tariff Order dated 9.6.04 concerning creation of Regulatory Asset(s) by DERC.24. On 23.8.06 Civil Appeal No.2733 of 2006 filed by DERC came for hearing when the following interim order washearing 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 the purpose of making a departure from the Schedule VI rates. The basic issue involved in this appeal is whether the Appellate Tribunal was 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 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 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 order dated 13th June, 2006, we had permitted the process of determination to be continued by the appellant as 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. This matter shall be placed for further hearing after a period of six weeks.26. It is, however, made clear that we have not given any interim protection for any period other than the period to which the present appeal relatesfacts giving rise to this civil appeal are as follows. On 23.1.92 Ministry of Power (MOP for short) issued a notification (which was published in Official Gazette on 31.1.92) 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 column no.1, 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 which it was stated that the reference to the straight-line method in the said Notification was intended to differentiate the same from the concept of reducing balance method and not to derive rates from the fair life of the29.3.94, 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. 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 in6.1.2001 the Government of National Capital Territory of Delhi (GoNCTD for short) decided to unbundle Delhi Vidhyut Power (DVB for short), its undertaking and assets, and vest the same in six successor companies including three distribution companies (DISCOMs 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 15.2.2001 GoNCTD issued the Request for Qualification document (RFQ for short) to the prospective bidders. It indicated the period of transition 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 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 of 2001-02 would get adjusted in 2002-03, 2003-2004, 2004-05 and 2005-06. In para 5.10 of the RFQ document, GoNCTD stated that it was 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 6.1.01 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 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 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 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 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 further 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 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 proposed23.5.01, DERC issued its Retail Supply Tariff Order on the Annual Revenue Requirement (ARR for short) for the financial year 2001-02 and the Tariff Determination Principles for the financial years 2002-2003 till 2005-06. This Tariff Order computed the ARR of DVB for the 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 strategy so that tariff levels could be indicated for the next five years [See: para 1.6.6]. Under 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 vide Tariff Order dated 23.5.01, that for want of details regarding asset-composition at the beginning of financial 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 the financial year 2000-01 and at Rs.262 crores for the financial year20.11.01 GoNCTD notified the Transfer Scheme under Section 15, 16 and 60 of DERA setting out rules for transfer and vesting of assets, liabilities and obligations of DVB in the three DISCOMs herein. Under the 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 from22.11.01 GoNCTD issued Request for Proposal document (RFP document for short). The said document was accompanied by the Policy Directions issued to the prospective bidders referring to the transition period 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 their22.11.01, GoNCTD after considering the views expressed by DERC issued Policy Directions under Section 12 of DERA for restructuring 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. It was further clarified that the transition period shall be of 5 years (2002 till 2007) to attract private participation in respect of AT&C loss reduction, tariff structure including return on equity of 16% and 50% additional revenue arising from AT&C loss reduction with inbuilt incentive to DISCOMs. 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 22.11.01 till end of financial yearon 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 by DERC, approved Bulk Supply Tariff to be charged by Delhi Power Supply Company Ltd. to the said DISCOMs, 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 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 yearM/s. Tata Power Company Limited submitted its bid for 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% equity in the other Distribution Companies owned bythe sake of convenience we are stating the facts concerning the bids submitted by M/s. Tata Power Company Limited in the context of purchase of 51% equity in the North North-West Delhi Distribution29.5.02, GoNCTD accepted the bid of M/s. Tata Power Company Ltd. based on the loss reduction profile, RFP documents etc. Accordingly, M/s. Tata Power Company Ltd. was invited to sign Share Acquisition Agreement by GoNCTD. This was on1.7.02, the Transfer Scheme was brought into force by GoNCTD. The majority share-holding (51%) and management control of the three Distribution Companies owned by GoNCTD stood transferred to the successful private bidders. M/s. Tata Power Company Ltd. was one of the threeprivatization 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 stating that all directives issued before the commencement of 2003 Act under DERA shall stand expresslyTariff Order dated 26.6.03 DERC reduced the rate of depreciation from 6.69% to25.7.03 North Delhi Power Ltd. (NDPL for short), a joint venture of M/s. 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 to challenge the reduction in the rate of depreciation. While rejecting the Review Petition it was held by DERC that depreciation is a charge to the Profit and Loss Account and it represents a measure of loss in value of an asset arising from use, efflux of time and market changes. It was further held that 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 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) at 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 that the erstwhile DVB was required to file ARR by 31.12.01 for the financial year 2002-03 which they failed to do so and instead the three Distribution 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 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 2001-2002 and the BST Order dated 22.2.2002 applicable for two months ending 31.3.02. 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 of NDPL 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 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 determination of ARR. It was further held that DERA empowered DERC to depart from the Principles mentioned in Schedule VI of the said 1948 Act, during the process of tariff determination, by providing in writing the 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. It was further held that the depreciation expenditure at the rate of 3.75% 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 Review Petition of NDPL came to be dismissed as per the order of DERC onon 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 to NDPL the assured return on equity at 16% as well as depreciation expenditure at the rate ofReview Petition dated 8.7.04, NDPL requested DERC to revise its Tariff Order dated23.7.04 NDPL preferred Writ Petition No.15175 of 2004 before this Court. That petition was disposed of on 9.8.05 upon constitution of Appellate Tribunal for Electricity (ATE forabove Review Petition dated 8.7.04 was dismissed by DERC onby 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 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 mentioned in Schedule VI to the said 1948 Act. By the said order, ATE further held that DISCOMs were entitled to 16% ROE, which is accepted as final bystated above, aggrieved by the decision of ATE dated 24.5.06, DERC filed the present Civil Appeal No.2733 of 2006 before this Court limited to the question of21.7.06 ATE also allowed another appeal filed by NDPL challenging the Tariff Order dated 9.6.04 concerning creation of Regulatory Asset(s) by23.8.06 Civil Appeal No.2733 of 2006 filed by DERC came for hearing when the following interim order wasg 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 the purpose of making a departure from the Schedule VI rates. The basic issue involved in this appeal is whether the Appellate Tribunal was 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 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 expressed any opinion on the merits of the case. The exercise to be undertaken by the Appellate Tribunal shall be only on the question ofis clarified that order dated 13th June, 2006, we had permitted the process of determination to be continued by the appellant as 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. This matter shall be placed for further hearing after a period of sixis, however, made clear that we have not given any interim protection for any period other than the period to which the present appeal relates

Reasoning: 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.