Depreciation in transitional electricity tariffs must follow the approved regulatory framework, not fair-life assumptions or debt-repayment criteria.

Depreciation in electricity tariff setting for a transition period was treated as a cost-allocation mechanism tied to replacement cost and the approved regulatory framework, not as a purely fair-life accounting exercise. The statutory scheme required the commission to follow the Sixth Schedule principles unless recorded reasons justified departure, and the applicable policy directions and tariff notifications had already fixed a higher depreciation basis. A reduction based on fair life of assets or absence of debt repayment was inconsistent with those notifications, weakened the transition package, and upset the legitimate expectation of private investors; the higher depreciation basis therefore had to be maintained.

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Issues: Whether the regulatory commission was justified in reducing the depreciation rate from 6.69% to 3.75% while fixing electricity tariff during the transition period, and whether such reduction could be sustained under the applicable statutory framework and policy directions.

Analysis: Depreciation in electricity accounting is an allocation of cost over the useful life of assets and, in the context of a capital-intensive utility, may serve the object of replacement cost rather than a purely accounting notion tied to fair life. The statutory scheme under the Delhi Electricity Reforms Act, 2000 required the commission to be guided by the financial principles in the Sixth Schedule to the Electricity (Supply) Act, 1948, while permitting departure for recorded reasons. The policy directions and tariff framework issued for the transition period created certainty for bidders and reflected the higher depreciation basis already adopted in earlier tariff orders and ministry notifications. The reduction was based on fair life of assets and absence of debt repayment, but the note to the relevant notifications expressly negatived derivation of depreciation rates from fair life, and loan repayment was not the relevant criterion for reducing authorized depreciation in this setting. The reduction also undermined the transition package, the assured return framework, and the legitimate expectation generated for private investors.

Conclusion: The reduction in depreciation rate was not justified, and the higher depreciation basis was to be maintained.

Final Conclusion: The appeal failed, and the tariff determination made by the appellate tribunal in favour of the distribution companies was upheld.

Ratio Decidendi: Where a tariff regime for a transition period is framed on the basis of statutory principles, policy directions, and prior tariff orders, a regulatory departure from the prescribed depreciation basis cannot rest on fair-life reasoning or absence of debt repayment if those factors are inconsistent with the governing notifications and the structure of the approved transition package.

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