Supreme Court Rules on Cross-Subsidy Surcharge Determination – Not mandatory for determining Tariff as well Cross Subsidy Surcharge simultaneously as long as the CSS is based on the prevailing tariff
The Hon’ble Supreme Court of India, delivered a significant judgment on 29th April 2025 (Civil Appeal Nos. 8862-8868 of 2022), addressing the issue of determining Cross-Subsidy Surcharges (‘CSS’) for open access electricity consumers in Rajasthan. The said case, involved statutory appeals filed by the Distribution Companies of Rajasthan against the judgment dated 15.09.2022 passed by the Appellate Tribunal for Electricity (‘APTEL’).
The core dispute revolved around the Order dated 01.12.2016 passed by the Rajasthan Electricity Regulatory Commission (State Commission) which determined the CSS applicable from 01.12.2016. The Appellants before the Hon’ble Supreme Court were the distribution licensees in Rajasthan, while the Respondents were industrial units who had opted for open access to procure electricity from sources other than the distribution licensees.
Understanding Open Access and Cross-Subsidy Surcharge
The Electricity Act, 2003 introduced the concept of open access, allowing consumers to buy electricity from sources other than the traditional distribution licensee in their area. Previously, electricity was typically sourced only from the local distribution licensee.
However, the electricity sector has historically involved cross-subsidisation, where certain categories of consumers (like industrial or commercial users) pay higher tariffs to subsidise the cost of supply for others (like agricultural or low-end domestic consumers). These higher-paying customers are often referred to as ‘subsidising consumers‘.
The introduction of open access meant that these subsidising consumers could potentially bypass the local distribution licensee, thereby reducing the licensee’s revenue used for cross-subsidies. To compensate distribution licensees for this loss and the fixed costs arising from their obligation to supply, the Electricity Act, 2003 mandated the levy of CSS on consumers who choose open access. CSS is described as a “statutory charge payable by the consumers who decide to source electricity through open access from sources other than the distribution licensee of the area”. It is meant to meet the requirements of the current level of cross-subsidy within the distribution licensee’s supply area. The Act also stipulates that such surcharges and cross-subsidies should be progressively reduced. (Section 42 (2) of the Electricity Act, 2003)
The dispute in Rajasthan
In Rajasthan, the State Commission notified the Rajasthan Electricity Regulatory Commission (Terms and Conditions for Determination of Tariff) Regulations, 2014, which include provisions for cross-subsidy (Regulation 89) and a formula for determining CSS (Regulation 90). The distribution licensees petitioned the State Commission in July 2016 for determination of the CSS under Section 42(2). At this time, the tariff for FY 2015-2016, determined by an Order dated 22.09.2016, was in force. This tariff order made it clear that it would remain effective until the next tariff order.
On 01.12.2016, the State Commission passed an Order determining the CSS rates based entirely on the tariff fixed for FY 2015-2016 by Order dated 22.09.2016. The CSS rates were fixed per unit for various voltage levels for large industrial service open access consumers. The State Commission clarified that the CSS would be levied from 01.12.2016 and remain in force until re-determined .
APTEL set asides the State Commission’s Order
The industrial units (Respondents before the Supreme Court) challenged the 01.12.2016 Order before APTEL. APTEL allowed the appeal and set aside the Order dated 01.12.2016 on the follows basis –
- The absence of a tariff petition for FY 2016-2017 should not have been overlooked .
- CSS determination requires authenticated/audited data used for tariff fixation, which was allegedly not available .
- The order resulted in a “quantum jump” in CSS rates, which went against the policy of progressive reduction.
- The distribution licensees failed to explain the delay in filing tariff petitions.
- Since the tariff order of 22.09.2016 was to remain in force until the next order (passed only on 02.11.2017), the CSS rates should not have been altered before that date.
Supreme Court Overturns APTEL Decision
The Rajasthan Distribution licensees appealed before Supreme Court. The Supreme Court examined Section 42(2) of the Electricity Act, 2003 and the Rajasthan Tariff Regulations, 2014, particularly Regulation 90, which provides the formula for CSS determination, which explicitly states that the CSS is determined based on the “Tariff payable by the relevant category of consumers”. This means the CSS calculation depends on the prevailing tariff rates.
Crucially, the Supreme Court found nothing in either the Electricity Act, 2003 or the Rajasthan Tariff Regulations, 2014, that makes the determination of CSS simultaneous with the determination of tariff, mandatory. While it can be determined along with the tariff, it can also be determined separately based on the prevailing tariff rate.
The Supreme Court observed that the State Commission’s order dated 01.12.2016 determined the CSS entirely based on the prevalent tariff i.e. Tariff Order dated 22.09.2016.
The Supreme Court held that the APTEL committed an error by concluding that tariff and CSS determinations must always coincide. Since CSS is in the nature of compensation related to the tariff that the distribution licensee would have received from open access consumers, it must be based on the applicable retail tariff recoverable during the relevant period. The State Commission’s determination did precisely this, basing the CSS on the data and financials from the prevailing 22.09.2016 Order.
Conclusion
Finding the APTEL’s view erroneous, the Supreme Court set aside the judgment of the APTEL and restored the State Commission’s order dated 01.12.2016.
This judgment clarifies that while CSS determination can occur alongside tariff fixation, it is not legally mandated to do so. The CSS can be determined separately, provided it is correctly based on the prevailing tariff rates applicable to the relevant consumer category. The case highlights the interplay between open access, cross-subsidies, tariff determination, and the regulatory framework governing the electricity sector in India.
