Beyond the 13-Percent Ceiling: Supreme Court on the True Reach of Note 3, Regulation 55, and Judicial Self-Restraint in Electricity Tariff Matters

1. Introduction

In The State of Himachal Pradesh v. JSW Hydro Energy Ltd. (2025 INSC 857) the Supreme Court of India revisited the long-standing tension between contractual freedom in hydropower development agreements and the tariff-centric regulatory powers of the Central Electricity Regulatory Commission (CERC). The dispute centred on whether Note 3 of Regulation 55 contained in the CERC (Terms and Conditions of Tariff) Regulations, 2019—limiting “free energy to the home State” (FEHS) to 13 % of net generation—had the effect of nullifying a pre-existing Implementation Agreement obliging a private generator to supply 18 % power free of cost to Himachal Pradesh after the 12th year of commercial operation.

The judgment not only clarifies the substantive meaning of the 13 % cap but also establishes an important procedural precedent: High Courts should not exercise writ jurisdiction to re-write sectoral contracts or to interpret CERC tariff regulations when the CERC and the Appellate Tribunal for Electricity (APTEL) are specifically empowered to decide such matters.

2. Summary of the Judgment

Interpretation of Regulation 55: The 13 % figure in Note 3 is a tariff calculation parameter that merely limits what portion of free power can be passed through to beneficiaries via tariff. It does not prohibit a generating company from gifting or supplying a higher quantum of free power contractually.
Contract survives: Therefore the 1999 Implementation Agreement—requiring a total of 18 % free power for 28 years—remains valid and enforceable.
Petition before High Court not maintainable: Disputes on interpretation of tariff regulations lie within the exclusive domain of CERC/ APTEL. Resort to Article 226 was inappropriate, particularly when the generator had earlier approached CERC and accepted its tariff order without appeal.
Appeal allowed: The impugned Himachal Pradesh High Court order modifying the Implementation Agreement was set aside.

3. Analysis

3.1 Precedents Cited and Their Influence

PTC India Ltd. v. CERC (2010) 4 SCC 603.
– Established that a validly framed CERC regulation overrides inconsistent contractual clauses within the field it occupies.
• The Court here distinguished PTC India: Regulation 55 only covers tariff pass-through; it does not “occupy the field” of royalty-like free-power obligations in development agreements.
Tata Power Co. v. Reliance Energy (2009) 16 SCC 659.
– Recognised the post-2003 “delicensing” of generation and upheld generator autonomy in allocation decisions, subject to tariff approval.

• The Court relied on this autonomy to let JSW Hydro honour its voluntarily assumed 18 % free-power promise.
Jaipur Vidyut Vitran Nigam Ltd. v. MB Power (2024) 8 SCC 513.
– Warned High Courts against bypassing sectoral remedies under the Electricity Act.

• Cited to emphasise that writ courts should not intrude where CERC/APTEL are competent.

3.2 Legal Reasoning of the Court

Nature of Free Power: The obligation to deliver free power is part of the consideration paid by the generator for use of public resources (river water, land, clearances). It functions like a royalty, not a tariff component.
Scope of Regulation 55, Note 3:
- The phrase “shall be taken as 13 % or actual, whichever is less” explicitly contemplates situations where the actual free power exceeds 13 %.
- Consequently the cap applies only to tariff computation formulas (saleable capacity, energy charge, etc.).
- No language indicates an absolute prohibition on supplying more than 13 % free power.
CERC’s 2022 Tariff Order: When JSW Hydro asked for “relaxation” of the 13 % cap, CERC merely refused pass-through beyond 13 % and declared that PPA/PSA clauses inconsistent with tariff recovery must be aligned. It never struck down the Implementation Agreement.
Forum Appropriateness:
- Section 79 & Section 178 empower CERC to decide tariff issues; Section 111 provides an appeal to APTEL.
- Allowing writ petitions to modify contracts would fragment the sectoral dispute-resolution scheme and undercut uniform regulatory development.
Doctrine of Election / Approbat ion and Reprobation: – JSW Hydro, having accepted the CERC order without appeal, could not pivot to the contrary position that the Implementation Agreement stands overridden.

3.3 Impact of the Judgment

Substantive Clarification: Generators and States can still negotiate royalty-type free power beyond 13 %. Only the tariff pass-through is capped, protecting consumers from hidden costs.
Regulatory Architecture Reinforced: Confirms that CERC and APTEL are primary fora for interpreting tariff regulations; High Courts must exercise restraint.
Contractual Certainty: Large-scale hydro projects, often financed on the strength of governmental concessions, gain clarity that statutory tariff caps do not automatically rewrite earlier concession agreements.
Future Litigation Pathway: Parties will now approach CERC/APTEL—rather than filing writs—when disputing the interplay between tariff regulations and concession terms.

4. Complex Concepts Simplified

Free Power (FEHS): A percentage of the plant’s output delivered to the host State at zero monetary price, akin to a royalty for exploiting local natural resources.
Tariff Pass-Through: Elements the generator can recover from distribution companies (and ultimately consumers) through regulated prices.
Delicensing of Generation: Post-2003, anyone can set up a power plant without a licence, though selling power remains tariff-regulated.
Regulatory Jurisdiction vs. Contractual Autonomy: Regulations can override contracts only within the field they explicitly govern; beyond that, contracts stand.
CERC / APTEL Hierarchy: CERC frames tariff regulations and adjudicates disputes; dissatisfied parties appeal to APTEL; further appeal lies to the Supreme Court. High Courts are generally bypassed unless extraordinary grounds exist.

5. Conclusion

The Supreme Court’s ruling realigns the boundary between regulatory power and contractual freedom in the electricity sector. By holding that the 13 % ceiling in Note 3, Regulation 55 is not a blanket statutory limit on free-power obligations, the Court safeguards States’ ability to bargain for royalty-style benefits and preserves generators’ capacity to honour negotiated concessions. Equally significant is the procedural message: tariff-related grievances belong before the specialised fora created by the Electricity Act, not in writ courts. This twin affirmation—of sectoral autonomy and judicial self-restraint—will likely guide future hydropower contracts, tariff petitions, and litigation strategy across India’s power industry.