Court confirms State Electricity Regulatory Commissions' jurisdiction to impose surcharge under Electricity Act, 2003; rejects challenges against ESCOMs and affirms surcharge liability regardless of inter-State open access usage
In a significant ruling dated August 5, 2026, the Karnataka High Court (Dharwad Bench) delivered a comprehensive verdict in a batch of writ petitions filed by Ugar Sugar Works Limited, Shri Hiranyakeshi Sahakari Sakkare Karkhane Niyamit, Godavari Biorefinaries Limited, and others challenging the imposition of cross-subsidy surcharge (CSS) by Hubli Electricity Supply Company Limited (HESCOM) and related regulatory provisions under the Electricity Act, 2003.
The petitioners, engaged in bagasse-based cogeneration power projects in Karnataka, contested the levy of CSS imposed by ESCOMs (Electricity Supply Companies) for the electricity drawn from distribution lines, including electricity procured through inter-State open access mechanisms such as the Indian Energy Exchange. They argued that ESCOMs lacked the status of distribution licensees under Section 14 of the Electricity Act, 2003, and hence could not impose such surcharge. Additionally, petitioners challenged the constitutional validity and vires of Regulation 3(1) of the Karnataka Electricity Regulatory Commission (Licensing) Regulations, 2004, and the Electricity (Amendment) Rules, 2023 promulgated by the Union of India.
The Court meticulously examined the legislative framework governing electricity distribution, open access, and surcharge provisions. Citing a series of landmark Supreme Court judgments, including Sesa Sterlite Limited v. Orissa Electricity Regulatory Commission (2014), Ramayana Ispat Pvt. Ltd. v. State of Rajasthan (2025), and Jaipur Vidyut Vitaran Nigam Ltd. v. Rajasthan Textile Mills Association (2025), the Court emphasized the following key legal principles:
1. Cross-Subsidy Surcharge (CSS) Rationale:
The CSS functions to compensate distribution licensees for the loss of cross-subsidy revenue caused when high-tariff consumers opt for open access supply from alternative sources. This surcharge safeguards the financial viability of ESCOMs and enables them to fulfill their obligation to supply electricity to vulnerable and subsidized consumer segments.
2. Jurisdiction of State Electricity Regulatory Commissions (SERCs):
While the Central Electricity Regulatory Commission (CERC) regulates inter-State transmission, State Commissions retain regulatory authority over intra-State transmission and distribution, including the imposition of CSS. The Court analogized regulatory authority over electricity distribution within States to toll imposition on National Highways passing through those States, underscoring that intra-State consumption falls within the ambit of State Commissions' jurisdiction even if power originates from outside the State.
3. Definition and Status of ESCOMs as Distribution Licensees:
The Court upheld that ESCOMs are "appropriate Government" entities deemed to be distribution licensees under Section 14 of the Electricity Act, 2003, by virtue of undertaking distribution responsibilities delegated by the State Government. Thus, their tariff orders, including levy of CSS, are valid and enforceable.
4. Applicability of CSS Regardless of Open Access Type:
The Court rejected the petitioners' contention that CSS should not apply to electricity procured via inter-State open access. It held that consumers situated within the ESCOMs' licensed distribution areas are liable to pay CSS irrespective of whether electricity is sourced from inter-State exchanges or otherwise, as they benefit from the distribution licensee's infrastructure and obligations.
5. Validity of Licensing Regulations and Amendment Rules:
The Court found no merit in the challenge to Regulation 3(1) of the Licensing Regulations and the Electricity (Amendment) Rules, 2023, affirming that these provisions are consistent with Sections 14 and 16 of the Electricity Act, 2003. The rules and regulations align with the legislative scheme to regulate licenses and conditions effectively.
6. Rejection of Discrimination Claim:
The petitioners argued that exemption of solar power projects from CSS while levying it on cogeneration plants amounted to unconstitutional discrimination. The Court dismissed this claim, emphasizing that tariff and surcharge structures are within the regulatory discretion to balance policy goals and do not violate Article 14 of the Constitution.
7. Limitation and Other Procedural Arguments:
Contentions regarding limitation under Section 56 of the Act and applicability of surcharge only on consumers directly using ESCOM lines were also rejected.
In conclusion, the Karnataka High Court dismissed all writ petitions challenging the surcharge demands and the regulatory framework underpinning them. The Court's decision reinforces the authority of State Electricity Regulatory Commissions to impose CSS for sustaining equitable electricity supply and distribution, especially to subsidize vulnerable consumers, and validates ESCOMs' status as distribution licensees under the Electricity Act, 2003.
This ruling has far-reaching implications for cogeneration plants and other consumers availing open access electricity in Karnataka and potentially other States, affirming that tariff obligations including surcharge must be respected regardless of the electricity sourcing mechanism.
Bottom Line:
Electricity Act, 2003 - Cross-subsidy surcharge (CSS) imposed on cogeneration plants upheld - Petitioners liable to pay surcharge regardless of using inter-State open access; State Electricity Regulatory Commissions have jurisdiction under the Act to impose such tariffs.
Statutory provision(s):
Electricity Act, 2003 Sections 14, 16, 42; Karnataka Electricity Regulatory Commission (Licensing) Regulations, 2004 Regulation 3(1); Electricity (Amendment) Rules, 2023 Rule 3 (inserting Rules 4B and 4C)
