The Legality of Automation: Analysing the Index-Linked Tariff Revision under Draft National Electricity Policy 2026

[Aryan and Ashish are students at Dr Ram Manohar Lohia National Law University.]

On 20 January 2026, the Ministry of Power notified the draft National Electricity Policy (NEP) 2026 inviting stakeholders to provide feedback before its finalization. There are several bold steps that the Ministry has undertaken in the new policy, which updates the current 2005 NEP, leading to commentators calling it India’s Second-Generation Power Sector Reform. One such feature is an index-linked automatic tariff revision mechanism. The draft policy states that there is an urgent need for financial sustainability in the power sector through recovery of supply cost and identifies the continued practice of setting tariffs below the cost of supply has resulted in distribution companies (DISCOMs) being trapped in recurrent debt cycles.

However, the concerns are not new. In 2016, the National Tariff Policy sought to establish long-term predictability through multi-year tariff frameworks and periodic true-ups. Since those mechanisms still relied on State Electricity Regulatory Commissions (SERCs) to proactively clear cost pass-throughs, they were routinely delayed by local political pressures, leading to a massive accumulation of “regulatory assets”. Further, the Electricity (Amendment) Bill 2022 and the recent Electricity Bill 2025 attempted to address this by requiring stricter tariff-setting discipline, forcing cost-reflective pricing, and implementing stringent payment security mechanisms. Although well intended to improve the financial health of the DISCOMs operations, these measures face an inherent limitation as they rely on ‘adoption’ by SERC, which can fail to issue a timely order.

To alter this state, the mechanism of automatic annual tariff revision is proposed where the idea is to link tariff to a suitable index for automatic annual revision which operates if no tariff order is passed by the State Commission. However this change prima facie does not align with the tariff revision/determination framework envisaged in the parent statute i.e. the Electricity Act 2003 (Act). In this blog, the author investigates the sustainability of such automatic tariff revision mechanism, pointing legal and policy challenges it would face in materialising. Potential solution to the legal issues is discussed.

Current Framework of Tariff Determination and Revision under the Act

Before delving into the limitation of the method proposed, a brief perusal of the current method of tariff determination and revision should be analysed. Broadly tariff determination process under the Act puts the locus of pricing away from strict executive control to a more deliberative multi-stakeholder process administered by independent commissions. Under Sections 79 and 86, the Central Electricity Regulatory Commission (CERC) regulates inter-state utilities, while SERCs govern intra-state generation, transmission, and retail distribution.

Section 61 of the Act provides the guiding principles for tariff determination and mandates a gradual reduction of cross-subsidies, promotes renewable energy integration, and applies cost-reflective pricing principles designed to reward operational efficiency. The commissions actively determine "cost-plus" tariffs (cost plus a guaranteed profit) across supply, transmission, and retail channels under Section 62. This, however, can be bypassed under Section 63, where the Commission does not determine the tariff but adopts a market discovered tariff through a transparent process of competitive bidding in accordance with guidelines issued by the Central Government.

As an illustration, for determining electricity tariffs for a year, the SERC will begin the assessment with principles provided under Section 61 as a guide, and the Commission applies Section 62 by conducting an intensive "cost-plus" audit, calculating exact generation expenses and adding a guaranteed profit margin to fix a final tariff. However, for a new solar project, the Commission can bypass this calculation via Section 63 and instead hold a transparent competitive auction where private developers bid against each other, and the Commission then simply adopts the lowest market-discovered rate thereby automatically satisfying the efficiency and renewable mandates of Section 61, without setting the price themselves.

The actual operationalisation of the tariff request is through a strict, public-facing process under Section 64. Utilities must file an annual tariff petition, publish it widely to invite public objections, and undergo transparent regulatory hearings. Next, the Commission is legally mandated to issue a comprehensive tariff order within 120 days of receiving the application and to protect consumers from frequent price volatility, Section 62(4) dictates that tariffs cannot ordinarily be amended more than once in a single financial year. However, a vital statutory exception is carved out for the fuel adjustment charge (FAC) formula, which allows utilities to automatically pass through mid-year fluctuations in volatile raw fuel and power procurement costs.

To illustrate, a DISCOM that needs to raise it electricity rates cannot simply hike its prices overnight but must file a formal annual tariff petition with the State Commission, which is then published in major newspapers to invite public objections and feedback. Following a series of transparent, public regulatory hearings where consumer advocacy groups and citizens debate the proposed rates, the Commission is legally mandated to issue a comprehensive, binding tariff order within 120 days of the initial application. To protect consumers from unpredictable price jumps, Section 62(4) ensures this approved rate is locked in and cannot ordinarily be altered again during that financial year. However, if global coal or railway freight costs suddenly skyrocket mid-year, the utility can trigger the FAC exception that allows them to bypass the lengthy 120-day public hearing process and use a pre-approved mathematical formula to automatically pass that specific raw fuel cost fluctuation directly through to consumers' monthly bills.

The Limitation of Automatic Annual Revision of Tariff Linked to a Suitable Index Mechanism

Now observing the tariff determination process under the Electricity Act provides us with a model where firstly, the tariff revision process should be done annually once and secondly, only through stakeholder participation and deliberation under Section 64. This is an important manifestation of deliberative democracy as envisaged under the Indian constitutional scheme in general and the Act’s preamble which aims to reconcile the best measures conducive to development of electricity industry, promoting competition therein while protecting interest of consumers. This ensures that effective ex-ante framework, where before the tariff order is passed by the relevant commission, all affected parties are consulted and a consensus is built over the tariff through relevant commission’s mediating presence.

By focusing on ‘annual revision’ of the tariff, the draft NEP upends the Section 64 framework of tariff revision to the extent that it bypasses the deliberation requirement in such instances. The framework then shifts to an ‘ex-post’ framework during these instances (where no tariff order is passed by the State Commission), which are quite frequently seen. Here, the challenge to tariff determined by automatic revision can only be after it has been adopted. In essence, the policy translates consumer interests and other guiding principles under Section 61 into an index, like Consumer Price Index. A practical harm due to this change is the removal of the protective buffer that shielded consumers from immediate price shocks without their participation in the revision process. By linking the revisions to an index, the policy circumvents the deliberative mandate and the de-insulates the consumer form the real-world inflation of power supply costs.

The courts have also been cautious of this fact. In Gujarat Urja Vikas Nigam Limited v. Solar Semiconductor Power Company Private Limited and Another where the Hon’ble Supreme Court was examining the extent to which the Commission could exercise its inherent power under the Gujarat Electricity Regulatory Commission (Conduct of Business) Regulations 2004, it went ahead to note that the interest of the consumers, as an objective, can be clearly ascertained from the Act. The court held that preamble of the Act mentions protecting the interests of the consumers and requires that the interests of the consumers be safeguarded when determining the tariff. It further noted that under Section 64, read with Section 62, determination of tariff is to be made only after considering all suggestions and objections received from the public. Towing the same line, Bombay High Court in O2 Renewable Energy VII Private Limited and Others v. Maharashtra Electricity Regulatory Commission and Others held that Maharashtra Electricity Regulatory Commission (MERC) acted beyond its authority in revising the multi-year tariff order without giving prior notice or a fair hearing to all parties concerned. The court emphasized the importance of procedural consistency, noting that when MERC had followed a participatory process in issuing the original tariff order, it was bound to adopt the same approach while reviewing it. Thus, any revision that is envisaged under the NEP bypassing Section 64 approach is liable to be declared ultra vires of the Act.

The Way Ahead: Policy v/s Statute

Although the proposed automatic tariff revision mechanism prima facie looks legally deficient under Section 64, it is important to recognize the commercial realities driving the Ministry of Power’s proposal. The draft NEP 2026 is attempting to cure a systemic market failure. SERCs frequently delay issuing annual tariff orders, often bowing to state-level political pressures to avoid hiking power rates. This regulatory paralysis has jammed DISCOMs in a debt trap leading to severe deterioration of the financial health of the sector. In this context, the Ministry is focusing on Section 61(d) of the Act, which explicitly mandates that tariff regulations must safeguard the commercial principles and financial recovery of the electricity supply cost. The NEP's automatic indexation is a desperate measure to enforce financial discipline where state regulators have abdicated their statutory duty. This, however, collides heads-on with a fundamental tenet of administrative law where the delegated legislation or policy cannot override explicit procedural mandates of its parent statute.

To harmonise the NEP framework with the Act, the author proposes two potential solution –- a formula-based approach and the legislative amendment.

Formula-based approach

The exception present under Section 62(4) regarding FAC can be leveraged to introduce the automatic annual tariff revision. Currently, the FAC allows for automatic pass-through of fuel costs without fresh hearings because the formula for passing-through was already subjected to public scrutiny.

Similarly, instead of bypassing Section 64 entirely, SERCs could be mandated to hold a comprehensive, multi-stakeholder public hearing to deliberate and approve the specific "index-linked formula" for a multi-year control period. Once the public has had the opportunity to object to and shape the index itself, the subsequent annual application of that formula becomes a mere arithmetic exercise rather than a fresh tariff determination. This would satisfy the deliberative requirement of Section 64 ex-ante, shielding the subsequent automatic revisions from legal challenge.

Legislative amendment

A relatively more robust solution is through parliamentary intervention. Although the Electricity Bill 2025 does not discuss provisions pertaining to automatic revision of tariff, to permanently insulate it from litigation, the Central Government must introduce an amendment to Section 64 of the Act. This amendment would need to explicitly grant statutory backing for automatic, index-linked tariff revisions in the specific event that a State Commission fails to issue a tariff order within the mandated 120-day timeframe.

Conclusion

The draft NEP 2026’s proposal for an index-linked automatic tariff revision is a bold and commercial necessary intervention aimed at saving DISCOMs from financial ruin. Energy NGOs, like Prayas (Energy Group), have appreciated this automatic annual revision stating that such revision is necessary in many with significant financial stress due to build-up of working capital liabilities, substantial regulatory assets or annual revenue gaps. However, in its current model, it runs a serious risk of being impermissible within the limits of the Act. A practical way forward would include alteration to the legal structure –- either through subjecting the index formula itself to public hearings or by directly amending the parent Act.