Court Says Regulatory Asset Audit Ordered By Supreme Court May Include Examination Of Discoms; CAG Audit Not Barred At Notice Stage
New Delhi, June 22: The Delhi High Court has refused to interfere with a notice issued by the Government of NCT of Delhi (GNCTD) proposing the entrustment of a Comptroller and Auditor General (CAG) audit of BSES Rajdhani Power Limited (BRPL) and BSES Yamuna Power Limited (BYPL), holding that a writ petition challenging a mere show-cause notice is ordinarily not maintainable.
Justice Tejas Karia dismissed the petitions filed by the two power distribution companies challenging a notice dated 06.06.2026 issued under Section 20(3) of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971, through which GNCTD proposed entrusting the audit of the discoms to the CAG.
The dispute assumes significance as it arises from the long-running controversy surrounding Regulatory Assets (RA) accumulated by Delhi's power distribution companies and the Supreme Court's directions requiring a strict audit of circumstances leading to prolonged non-recovery of such regulatory assets.
Background: Regulatory Asset Dispute
The litigation traces its origins to the restructuring and privatization of the erstwhile Delhi Vidyut Board (DVB) in 2002, following which BRPL and BYPL became private distribution licensees operating in Delhi.
Over the years, substantial regulatory assets accumulated because approved tariffs did not fully recover the costs incurred by the distribution companies. The issue eventually reached the Supreme Court, which in August 2025 directed electricity regulators across the country to undertake a strict and intensive audit of circumstances that allowed distribution companies to continue functioning without recovery of regulatory assets.
Pursuant to those directions, the Delhi Electricity Regulatory Commission (DERC) sought an audit. However, controversy arose over whether such audit could be conducted by the CAG. The matter was also considered by the Appellate Tribunal for Electricity (APTEL), which directed DERC to appoint a Chartered Accountant for conducting the audit and expressed reservations regarding the proposed CAG audit.
Against this backdrop, GNCTD issued the impugned notice proposing entrustment of audit to the CAG and inviting objections from the discoms before taking a final decision.
BSES Contended Audit Was Contrary To Earlier Judgments
Senior Advocate Sandeep Sethi, appearing for the petitioners, argued that the proposed audit was contrary to the Supreme Court's Regulatory Asset judgment and the earlier Delhi High Court decision in the URJA case.
The discoms contended that the Supreme Court had directed an audit of the circumstances leading to prolonged regulatory assets and not an audit of the distribution companies themselves. According to the petitioners, the audit contemplated by the Supreme Court was primarily intended to examine the role of the regulator and instances of alleged regulatory failure.
It was further argued that APTEL had already quashed an earlier attempt to initiate a CAG audit and directed appointment of a Chartered Accountant instead. Therefore, GNCTD could not revive the same process through a fresh notice.
The petitioners also relied heavily on the 2015 URJA judgment of the Delhi High Court, where a Division Bench had held that a parallel CAG audit would serve no useful public purpose in matters already regulated under the Electricity Act and overseen by DERC.
GNCTD Defended Proposed Audit
The Government of NCT of Delhi opposed the petitions, arguing that the impugned communication was merely a show-cause notice providing an opportunity of hearing and therefore did not create any enforceable grievance.
The Government further submitted that the Supreme Court's Regulatory Asset judgment emphasized the need for a strict and intensive audit in public interest. Since regulatory assets and associated recoveries ultimately impact electricity consumers, an independent audit was necessary to ensure transparency, accountability and financial discipline.
GNCTD argued that the proposed audit would help ascertain the circumstances in which the distribution companies continued operating despite prolonged non-recovery of regulatory assets and would serve the larger interests of consumers.
High Court: Show-Cause Notice Cannot Ordinarily Be Challenged
At the outset, the Court noted that the impugned communication merely called upon the discoms to submit their responses and participate in a hearing before any final decision regarding entrustment of audit was taken.
Relying on the Supreme Court's decisions in Union of India v. Kunisetty Satyanarayana and Secretary, Ministry of Defence v. Prabhash Chandra Mirdha, the Court reiterated that writ jurisdiction is ordinarily not exercised to quash show-cause notices because such notices do not by themselves affect legal rights or create adverse civil consequences.
The Court observed that a notice merely offering an opportunity of hearing cannot generally be treated as an adverse order warranting immediate judicial intervention.
Supreme Court's Audit Direction Not Limited To Regulator
Rejecting the principal argument advanced by the petitioners, the Court held that the Supreme Court's Regulatory Asset judgment did not restrict the audit solely to DERC or exclude examination of the distribution companies.
According to the Court, the direction requiring a "strict and intensive audit of the circumstances" surrounding non-recovery of regulatory assets was broad enough to include examination of the records, conduct, accounts and financial position of the distribution companies themselves.
The Court observed that determining the reasons behind prolonged accumulation of regulatory assets would necessarily require examination of all relevant stakeholders, including the discoms. Therefore, the contention that the proposed audit amounted to a mischaracterization of the Supreme Court's directions was rejected.
CAG Audit Not Expressly Prohibited
The High Court further noted that the Supreme Court had not specified any particular auditing agency for conducting the exercise. Nor had it expressly prohibited the possibility of a CAG audit.
Consequently, subject to compliance with the statutory requirements under Section 20 of the CAG Act, the Court held that audit by the CAG could not be ruled out merely because the Supreme Court did not specifically name the CAG as the auditing authority.
Court Distinguishes Earlier URJA Judgment
Addressing the reliance placed on the 2015 URJA judgment, the Court held that the factual context of the present dispute was fundamentally different.
The Court noted that the earlier case involved a proposed audit under the general framework of the Electricity Act, whereas the present proposal stemmed from specific directions issued by the Supreme Court in the Regulatory Asset judgment. Further, the current process had been initiated as part of compliance with the Supreme Court's directions and not as an attempt by GNCTD to create a parallel regulatory mechanism.
The Court also emphasized that unlike the earlier proceedings, the present notice expressly provided an opportunity of hearing to the discoms before any final decision could be taken.
For these reasons, the Court held that the URJA judgment did not bar issuance of the impugned notice.
Petition Dismissed
Concluding that the impugned communication was only a show-cause notice and that the objections raised by the petitioners could be adequately considered by the competent authority during the statutory hearing process, the Court dismissed the writ petition.
The Court clarified that all contentions of the parties on the merits of the proposed audit remain open and must be independently considered by the competent authority while deciding whether the audit should ultimately be entrusted to the CAG.
Key Takeaway
The judgment is significant because it keeps open the possibility of a CAG audit of Delhi's private power distribution companies while simultaneously reaffirming the settled principle that courts ordinarily do not interfere at the stage of show-cause notices. The ruling also highlights the continuing judicial scrutiny surrounding regulatory assets and their impact on electricity consumers in Delhi.