Audit Was Not the Question. Method Was.

• By Mayuri Singh and Nishant Saxena

A recent ruling of the Appellate Tribunal for Electricity (APTEL) on Delhi’s power sector does more than settle a dispute on audit authority. It sets a clear boundary on how regulatory reform must be executed.

The direction to audit distribution companies remains undisturbed. The attempt to route that audit through the Comptroller and Auditor General (CAG)  does not. The Tribunal held that the audit must proceed through a chartered accountant, since the statutory conditions required to invoke the CAG route were not satisfied.

The message is direct. Even where a higher judicial mandate exists, regulatory action must remain anchored in the statute that governs it.

The decision in context

The Hon’ble Supreme Court had earlier addressed the accumulation of regulatory assets, directing State regulators to establish a liquidation roadmap and undertake a strict and intensive audit into the circumstances that led to their build-up.

In response, the Delhi Electricity Regulatory Commission (DERC) sought to initiate a CAG-led audit. The distribution companies challenged this approach, pointing to the requirements under Section 20 of the CAG Act.

The Tribunal’s ruling turned on two findings.

The approval to entrust the audit to the CAG was set aside. There was no material to demonstrate that the Lt. Governor had formed and recorded satisfaction that such an audit was expedient in “public interest”. Nor was there evidence that the utilities were given a meaningful opportunity to respond to a defined audit proposal, including its scope and terms.

At the same time, the Tribunal directed that the audit proceed through a chartered accountant, to be appointed within one week and to complete the exercise within three months.

The audit continues, but its method is brought back within statutory limits.

Objective and method cannot diverge

The judgment draws a distinction of wider relevance.

The objective, as set by the Hon’ble Supreme Court, was regulatory discipline through audit and timely liquidation. The method adopted to achieve that objective had to comply with the statutory framework governing it.

Section 20 of the CAG Act requires a demonstrable public-interest basis, supported by recorded satisfaction, prior consultation with the CAG, agreement on terms, and a meaningful opportunity for the affected entity to respond to a concrete proposal.

These elements are not procedural formalities. They define the legal route through which such a decision must travel.

In this case, that route was not established on record.

Where the decision framework fell short

The DERC’s authority to initiate an audit was not in question. The issue lay in how that authority was exercised.

→ There was no recorded reasoning explaining why a CAG-led audit, as opposed to other available mechanisms, satisfied the statutory threshold of public interest.

→ The scope of the proposed audit was not defined in a way that allowed the utilities to respond meaningfully.

→ The statutory sequence of consultation, agreement on terms, and opportunity to represent did not materialise in a manner that could be examined.

The effect was straightforward. The decision moved forward without the framework required to sustain it. This is where regulatory action moved ahead of its statutory design, without building the narrative and record required to justify that choice.

At a practical level, this is not only a legal lapse. It reflects how regulatory decisions are often constructed and communicated. The choice of instrument was not accompanied by a clearly articulated rationale, a defined scope, or a structured engagement with stakeholders. In the absence of that, even a defensible objective begins to appear arbitrary. In a sector where regulatory actions carry financial and public implications, the way a decision is explained becomes as important as the decision itself.

Audit as a focused inquiry

The Tribunal also clarified the nature of the audit.

The exercise is directed at examining the circumstances in which regulatory assets accumulated. It is not conceived as a wide-ranging forensic investigation akin to tax or enforcement proceedings.

This distinction explains why the Tribunal did not consider it necessary to invoke a constitutional audit institution, particularly when the regulator already has the ability to conduct a rigorous, purpose-driven inquiry through professional mechanisms such as chartered accountants. The Delhi High Court’s earlier RWAs judgment had recognised this capability.

The audit is therefore framed as a targeted examination of regulatory outcomes and decision pathways, rather than a reopening of financial accounts in their entirety.

Delay is no longer a neutral act

On regulatory asset liquidation, the Tribunal’s position is unambiguous.

The request to defer commencement until completion of the FY 2023-24 true-up process was rejected. The Tribunal held that there is no legal impediment to initiating liquidation where the quantum of regulatory assets is already known, even if subject to later adjustment.

It further directed that the process of liquidation must begin within three weeks from the date of the order. At the same time, recognising the statutory process involved, it granted time until 30 June 2026 for issuance of the FY 2023-24 true-up order.

More significantly, the delay itself was examined. The order records that the conduct “appears to be malafide” and “needs to be deprecated,” noting the absence of any cogent or plausible reason for not commencing liquidation earlier.

This clarifies how delay is now being viewed. It is not an administrative choice without consequence.

Deferred liquidation increases the burden ultimately borne by consumers and weakens the reform trajectory set by the Hon’ble Supreme Court. The space for postponing implementation through sequencing is narrowing.

The Tribunal’s supervisory posture

The judgment also clarified the Tribunal’s role.

Invoking its powers under Section 121 of the Electricity Act, the Tribunal rejected the view that it could not examine the legality of the DERC’s chosen implementation path. Where the method adopted departs from the governing statute, it falls within its remit to intervene.

Compliance with judicial directions is therefore not assessed in isolation. It must align with the statutory framework within which regulators operate.

Implications beyond the case

The immediate outcome is clear. The audit will proceed through a chartered accountant within a defined timeframe, and regulatory asset liquidation must begin without further delay.

The broader implications are more consequential.

Regulators will need to ensure that decisions, particularly those taken in response to judicial directions, are supported by a clear and recorded rationale aligned with statutory requirements.

Audit design will need to reflect purpose, with mechanisms proportionate to the objective.

Timelines linked to tariff impact and consumer burden are likely to face closer scrutiny, reducing the scope for deferment through internal sequencing.

For utilities, engagement with regulatory processes will increasingly require attention to how decisions are structured, not only to what they seek to achieve.

Parting Thoughts

The ruling does not alter the direction of reform in the power sector. It sharpens the discipline within which that reform must be carried out.

As institutions move to address legacy issues, the durability of regulatory action will depend on the strength of the legal and procedural framework that supports it.

The objective may be clear. The route must be equally precise, and equally well constructed, recorded, and communicated. That is where regulatory credibility is now being tested.

Can regulatory urgency coexist with strict statutory discipline, or will one inevitably slow the other down?

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