For around a decade now, the Indian Railways has operated under the tag of an electricity distribution entity, allowing it to procure electricity at a lower cost. A recent Supreme Court order, however, has cancelled this “deemed licensee” status, setting off alarm bells for the national transporter at a time when its earnings are already under stress.The Railways is the country’s single largest user of electricity, deploying it mainly to run its locomotives as it rapidly electrifies the track network. It spent Rs 32,378 crore to run trains in 2024-25.But the Supreme Court ruling could push up these traction energy costs by over 30%, the Railway Board has warned in a May 15 letter. This would come on top of a 11.6% increase in ordinary working expenses (OWE) and 9.1% rise in pension expenditure in April. Meanwhile, freight operations, which make up 65% of the Railways’ earnings, have declined by 5%.All this could combine to hurt the Railways’ operating ratio — that is, how much it spends to earn every rupee — which has been under pressure for years. A lower operating ratio indicates better financial health. Railways’ operating ratio has usually remained above 98%, meaning it spends more than Rs 98 to earn Rs 100. Why was Railways given that status, why did it come under challenge, and what could this ruling mean for its financial health? A deeper dive.First, what is a deemed licensee? Story continues below this adA deemed distribution licensee is essentially a type of power distribution company (discom). It operates a system to distribute and supply electricity — rather than consuming it for its own use. A consumer can procure electricity in two ways — either from the distribution licensee in their area or through “open access”. If the consumer opts for the second route, they need to pay two surcharges — ‘cross-subsidy surcharge’ and ‘additional surcharge’. These charges compensate distribution companies for subsidised tariffs extended to categories such as farmers and low-income households.Also Read | Mumbai to Ahmedabad @ 320kmph: The making of the bullet trainThe Railways used to procure electricity like an ordinary consumer through the second route, paying both surcharges.Story continues below this adBut it argued that it qualified as a deemed distribution licensee since it operated a vast electricity distribution network for locomotives, signalling systems and station facilities. This status allowed it to procure electricity through open access without paying the two surcharges.It began operating under this tag in November 2015 following a Central Electricity Regulatory Commission (CERC) order. So why did the Railways seek the tag?The Railways initially did attach much importance to the deemed licensee status as it was still heavily reliant on diesel locomotives, making it the country’s largest buyer of the fuel. In 2016-17, it consumed nearly 287 crore litres to run trains. In 2017, only around 40% of the total broad gauge network (around 70,000 route kilometres) was electrified. But the Railways also began pushing for greater electrification around this time.Story continues below this adBetween 2019 and 2025, the pace of electrification surged, with over 15 route km being electrified each day on an average.Also Read | India’s high-speed rail dreams taking shape in this nondescript Adivasi villageBy 2024-25, the Railways’ diesel usage dropped 62% from 2016-17. Now, 99.6% of the country’s tracks are electrified.With this new push, in 2015, the CERC was requested to issue guidelines to all state transmission utilities and state load dispatch centers to facilitate open access to Railways as deemed licensee.However, multiple distribution companies and State Electricity Regulatory Commissions (SERCs) contested this order. Five out of the eight SERCs held that the Railways does not qualify as a deemed distribution licensee.Story continues below this adOn February 12, 2024, the Appellate Tribunal for Electricity held that the Railways did not qualify as a deemed licensee and was liable to pay cross-subsidy surcharge and additional surcharge like any other consumer.It is this order that the Supreme Court upheld on May 8. The top court has ruled that the Railways purchases electricity exclusively for its own use and supplies it to no one but its own constituents.How could these surcharges affect Railway finances?These two surcharges will increase the Railways’ electricity consumption costs and, ultimately, its net revenues (total revenues-expenditures). The Railways’ net earnings were marginal in 2022-23 and 2023-24. For 2024-25, it was Rs 2,660 crore but revised downward to Rs 1,957 crore for 2025-26. For the current financial year, 2026-27, it was projected to be Rs 3,000 crore. But this was before the Supreme Court ruling.Story continues below this adRailways in 2025 | Kashmir and Mizoram lines completed; new frontiers, traffic and freight challenges aheadWhat is making the situation worse for the Railways is its subdued income from the subsidised passenger sector and dependence on freight. For FY27, total revenue is projected at Rs 3.02 lakh crore and total expenditure is estimated at Rs 2.99 lakh crore. Of this revenue, passenger revenue is projected at Rs 87,300 crore and freight revenue at Rs 1.89 lakh croreIn comparison, passenger revenue stood at Rs 75,368 crore in 2024-25 and around Rs 80,000 crore in 2025-26. Freight earnings were Rs 1.71 lakh crore in 2024-25 and Rs 1.77 lakh crore in 2025-26With electricity costs expected to rise sharply after the Supreme Court ruling, the Railways may now face additional pressure on its operating ratio and overall finances.