“Far from being demeaning to human spiritual values, scientific rationalism is the crowning glory of the human spirit.”

– Richard Dawkins

Iman Kalyan Baksi

Dawkins here dawns upon a philosophical question, asking whether rationality and the human spirit are condescending to each other. On the other hand, the electricity sector at this stage asks a similar question: is the rationalisation of tariffs necessarily harsh and iniquitous? With a philosophical background set, the core issue to be dealt with here is the rationalisation of tariffs and its effect on two larger questions on electricity distribution – open access and cross-subsidy. With the Tariff Policy of 2016 laying out clear instructions regarding the two, its implementation has not been satisfactorily met by the various states, thereby making distribution the weakest link in the power sector in general.

Background

With a view to look at open access in electricity through the framework of tariff rationality, it is important to start with what its legal sanctions are and the problems at hand. Open access (OA) is defined by the Electricity Act of 2003 as “the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission”  (Electricity Act 2003). The Act also lays down that the State Commission shall introduce OA in phases keeping in mind certain cross subsidy surcharges and other surcharges to be levied on OA users to meet the requirements of the distribution licensees and that too must be progressively reduced. It is clear that OA was introduced in order to make the distribution more marketized and to induce competition, but it has failed due to a number of issues. The chief issues being connected are the continuous shift of consumers from OA to the public utility, cross subsidy surcharges (CSS), additional surcharges, tariff rationalization and so on (Ministry of Power 2017). 

Cross Subsidy Surcharges (CSS)  

The main aspect to be focussed upon here is the aspect of cross-subsidy surcharges not only from OA consumers, but consumers in general – especially commercial and industrial consumer groups. Coming to the general aspect of cross-subsidy, the Tariff Policy states that:

“For achieving the objective that the tariff progressively reflects the cost of supply of electricity, the Appropriate Commission would notify a roadmap such that tariffs are brought within ± 20% of the average cost of supply. The road map would also have intermediate milestones, based on the approach of a gradual reduction in cross-subsidy” (Tariff Policy 2016)

This makes it clear that subsidised consumer groups like farmers and domestic consumers must get subsidies up to 80% of the cost of supply (CoS) while subsidising entities like industries and commercial enterprises must pay a maximum of 120% of CoS (keeping the actual cost to be 100%). However, the following table shows the problem of non-responsiveness of states with regard to the tariff policy.

Cost Coverage in Tariff Orders	Within 20%	Outside 20%
Basis of average cost of supply	4 states	9 states
Basis of cost of supply	2 states	1 state
Not Published	–	13 states

The problem with the above table is varying in nature. Firstly, as a whole only 6 states out of 29 are meeting the criteria as mentioned, which shows the lackadaisical nature of the states in response to the Tariff Policy. Secondly, there is a more structural problem of calculation of tariffs which is differential in nature. While some states use ACoS method to calculate subsidies the rest calculate using the CoS method. States using the CoS method can be differentiated further through their different methods like the embedded approach or the simplified approach (Forum of Regulators 2015). Such non-uniform techniques are difficult to gauge and make sense of when the problem faced is of a similar nature. More importantly, the lack of publishing of information regarding the cost coverage is a blot on the system of transparent and accountable regulation. A mechanism must be put in place to ensure such an information vacuum does not occur, that is like a council of states discussing tariffs strengthening cooperative federalism. Hence tariff rationalisation has to first take account of the following factors in matters of CSS and cross-subsidy in general. 

To make a brief note as to why CSS affects open access is because it can make a huge portion of the cost of supply and if DISCOMS are only dependent on such a surcharge for filling up the revenue requirements of the company, then the progressive tariff can be an impediment to take up OA. So, it must be stated that CSS must be levied with an aim of its progressive reduction and a part of the revenue must be taken up by the state and the central governments in order to help the DISCOMS maintain its financial sustainability and also because to not put too much pressure on the CSS as a source of revenue which can dampen the competitive spirit. The proposal given by the Ministry of Power was to introduce the levying of CSS via the Time of the Day (ToD) framework. It means classifications like the peak, non-peak hours must be taken into account while levying such surcharges. Also, an important suggestion is to not impose CSS as a blanket charge but to keep classifications like category wise rate and voltage wise rate in order to have a much more rational and well-defined rate structure for CSS and cross-subsidy for non-OA consumers.

 Re-designing of Revenue

The final discussion on the topic of tariff rationalisation is the issue of designing revenue collected by the SERCs in general. Now the main issue here is the principle laid down in the National Tariff Policy of 2016 which is that the tariffs imposed must be reflective of the cost. In fact, the whole issue of tariff rationalisation is based on this principle other than the general principles of market and competition. The progressive reduction of cross subsidy in general form electricity tariff is due to the fact that without being blind to the issue of universal supply, there must be an efficient and effective way of applying the right to electricity in India. 

The costs of electricity pricing are mainly divided into variable/energy and fixed/demand cost. Now the problem here lies in that the charges borne by the consumer and costs incurred upon the public utility are not reflective of each other. It is often seen that while consumers pay for the variable cost incurred, a huge chunk of the fixed costs is not billed for revenue. This can be seen in the table below taking the example of Maharashtra:

	Cost (in %)	Revenue (in %)
Fixed	42	16
Variable	58	84

So as the above table suggests, the revenue and cost are not reflective of each other, thereby causing problems in raising revenues in correspondence of the high fixed costs of the SERCs. Thus, there is a huge gap between revenue and cost, leading to pushing of the pressure of such a gap into subsidies and cross subsidies, which further makes the whole process financially unviable. In fact the above source even states only 27% of the fixed cost is recovered trough fixed tariff and the first proposal would be ensure the reflection of the fixed cost in the revenue collection. However, as it must be reiterated that consumer categories like the domestic categories and farmers must not be treated as a blanket category and distinction between the higher and lower tension users must be made and only then such transference be made.

Conclusion

To conclude, a Regulatory Impact Assessment (RIA or a Cost and Benefit Assessment) must be made in discussion with the stakeholders, and as mentioned a phase by phase approach must be made. The RIA shall ensure that possible impacts like an inflationary impact and its solutions like helping farmers through subsidies as a means to help them absorb the tariff hike should be taken into fold while implementing the policy. So, all in all tariff rationalisation as a policy must not be treated as an inhuman policy attached as a tag to it just because it involves as revision of costs. In the near future, it is a policy that shall save the crumbling finances of power industry in India.

Iman has a Bachelor’s degree in History from the University of Delhi and is interested in education policy, issues in governance and cultural policy. Food, cinema and chai in different permutations and combinations are of interest to him other than the policy space. He can be reached out at imankbaksi@nls.ac.in.

References

Forum of Regulators. 2015. “Report on Road Map for Reduction in Cross Subsidy” (http://www.forumofregulators.gov.in/Data/WhatsNew/Report.pdf) (accessed on 15^th June 2020)

Forum of Regulators. 2017. “Minutes Of the 60th Meeting Of The Forum Of Regulators (For) Held At New Delhi” (http://www.forumofregulators.gov.in/Data/Meetings/Minutes/60N.pdf) (accessed on 15^th June 2020)

Ministry of Law and Justice. 2003.”The Electricity Act ” (http://www.cercind.gov.in/Act-with-amendment.pdf) (accessed on 15^th June 2020)

Ministry of Power. 2016. “Tariff Policy Resolution” (http://www.cercind.gov.in/2018/whatsnew/Tariff_Policy-Resolution_Dated_28012016.pdf) (accessed on 15^th June 2020)

Ministry of Power. 2017.  “Consultation Paper on issues pertaining to Open Access” (https://powermin.nic.in/sites/default/files/webform/notices/Seeking_Comments_on_Consultation_paper_on_issues_pertaining_to_Open_Access.pdf) (accessed on 15^th June 2020)