TARIFF PHILOSOPHY PAPER OF M.P.E.R.C.

PAYING CAPACITY / CROSS  SUBSIDIZATION / SUBSIDY

1. It is well recognized that to a large measure, the supply of power, at rates far less than the actual cost, to various categories of consumers contribute to losses of SEBs. It is also, recognized that a welfare State has to ensure that electricity, as a basic necessity, is available at affordable rates to its poorer citizens who lack the ability to pay for it, at cost price or market rate provided they do not misuse the facility. The following issues shall, however, be considered:
   1. the classes of consumers eligible for receiving electricity at subsidized rates without misusing it;
   2. the quantum of subsidy (cross subsidy and Government subsidy); and
   3. Government’s ability to bear the cost of subsidy and mechanism of flow of subsidy to the utility.
2. A class of consumers that is undeniably entitled to subsidized supply of electricity are the "life-line consumers". The life-line consumers use less electricity to meet their basic needs. The lower tariffs to life-line consumers, provided they do not misuse the electricity, should not cause significant financial loss to SEB. Such financial loss can be recovered to some extent by charging higher price to large-volume consumers, who have the capacity to pay. The life-line consumers usually belong to domestic and agriculture categories. Electricity subsidy should, therefore, be limited to specified level of consumption/load. Consumption above this level could be charged on a graded basis or scale, so that the big farmers and better off domestic consumers pay close or equal to actual cost.
3. The cross subsidization beyond reasonable and acceptable level adversely affects economic use of electricity and discourages investment in industrial and commercial sectors. Large industrial users usually pay above the cost of supply, whereas by cross – subsidization, low voltage users, such as, domestic and agricultural consumers, pay tariffs below the costs. Low LT tariffs result in an unproductive high demand of power, which puts pressure on the system capacity and the quality of service. The Commission shall therefore, consider the paying capacity of different categories and structure a reasonable cross-subsidy mechanism. Should the Commission consider so, it will need to:
   1. gather information on capacity to pay;
   2. define categories of consumers needing cross-subsidies, if any;
   3. identify the best mechanisms for providing those subsidies and the appropriate size of the subsidies;
   4. determine which category of consumers should pay for the cross-subsidization;
   5. quantify the current levels of cross-subsidies; and
   6. develop a plan for moving from the current cross-subsidy regime.
4. Approach of the Commission in the matter of subsidy under tariff structure shall be as under:
   1. Cross subsidy to be eliminated gradually in a phased manner over a period of 3-5 years. However, cross subsidy to domestic life-line consumers may continue even thereafter.
   2. For remaining domestic consumers, the tariff may be so increased that it becomes equal to the cost of supply within the next 3-5 years.
   3. Tariff of agriculture consumers be also increased gradually so that it comes to minimum seventy five percent of the cost of supply in the next 3-5 years.
   4. All other categories should be charged tariff not less than the cost of supply.
   5. The following mode of subsidization may be considered:
      1. cross–subsidization from industrial and commercial categories and those categories, which have capacity to pay, shall be to a reasonable limit; and
      2. the State Government shall provide subsidy to an agreeable extent by making explicit provision in the State Budget. The mechanism of flow of subsidy amount to the utility shall be as decided by the Commission.