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

UNIFORM / DIFFERENTIAL TARIFF

1. Historically uniform tariffs have prevailed in Madhya Pradesh and also in all other States in spite of significant geographic cost differences. Moreover, the public has become accustomed to uniform tariff for long.
2. Efficiency may suffer if prices do not reflect reasonable cost differences. In this case, consumers paying less than the cost will tend to consume more electricity and those paying more than the cost will be forced to consume less resulting in sub optimal use of available electricity.
3. Differential tariffs that vary in relation to cost differences generally make better use of society's resources than uniform tariffs. While geographically cost-based tariffs are more efficient, the shift away from uniform retail rates across the region violates the principle of good tariff design that the existing consumers should not be surprised by sudden and significant discontinuities in their tariffs. The principle of tariff continuity, however, should not be allowed to preserve inefficient tariffs indefinitely. In fact, differential tariff based on cost differences for different zones is a natural outcome.
4. Prices for electricity that reflect differences in cost as much as possible are usually more efficient. This principle holds good over time and for geographical area. The Commission believes that effective cost-based electricity pricing would involve Time of Day (TOD) tariff and that it should be applied for H.T. customers, subject to availability of meters. However, even if meters are available, still considering their cost and also the large number of consumers in LT category, application of TOD tariff may not be practicable. This principle would result in reduction of purchase of costly power during peak hours by shifting loads to off-peak hours and thereby flattening the load curve through demand side management.
5. The need for having differential tariff may be felt later when the power sector in the State undergoes reforms. This will depend upon the nature of the reforms the State opts for. If as a part of the reforms, separate distribution companies are formed, each such company may propose its own tariff based on its own cost. However, MPSEB presently being the sole supplier of electricity in the State, there does not seem to be sufficient reason for the Commission to shift from the concept of uniform tariff.