Early this month, the Gujarat electricity regulator rolled out a tariff regime for the current fiscal year. On the face of it, this reflects poorly on the principle of aligning tariff with costs. The tariff increase closes only 20% of the revenue gap. Against a shortfall of Rs 1,500 crore that requires an average raise of 30 paise per unit across all consumers, the increase is a modest 10 paise per unit for most consumers barring those in the below poverty line segment.
However, the regulator in Gujarat derives confidence in restoring the financial health of utilities from two aspects of the overall tariff design. First, any rise in fuel cost leading to a tariff hike is automatically “passed through” to the consumers. Similar is the case when the utility purchases expensive power in times of shortages—utilities don’t need to seek lengthy regulatory approvals fraught with political resistance for recovering the higher costs through an increase in tariff. As a result, over the last two years, the tariff for the domestic segment in Gujarat has risen a significant 20%.
Thus Gujarat has not witnessed a substantial build-up in tariff gaps that need to be closed; the financial health of the four distribution utilities in the state is significantly better than those in other states.
There are lessons here for other states.
Most have not coped well owing to two factors. First, for a long time, the automatic surcharge allowance was not implemented even though in several cases it was part of their regulation. Second, in some stray cases, even when the regulator passed orders allowing automatic tariff hikes, the political system stalls it. This happened in West Bengal after Mamata Banerjee took over as chief minister—the state-owned distribution utility did not enforce it, though over the last few months this blockade has eased.
With the Union government preparing a bailout package for the state electricity sector, the efficient working of the state electricity regulator will be crucial to its success. Past performance hardly inspires confidence. It is essential that the package involves an oversight on the performance of the regulators.
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