The inefficient electricity tariff structure

The tariff orders for the Financial Year (FY-18) from Karnataka Electricity Regulatory Commission (KERC) were released in the second week of April, an uncharacteristic delay for the commission. What prompted the delay was an impromptu revised Annual Revenue Requirement (ARR) from the Bangalore Electricity Supply Company (BESCOM) two days before the scheduled public hearing. Subsequently a second hearing was held to look into the revised submission and hence the delay.

A need for revision

It is quite surprising for BESCOM to have a ‘Eureka’ moment and propose a new tariff structure for High Tension (HT) industrial and commercial consumers in order to keep them from migrating to open access. BESCOM proposed to increase the fixed cost component and reduce the energy charges, which seems to be a criterion for these consumers to migrate to open access independent of BESCOM supply.IndHT2a

Between FY 14 and FY 16, the number of industrial clients under BESCOM area increased by over 15%. However, the net sales made to this category has fallen by nearly 10%. On the contrary the energy quantum procured through open access mostly on the day ahead short term market has more than doubled which explains BESCOM’s concern.

Why is this migration a concern?

The root cause of the problem lies in the cross subsidising effect brought in by the two part tariffs. In an efficient system the fixed costs incurred in setting up infrastructure to deliver power is recovered in this component and energy charge reflects the true cost of supplying a single unit of energy. The National Tariff Policy of 2016 envisages this too. In reality, this system is inefficient due to an inherent need to cross subsidise consumer classes. Residential tariff has to be lower compared to industrial and hence when the industrial clients migrate, the revenues disappear too.

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BESCOM incurs 33% of its expenditure in fixed costs and however recovers only 11% through the fixed cost component in electricity tariffs. Hence it seemed very sensible for BESCOM to propose an increase in fixed costs and reduce the energy component.

The proposal dint go through the commission this year because of its ad-hoc submission and high resistance from industrial consumers who have made long term bilateral commitments assuming a high energy charge. A decline in energy charge and increase in fixed component would make their deals unfavourable. Although, the proposal seems radical it is not the real solution but it could make the situation better from worse and hence is likely to be given a try the next time around by when BESCOM is expected to make a solid case.

BESCOM data from relevant ARR filings.

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