Tariffs on electricity, water and gas: The cost of inefficient pricing

Source– The post is based on the article “Tariffs on electricity, water and gas: The cost of inefficient pricing” published in “The Indian Express” on 4th May 2023.

Syllabus: GS2- Government policies and interventions. GS3- Economy

Relevance– Pricing of essential goods and services

News– The article explain the issues of tariff on utilities

What are the issues with tariffs on utilities in India?

The pricing of utilities like electricity, water and gas is a complicated exercise in India. Prices are largely administered. They are not market driven. They seldom cover the costs of provision.

They are a deeply political decision.

Take the example of electricity. Tariffs levied by power distribution companies across states do not reflect the cost of supplying power. In 2020-21, the average cost of supplying power was pegged at Rs 6.19 per unit. In comparison, the revenue from discoms operations worked out to only Rs 4.21 per unit.

In the case of water, the recovery is even lower. According to some estimates, water boards across the country are able to recover only around a third of their operation and maintenance costs.

In the case of the Delhi Jal Board, in 2021-22, its projected income was insufficient to cover its operating costs and its interest liability.

The distribution of tariffs among different consumers is another issue . In most states, power and water tariffs paid by agricultural consumers are a fraction of those paid by industrial and commercial users.

For instance, in 2020-21, power tariffs for commercial users were nine times more than those for agricultural consumers, and industrial tariffs were seven times higher.

In comparison, in developed countries, tariffs for industrial consumers tend to be lower than those for households.

There are multiple pricing regimes. Chhattisgarh’s tariff order is an example of this. Industrial consumers are further divided into six slabs and each slab is charged a different fixed and energy cost. Domestic consumers are divided into five slabs.

In the case of gas too, there are multiple pricing regimes — from the administered pricing mechanism (APM) framework to the non-APM and imported LNG regimes.

What is the way forward for tariffs on utilities in India?

Consumers should get the full benefits of lower gas prices during a down cycle, and producers get the full upside when prices rise.

The imposition of the floor and ceiling is arbitrary but so is the proposed increase in gas prices every year.

Prices tend to act as signals for both producers and consumers. Market based pricing tends to lead to optimal usage, increased efficiency and better outcomes.

For instance, higher prices that reflect the true costs of electricity and water would perhaps encourage farmers to shift away from water-guzzling crops. But their low cost encourages inefficient usage.

What are the impacts of lower tariffs?

Costs are more than revenues. So, the supplying entities have little funds for repairs and maintenance or invest in capacity enhancement.

As per a CAG report, of the 1,797 unauthorised colonies in Delhi, 1,573 colonies had not been provided with sewerage facilities as of March 2018. Moreover, 567 unauthorised colonies were still dependent on tube-wells/hand-pumps.

Higher tariffs would have allowed for greater investments by the Delhi Jal Board to ramp up water supply in these areas.

The provision of free or heavily subsidised utilities is not a governance model.