The Central Electricity Authority (CEA) has proposed a national framework to rationalize fixed charges and redesign retail tariffs to improve the recovery of fixed costs incurred by distribution companies (DISCOM).

The report, titled “Report on Rationalising Consumer Fixed Charge to Reflect Fixed Costs of DISCOM,” was prepared after deliberations with stakeholders and has been suggested for placement before the Forum of Regulators for implementation.

The report states that fixed costs account for 38% to 56% of the annual revenue requirement of DISCOMs across the states studied. However, fixed charges currently contribute only 9% to 20% of total retail tariff revenue in several states.

According to the report, this gap causes DISCOMs to recover fixed costs through energy charges. This creates tariff distortions, increases volume risk for DISCOMs, and shifts infrastructure costs across consumer categories.

Fixed-Cost Recovery

The report identifies fixed-cost components as power purchase fixed costs, transmission charges, load despatch centre charges, and distribution costs. Distribution costs include return on equity, interest on loans, depreciation, operations and maintenance expenses, and interest on working capital.

It recommends that states adopt a uniform framework for calculating fixed costs to improve consistency, transparency, and cost reflectivity.

The report proposes that fixed charges for retail tariffs be progressively increased to target levels over the next five years, by 2030. It recommends a phased approach that accounts for existing tariff frameworks, regulatory decisions, metering infrastructure, and consumer capacity to absorb the increase.

For domestic and agricultural consumers, the report recommends fixed-cost recovery of 25% by 2030, followed by a higher target of 50% by 2035.

For industrial, commercial, and institutional consumers, it recommends fixed-cost recovery of 100%.

Tariff Redesign

The report recommends standardizing two-part tariffs for all consumer categories. For low-tension residential consumers, fixed charges should be levied at ₹/kW/month. For high-tension categories, including industrial, commercial, and institutional consumers, fixed charges should be levied at ₹/kVA/month.

It notes that many states currently levy flat monthly charges for residential consumers, independent of consumer demand. It says this creates a weak link between consumer load and the fixed cost imposed on the system.

It recommends linking fixed charges to consumer demand where possible.

Billing Demand

The report says fixed charges for industrial consumers are levied on a per kVA basis, but the definition of billing demand varies across states.

In most of the states studied, billing demand is defined as the higher of the maximum demand recorded during the month or a specified percentage of contract demand. The report notes that this percentage varies across states, creating scope for distortion and a lack of uniformity.

It recommends standardizing billing demand across states by linking it to the higher of a percentage of contract demand, the actual maximum demand, or the maximum peak demand.

kVAh Billing

The report recommends shifting to kVAh billing for consumers above 50 kW or other state-specified thresholds. It says replacing separate power factor incentives and penalties with kVAh billing would simplify tariffs and reflect power costs more directly. The report notes that inefficiencies are inherently reflected in higher kVAh consumption.

Open Access and Captive Consumers

The CEA report states that open access and captive consumers reduce DISCOM energy sales but remain connected to the grid for outages, maintenance, and peak demand.

Without standby charges, the report says DISCOMs procure power, incur fixed costs, and maintain infrastructure for such consumers, while recovering little or no cost from them when they source power from other suppliers.

It recommends separate standby charges for open access and captive consumers. These charges may include a fixed commitment charge per kW of contracted capacity per month, with separate charges for planned and unplanned standby.

Stranded capacity can arise when DISCOMs procure power under power purchase agreements and invest in infrastructure, while consumers reduce drawal from the grid through open access or captive options.

Residential and Small Consumers

The report cautions against a blanket increase in fixed charges for all consumers. It says small consumers with lower appliance use and lower motive loads contribute less to fixed costs. A move toward cost-reflective fixed charges may disproportionately affect low-income and rural consumers, especially those with poor supply quality and network access.

It recommends differentiated tariff treatment for both small and large consumers. It notes that Maharashtra, Tamil Nadu, Rajasthan, Andhra Pradesh, and Gujarat have differentiated tariffs for small and larger consumers.

Net Metering Consumers

The report recommends separate tariff categories for net metering consumers. It says net-metered consumers import power from the grid during non-solar hours and export power during solar hours. In states where net-metered consumers are billed mainly on net energy consumption, even wheeling costs may not be recovered if fixed charges remain low.

It also recommends separate fixed, variable, and time-of-day tariff components for net metering consumers.

Time-of-Day Tariffs and FPPAS

The CEA report says increasing fixed charges and reducing energy charges can affect time-of-day tariff signals. Several states apply time-of-day rebates or surcharges as a percentage of energy charges. If energy charges fall, the same percentage rebate or surcharge will have a lower rupee value.

Time-of-day tariff differentials may need to increase from 20% of energy charges to 30%-35% to retain the same price signal.

It also flags a similar issue for Fuel and Power Purchase Adjustment Surcharges (FPPAS). If fixed charges are increased and energy charges are reduced, FPPAS would take up a larger share of the revised energy charge.

International Practice

The report says that advanced economies such as the U.S., the UK and European countries generally use two-part retail electricity tariff structures comprising fixed or standing charges and variable per-kWh charges.

Residential fixed charges are usually lower than industrial fixed charges. Household fixed charges are typically 10% to 25% of total bills, while industrial consumers may have fixed shares of 25% to 45%.

This approach reflects the higher-capacity infrastructure required to serve industrial consumers.

Impact on Consumers

The report notes that the impact of higher fixed charges will vary across consumer categories and states. For industrial consumers with low load factors, increasing fixed charges could raise total electricity bills even if average tariffs remain unchanged. The report says consumers with low utilization may see a higher fixed-charge share in their bills.

Higher fixed charges may reduce energy charge arbitrage but may not fully prevent migration to captive power or open access. Large fixed-charge liabilities may encourage consumers to reduce contract demand through solar and storage investments.

Tariff redesign must therefore be phased and supported by category-specific approaches.

The framework concludes that recovering fixed costs through fixed or demand charges is essential to the financial viability of DISCOMs and to fair cost allocation among consumers. It says a shift toward fixed-cost recovery can help reduce cross-subsidy distortions and make retail tariffs more transparent and cost-reflective.

To make distribution companies more financially viable, the Ministry of Power has proposed an amendment to the Electricity Act, 2003, mandating electricity regulators to issue cost-reflective power tariffs.

Last August, the Supreme Court directed the states to clear the pending dues of approximately ₹1.74 trillion (~$19.72 billion) owed to DISCOMs within four years. New dues created after April 1, 2024, must be liquidated within three years.

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