DERC Issues Approach Paper on Tariff Rationalization in an Effort to Facilitate Market Competition

To address the issues being faced by open access consumers, DERC recommends strategies for introducing retail tariff competition


The Delhi Electricity Regulatory Commission (DERC) issued an approach paper on tariff rationalization last month. In the paper, DERC examines the existing regulatory framework for the electricity retail tariff and develops a strategy for creating competition in the market.

In the paper, DERC analyzes the present cost and revenue component of distribution licensees (DISCOMs) that are prevalent in the national capital. From the average rate of return (ARR), DERC observed that the total fixed cost in the ARR is 45 percent to 55 percent against revenue from fixed charges of 8 percent to 10 percent. At the same time, DERC noted that the variable cost component in the ARR is 45 percent to 55 percent against revenue from variable charges of 90 percent to 92 percent.

DERC also observed five primary issues that are impacting fair play between consumers and utilities under the open access mechanism and hindering the creation of an environment conducive to competition.

These are: the frequent shifting of open access consumers, the cross-subsidy surcharge, additional surcharges, stand-by charges, and the current tariff design and rationalization.

To tackle these issues, DERC recommended strategies for introducing retail tariff competition that take into account the present regulatory framework in Delhi’s distribution sector.

Key Recommendations

  • To make the retail tariff reflect the actual fixed cost, fixed charges and energy charges must be adjusted gradually over a three to five-year period.
  • DISCOMs should divide their businesses into carriage and content. The total distribution cost of existing distribution licensees should be split into carriage and content based on the actual expenditures incurred by the distribution licensee in the form of an actual fixed cost and an actual variable cost.
  • A retail supply licensee must be identified for the purpose of a universal service obligation (USO) and ensuring that electricity is provided at regulated rate to every consumer. To attain the objective of the USO, a portion of cheaper source power projects can be allocated to the USO supplier.

The DERC approach paper also refers to a Ministry of Power paper entitled “Consultation Paper on Issues Pertaining to Open Access,” and suggests a way forward on its highlighted issues.

In 2017, the Ministry of Power rated 41 distribution companies (DISCOMs) across the country for evaluating the performance of state power distribution utilities on a range of operational, financial, regulatory and reform parameters. In the list,  four Gujarat state power distribution utilities (DISCOMs) emerged as top performers for the fifth year in a row. Tripura replaced Meghalaya at the bottom of rating table.

Recently, Mercom reported that the states of Assam and Bihar issued draft terms and conditions pertaining to open access regulations in 2018.

Image credit: By Hemant banswal (Own work) [CC BY-SA 4.0], via Wikimedia Commons