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

In the case of water, the recovery is even lower. According to some estimates, water boards across the country are on average able to recover only around a third of their operation and maintenance costs. For instance, in Tamil Nadu, the operational cost is about Rs 20.81 per kilolitre. But as per the state’s White Paper in 2021, only Rs 10.42 per unit was levied from urban local bodies and Rs 8.11 per unit from rural bodies. 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. And in Haryana, the tariffs proposed for treated wastewater are less than half the total costs of water supply estimated at Rs 11.67 per kilo litre.

Dig a little deep and the political impulses behind the pricing decisions, the distributional imperatives become even more evident. 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, industrial tariffs were seven times higher, and household tariffs more than four times. In comparison, in developed countries, tariffs for industrial consumers tend to be lower than those for households. And while higher tariffs, levied on industrial users in India, help to subsidise agricultural consumers to some extent, the volumes involved in water mean that the same cannot be the case.

But the anomalies in pricing don’t just end here. Chhattisgarh’s tariff order, for instance, lays bare the existence of multiple pricing regimes even within these broad consuming segments. 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. A similar demarcation exists in the pricing of water. In addition, the sewerage charges levied across states also vary depending on the built-up area, the number of rooms and even the number of beds in the case of nursing homes. How are all these slabs and tariffs determined? Administrative fiat.

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. With the acceptance of the Kirit Parikh committee’s recommendations, another dimension has been added. Markets are allowed to operate in the APM regime but only so much. The government has put in place a floor and ceiling price, ostensibly to protect companies from lower prices and consumers from higher prices.

But, doing so raises the question — shouldn’t consumers get the full benefits of lower gas prices during a down cycle, and alternately, shouldn’t producers get the full upside when prices rise? Not only is the imposition of the floor and ceiling arbitrary but so is the proposed increase in gas prices every year. In a similar vein, there was some talk of fixing a floor price in the telecom sector a few years ago to help telcos. Thankfully, that proposal was never implemented.

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.

As costs outstrip revenues, the supplying entities are left with little funds to either pay for repairs and maintenance or invest in capacity enhancement. For instance, as per a CAG report, of the 1,797 unauthorised colonies in Delhi, 1,573 colonies (88 per cent) had not been provided with sewerage facilities as of March 2018. Moreover, 567 unauthorised colonies were still dependent on tube-wells/hand-pumps and water supplied through tankers for their needs. 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 subsided utilities is not a governance model.

The losses involved in supplying these utilities at prices that don’t reflect market realities are growing at a staggering pace. The total discom debt now exceeds Rs 6 lakh crore. In the case of water, while it is difficult to arrive at aggregate estimates of the financial burden, there are some indications of the scale of the problem. As per a CAG report, at the end of March 2019, outstanding loans to the Delhi Jal Board stood at Rs 27,660 crore. In the case of Tamil Nadu, the accumulated losses of the Tamil Nadu water supply and drainage board and the Chennai Metropolitan Water Supply and Sewerage Board stood at Rs 5,282 crore at the end of 2020-21. And in 2022-23, the total fertiliser subsidy was Rs 2.3 lakh crore, up from Rs 1.6 lakh crore in 2021-22.

At some point, this burden on the exchequer will simply become unmanageable. This calls for shifting away from administrative pricing. The preoccupation with managing prices across the entire economy must end.

ishan.bakshi@expressindia.com