This article is written by Piyush Pandey, a 5th- year law student at The ICFAI University, Dehradun, with a keen interest in IPR & Electricity Law.
Introduction
Electricity is one of the most important necessities of modern life. Households, industries, commercial establishments and public institutions all depend upon a reliable supply of electricity. However, the price paid by consumers for electricity is not determined solely by market forces or by electricity distribution companies. In India, electricity tariffs are regulated through a statutory framework under the Electricity Act, 2003, with an important role played by independent regulatory commissions.
The two principal regulatory bodies are the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions (SERCs). CERC primarily deals with matters relating to central generating companies, inter-State transmission and other inter-State electricity matters, while SERCs regulate important aspects of electricity within individual States. The division of powers between these authorities is intended to create a system of professional, transparent and economically rational regulation.
The question of “who decides the price of electricity?” therefore has a more complex answer than simply naming CERC or a State Commission. Electricity tariffs are determined through a regulatory process involving statutory principles, cost assessment, consumer interests, government policies and, in some cases, competitive bidding. This article examines the legal framework of tariff regulation and critically analyses the roles of CERC and SERCs in determining electricity tariffs in India.
Legal Framework for Electricity Tariff
The Electricity Act, 2003 provides the principal legal framework for electricity tariff regulation. Part VII of the Act, particularly Sections 61 to 64, deals with tariff determination.
Section 61 is particularly significant because it lays down the principles that the Appropriate Commission must follow while specifying the terms and conditions for determination of tariff. The Commission is required to consider factors such as competition, efficiency, economical use of resources, optimum investment, consumer interests and reasonable recovery of the cost of electricity.
Section 61 also requires the progressive reduction of cross-subsidies and movement towards tariffs that increasingly reflect the cost of supply. At the same time, the provision recognises the importance of promoting renewable energy and efficiency within the electricity sector.
Section 62 deals with the determination of tariff by the Appropriate Commission in specified cases. The Commission examines the costs and other relevant factors before deciding the tariff.
Section 63 provides an alternative mechanism through competitive bidding. Where tariff has been determined through a transparent bidding process conducted according to the guidelines issued by the Central Government, the Appropriate Commission is required to adopt the tariff determined through such bidding.
Section 64 establishes the procedure for making a tariff order. It provides for consideration of tariff applications and public participation before the final tariff order is issued. Thus, tariff determination is intended to be a reasoned regulatory process rather than an arbitrary decision.
Role of CERC in Tariff Regulation
The Central Electricity Regulatory Commission (CERC) is the central electricity regulatory authority. Its principal functions are provided under Section 79 of the Electricity Act, 2003.
CERC regulates the tariff of generating companies owned or controlled by the Central Government and certain generating companies having a composite scheme for generation and sale of electricity in more than one State. It also regulates inter-State transmission of electricity and determines tariffs for inter-State transmission.
Therefore, CERC does not determine the electricity tariff payable by every consumer across India. Its jurisdiction is primarily connected with central and inter-State electricity activities.
For example, when electricity is transmitted across State boundaries, the applicable regulatory framework may involve CERC. Similarly, tariffs relating to certain central generating companies fall within CERC’s jurisdiction.
CERC also frames regulations governing tariff determination. These regulations establish detailed methodologies concerning matters such as return on equity, depreciation, operation and maintenance expenses and other components relevant to tariff determination.
The role of CERC is therefore not merely to decide a particular price. It also develops the regulatory framework through which tariffs are calculated and reviewed.
Role of SERCs in Tariff Regulation
The State Electricity Regulatory Commissions (SERCs) perform a more direct role in regulating electricity within individual States. Their functions are primarily provided under Section 86 of the Electricity Act, 2003.
SERCs determine the tariff for electricity generated, supplied, transmitted or wheeled within their respective States in accordance with the statutory framework. They also regulate procurement and supply of electricity by distribution licensees and regulate intra-State transmission and other State-level electricity matters.
For ordinary consumers, the decisions of SERCs can therefore have a more direct impact on the electricity bill.
For example, if a State distribution company submits a petition seeking an increase in tariff because of higher power purchase costs or operational expenditure, the concerned SERC examines the proposal. After considering the applicable law, regulations, financial information, objections and suggestions, the Commission may approve, modify or reject the proposed tariff.
This demonstrates that a distribution company cannot simply decide to increase the regulated tariff according to its own choice. The tariff must generally operate within the regulatory framework established by the Appropriate Commission.
How Is Electricity Tariff Actually Determined?
Electricity tariff determination is a technical and financial process. A regulatory commission generally examines the costs claimed by the electricity utility and determines which costs are reasonably recoverable through tariffs.
The process may involve consideration of power purchase costs, operation and maintenance expenses, depreciation, interest costs, capital expenditure, return on equity, transmission and distribution losses and other relevant expenditures.
An important principle is that the entire expenditure claimed by a utility should not automatically be passed on to consumers. The regulator is expected to examine whether the expenditure is reasonable and whether the utility has operated efficiently.
For example, if a distribution company claims that its costs have increased significantly, the Commission may examine the reasons for the increase and determine whether those costs are justified. This regulatory scrutiny is important because consumers should not be required to pay for unnecessary or inefficient expenditure.
Thus, tariff regulation seeks to achieve a balance between reasonable cost recovery for utilities and protection of consumer interests.
Consumer Interest and Cost Reflective Tariffs
One of the major challenges in tariff regulation is balancing consumer affordability with the financial sustainability of electricity companies.
If electricity tariffs are kept artificially low, distribution companies may suffer financial losses. This may affect their ability to maintain infrastructure, purchase electricity and provide reliable services. On the other hand, excessively high tariffs can impose a significant burden on consumers.
Section 61 of the Electricity Act attempts to address this problem by requiring the Commission to safeguard consumer interests while also ensuring reasonable recovery of the cost of electricity.
Another important issue is cross-subsidy. In many States, different categories of consumers pay different tariffs. Industrial and commercial consumers may pay comparatively higher tariffs, while certain agricultural or domestic consumers may receive subsidised electricity.
The Act seeks a gradual reduction of cross-subsidies and movement towards tariffs that reflect the cost of supply. However, complete elimination of subsidies may have social consequences, particularly for economically weaker sections.
Therefore, tariff regulation must balance economic efficiency with social welfare.
Competitive Bidding and Tariff Discovery
Section 63 introduces an important market-oriented approach to electricity tariff determination through competitive bidding.
Under this system, electricity suppliers participate in a transparent bidding process and compete to supply electricity at a particular price. Where the bidding process complies with the prescribed guidelines, the Appropriate Commission adopts the tariff determined through such bidding.
Competitive bidding can promote efficiency and reduce the possibility of arbitrary cost claims. It also introduces competition into electricity procurement.
The Supreme Court’s decision in Kerala State Electricity Board Ltd. v. Jhabua Power Ltd. (2024) is relevant in understanding the relationship between government policy and regulatory independence. The case concerned electricity procurement through competitive bidding and the role of the State Electricity Regulatory Commission. The Supreme Court emphasised the independent role of the regulatory commission while considering government directions under the Electricity Act.
The decision is important because electricity regulatory commissions are expected to exercise their statutory and quasi-judicial functions independently rather than merely implementing political directions.
Judicial Approach: PTC India Ltd. v. CERC
The Supreme Court’s judgment in PTC India Ltd. v. Central Electricity Regulatory Commission, (2010) 4 SCC 603, is one of the important cases concerning electricity regulation.
The case dealt with the regulatory powers of CERC and the distinction between regulations framed by the Commission and orders relating to tariff determination. The judgment recognised the importance of the statutory regulatory framework established under the Electricity Act.
The decision demonstrates that electricity regulation involves different forms of decision-making, including rule-making and individual tariff determination. Regulatory commissions therefore exercise specialised statutory functions within the limits established by the Electricity Act.
Critical Issues in Tariff Regulation
Although the CERC-SERC framework has created an institutional mechanism for tariff regulation, several challenges remain.
First, rising power procurement costs can place significant pressure on electricity tariffs. Changes in fuel prices, market prices and electricity demand can affect the financial position of distribution companies.
Second, transmission and distribution losses continue to affect the efficiency of the electricity sector. Where losses remain high, they can ultimately increase the financial burden on utilities and consumers.
Third, cross-subsidisation creates a difficult policy problem. While subsidies can protect vulnerable consumers, excessive cross-subsidies can increase the tariff burden on industrial and commercial consumers.
Fourth, political influence remains a concern because electricity tariffs are politically sensitive. Frequent political intervention may undermine the independence of regulatory commissions.
Fifth, consumer participation in tariff proceedings can be improved. Although the legal framework provides opportunities for objections and public participation, ordinary consumers may find tariff proceedings highly technical and difficult to understand.
Finally, the transition towards renewable energy creates new challenges. Regulatory commissions must address issues relating to renewable power procurement, grid integration, energy storage and changing patterns of electricity generation and consumption.
Need for Stronger Regulatory Oversight
A more effective tariff regulatory system should strengthen transparency, accountability and consumer participation. Regulatory commissions should ensure that only prudent and efficiently incurred costs are recovered through tariffs.
Tariff orders should clearly explain why particular costs have been accepted or rejected. This would increase public confidence in the regulatory process.
The independence of CERC and SERCs should also be protected. Government policies are important for achieving broader energy objectives, but tariff decisions should remain based on statutory principles, evidence and proper regulatory assessment.
At the same time, movement towards cost-reflective tariffs should be gradual. Vulnerable consumers should receive targeted support so that economic efficiency does not come at the cost of access to essential electricity services.
Conclusion
The question of who decides the price of electricity in India cannot be answered by pointing to a single authority. Electricity tariffs are determined through a complex regulatory structure established under the Electricity Act, 2003.
CERC plays a central role in matters involving central generating companies and inter-State electricity activities, while SERCs regulate important electricity matters within their respective States. Sections 61 to 64 establish the basic principles and procedures for tariff determination, while Sections 79 and 86 define the respective functions of CERC and SERCs.
The objective of tariff regulation is not simply to make electricity cheaper or more expensive. It is to achieve a balance between consumer protection, reasonable cost recovery, efficiency, investment, competition and long-term sustainability.
The success of the regulatory system should therefore be measured by whether electricity tariffs are transparent, reasonable, economically sustainable and legally justified. Strong and independent regulatory commissions, effective consumer participation and greater scrutiny of utility costs are essential for achieving this objective.
Ultimately, CERC and SERCs do not merely “set the price” of electricity. They regulate the process through which the cost of electricity is assessed, tariffs are determined and the competing interests of consumers, utilities and the electricity sector are balanced.
