Distribution Licensees file Tariff Petitions before the appropriate Electricity Regulatory Commission (ERC), seeking approval of the Aggregate Revenue Requirement for the ensuing year/s. The Distribution Licensees also project the revenue from existing tariff, and thereby the Revenue Gap/(Surplus) with respect to the project ARR and revenue from existing tariff.

In case there is a Revenue Gap, then the tariff of different categories has to be increased in such a manner that the revenue is increased to match the ARR approved by the ERC for the ensuing year/s. While doing so, the ERCs usually keep the following aspects in consideration:

Distribution Licensees file Tariff Petitions before the appropriate Electricity Regulatory Commission (ERC), seeking approval of the Aggregate Revenue Requirement for the ensuing year/s. The Distribution Licensees also project the revenue from existing tariff, and thereby the Revenue Gap/(Surplus) with respect to the project ARR and revenue from existing tariff.

In case there is a Revenue Gap, then the tariff of different categories has to be increased in such a manner that the revenue is increased to match the ARR approved by the ERC for the ensuing year/s. While doing so, the ERCs usually keep the following aspects in consideration:

1. The revenue earned through revised tariffs should match the ARR approved for the ensuing year/s;
2. The tariff should progressively reflect the cost of supply of electricity and also, reduces cross-subsidies, as mandated under Section 61(g) of the Electricity Act, 2003 (EA 2003);
3. The category-wise tariffs are to be within +20% of the Average Cost of Supply (ACOS), as stipulated under the Tariff Policy 2016;
4. No consumer category is subjected to a tariff shock.

While the first 3 criteria listed above can be determined mathematically, the 4^th criteria, viz., ensuring that no category is subjected to a tariff shock, is a subjective criterion. The term ‘tariff shock’ is not defined anywhere. However, ERCs typically consider a tariff increase in excess of 10-15% as a tariff shock. Also, while specifying the Formula for recovery of Fuel and Power Purchase Price Adjustment (FPPPA) in the past, the ERCs have typically provided for automatic pass through of increase up to around 10-20% of the approved energy charges. 

As a thumb-rule, the following aspects may be kept in mind, while trying to address the concern of not subjecting any category to a tariff shock:

1. Annual tariff increases in excess of 10-15% may be considered as a tariff shock, as the increase due to FPPPA during the year would still be applicable;
2. If the overall tariff increase is itself around 15%, then the category-wise tariff increase for subsidised categories would have to be higher, considering their lower base tariff and the need to reduce cross-subsidies.