One Nation One Tariff: A Critical Review of its feasibility and desirability

In the evolving discourse of India's power sector, the concept of "One Nation One Tariff" (ONOT) has emerged as a topic of significant debate. Couple of years back, the standing committee on Parliament also deliberated on this important subject. This idea, inspired by initiatives like "One Nation One Grid" and "One Nation One Ration Card," suggests the unification of electricity tariffs across the country by pooling. Proponents argue that ONOT will level the playing field for consumers by eliminating regional disparities in electricity pricing. However, this proposition raises several constitutional, economic, political, and social questions that need to be thoroughly examined before moving forward.

Understanding Regional and Category-Wise Tariff Differences

Electricity tariffs in India vary significantly across regions and consumer categories. These differences are a product of various factors, including the cost of power generation, transmission losses, the financial health of state distribution companies (Discoms), and cross-subsidization policies.

1. Cost of Generation: The cost of generating electricity differs depending on the source (coal, hydro, renewable, etc.), the age of the plants, and the availability of natural resources in different regions. States rich in natural resources, such as coal or hydropower, typically enjoy lower generation costs.

2. Transmission and Distribution Costs: Transmission and distribution (T&D) losses vary across states depending upon their network length, area served, ration of low voltage to high voltage lines and governance structure with some states having modern infrastructure that minimizes these losses, while others struggle with outdated systems. These losses are factored as cost of supply into the final tariff that consumers pay.

3. Cross-Subsidization: In many states, industrial and commercial consumers are charged higher tariffs to subsidize residential and agricultural consumers. This creates a complex tariff structure that varies not only by region but also by consumer category.

4. Financial Health of Discoms: State Discoms often have different financial standings, influenced by factors such as subsidy regimes, operational efficiencies, and debt levels. Discoms in financially weaker states tend to pass on higher costs to consumers through tariffs.

5. Tariff : Generation, Transmission and Distribution tariffs are regulated by the appropriate regulatory commissions under whose jurisdiction the fall respectively.

Constitutional Framework and Centralization Concerns

The idea of ONOT intersects with the constitutional framework governing India's power sector. Electricity is a subject under the Concurrent List, meaning both the central and state governments have jurisdiction over it. The Electricity Act, 2003, provides a clear delineation of roles between the Centre and the states, allowing states considerable autonomy in determining tariffs.

1. State Autonomy vs. Centralization: Implementing ONOT would require a significant shift towards centralization, potentially undermining the autonomy of states in determining tariffs based on local conditions. This centralization could be perceived as an infringement on the federal structure, where states have the right to manage their own power sectors.

2. Legal and Constitutional Hurdles: Moving towards a unified tariff structure would necessitate amendments to the Electricity Act and possibly even the Constitution. Given the complexity of India's federal system and the diversity of stakeholders in the power sector, this could be a challenging and contentious process.

3. Impact on Federalism: The push for ONOT could lead to a centralization of power at the expense of state governments, which may resist such moves as it could limit their ability to tailor energy policies to local needs. This could exacerbate tensions between the Centre and states, particularly in a politically diverse country like India.

Why Not One Nation One Income Before One Nation One Tariff?

Before diving into the idea of ONOT, it's worth asking: why not address the more fundamental issue of income inequality across the nation? The disparities in electricity tariffs across different regions and consumer categories are, in part, a reflection of the broader economic disparities that exist in India.

1. Income Disparities: India is a country with significant income inequality, with vast differences in per capita income between states and between urban and rural areas. These disparities directly impact the ability of consumers to pay for electricity, making a unified tariff structure potentially regressive unless accompanied by measures to address income inequality.

2. Economic Inequality: A "One Nation One Income" policy, which would aim to reduce income disparities across regions, could potentially create a more level playing field for implementing ONOT. Without addressing income inequality, a unified tariff could disproportionately burden poorer consumers in low-income states or regions.

3. Policy Sequencing: Addressing income inequality before moving towards tariff unification could ensure that the benefits of ONOT are more equitably distributed, and that the policy does not exacerbate existing economic disparities.

Social Impact: The Burden on Vulnerable Populations

The social impact of ONOT could be profound, particularly for vulnerable populations. While the policy aims to create uniformity, it could lead to unintended consequences that disproportionately affect the poorest and most marginalized communities.

1. Increased Financial Burden: If ONOT results in higher tariffs in low-cost states, it could increase the financial burden on low-income households, especially in states where electricity is currently more affordable. This could lead to a rise in energy poverty, where people are forced to cut back on other essential expenditures to afford electricity.

2. Impact on Rural Areas: Rural areas, which often benefit from lower tariffs due to state-specific subsidies, could be adversely affected. Uniform tariffs might eliminate these subsidies, leading to higher costs for rural consumers who are already economically disadvantaged.

3. Equity Concerns: The principle of equity suggests that policies should take into account the differing abilities of individuals and regions to bear costs. A uniform tariff structure could undermine this principle, leading to greater inequality rather than reducing it.

Covering Up Inefficiencies: Rewarding Bad Investments?

One of the critical concerns with ONOT is that it could serve as a cover-up for inefficiencies in the power sector, rewarding poorly managed Discoms and bad investments.

1. Rewarding Inefficiency: In states where Discoms are inefficient or where poor investment decisions have led to higher generation or distribution costs, a unified tariff could essentially reward these inefficiencies by spreading the costs across the entire nation. This would disincentivize efforts to improve operational efficiencies and reduce costs locally.

2. Moral Hazard: By pooling tariffs nationally, there is a risk of creating a moral hazard where poorly performing Discoms have less incentive to improve their operations, knowing that their higher costs will be absorbed by consumers in more efficient states.

3. Impact on Investment: Investors may be wary of a system where their returns are diluted by the inefficiencies of other states. This could lead to reduced investment in the sector, particularly in states that have traditionally been more efficient and have attracted more private investment.

4. Distorted Market Signals: A uniform tariff might distort market signals that currently incentivize states to manage their power sectors efficiently. States that have historically maintained lower tariffs through better management and investment decisions might see little benefit from continuing to do so under a unified system.

Feasibility and Desirability in Economic and Political Contexts

The feasibility of ONOT depends on various economic and political factors. While the concept may appear attractive in theory, the practical challenges of implementation are substantial.

1. Economic Feasibility: The power sector in India is characterized by a diverse mix of energy sources, ownership models, and tariff structures. A unified tariff would require pooling electricity generated from different sources, at different costs, into a single national pool. This could lead to a situation where consumers in states with lower costs end up subsidizing those in higher-cost states, potentially leading to resistance from consumers and political leaders in more efficient states.

2. Political Desirability: Politically, ONOT could be a double-edged sword. While it may appeal to voters in high-tariff states, it could face opposition in states that have successfully kept tariffs low. Moreover, any perceived attempt by the central government to impose a one-size-fits-all policy on states could be politically contentious, particularly in the context of India's diverse and politically fragmented landscape.

Financial Implications and Sectoral Development

Implementing ONOT would have far-reaching financial implications for various stakeholders in the power sector, including state governments, Discoms, and private players.

1. Impact on Discoms: Discoms in states with lower tariffs might see their financial burden increase if they are required to align with a higher national tariff. Conversely, Discoms in high-tariff states could see relief, but this could come at the cost of increased political and consumer dissatisfaction in other regions.

2. Investment and Sector Development: ONOT could have mixed effects on investment in the power sector. On one hand, a unified tariff could create a more predictable and stable pricing environment, potentially attracting investment. On the other hand, the financial stress on Discoms and the potential for political pushback could deter private investment, particularly in states that feel disadvantaged by the new tariff regime.

3. Equity and Access: While ONOT aims to promote equity by levelling tariffs across the country, it could inadvertently harm the poorest consumers if the unified tariff is set higher than what they currently pay. This could undermine efforts to improve access to affordable electricity for all.

Weighing the Costs and Benefits

The idea of "One Nation One Tariff" is rooted in the principles of equity and national integration, aiming to eliminate regional disparities in electricity pricing. However, its implementation would require significant changes to the existing legal and constitutional framework, a careful balancing of economic interests, and a nuanced understanding of India's political dynamics.

While ONOT could benefit consumers in high-tariff regions, it could also lead to financial strain on Discoms, political resistance, and challenges to federalism. Moreover, the policy risks covering up inefficiencies within the power sector, rewarding bad investments, and increasing the financial burden on vulnerable populations. The costs and benefits of such a policy must be carefully weighed, with a focus on ensuring that any move towards tariff unification does not come at the expense of state autonomy, economic feasibility, or the broader development of the power sector.

Ultimately, the success of ONOT will depend on finding a balance that respects the diversity of India's power sector while striving towards