The Karnataka Electricity Regulatory Commission (KERC) has issued the draft Karnataka Electricity Regulatory Commission (Roadmap for Reducing Cross-Subsidy and Cross Subsidy Surcharge) Regulations, 2025.

The draft regulations seek to formally establish a time-bound roadmap for reducing tariff cross-subsidies across consumer categories and to align retail tariffs more closely with the cost of supplying electricity, consistent with statutory requirements and national tariff policy objectives.

KERC has invited comments, objections, and suggestions from stakeholders within 30 days of publication in the official gazette.

Background

Cross-subsidy in retail electricity tariffs refers to the practice in which certain consumer groups pay tariffs higher than the cost of supply, so that other groups can be supplied power at tariffs below cost.

KERC notes that the Electricity Act, 2003, requires state commissions to reduce cross-subsidies and move toward cost-reflective pricing progressively. This objective is reiterated in the National Tariff Policy, 2016, which expects tariffs for consumer categories to be within a band of ±20% of the average cost of supply (ACoS).

The tariff policy also envisages that state commissions should provide a clear roadmap with milestones for achieving such convergence.

In the draft, KERC explains that it has historically reduced cross-subsidies through its tariff orders and that, over time, most consumer categories in Karnataka have moved closer to the ACoS. However, the Commission acknowledges that it had not previously issued a separate roadmap regulation.

The present proposal is positioned as a formal step to codify the approach and, importantly, responds to a Karnataka High Court order of December 2024, which directed the Commission to specify, through appropriate regulations, the manner in which cross-subsidy and cross-subsidy surcharge are to be progressively reduced.

Current Cross-Subsidy Position

KERC anchors the roadmap in its tariff, under which retail tariffs were determined for FY 2025-26, FY 2026-27, and FY 2027-28. In that order, KERC also assessed the extent of cross-subsidy across consumer categories by comparing category-wise tariffs with the ACoS.

The Commission indicates that most categories are already within the ±20% band, but two categories remain significantly outside that range on the subsidised side, meaning their tariffs remain substantially below cost. These are LT-6(c), which covers electric vehicle charging stations, and HT-3, which covers lift irrigation for private consumers.

For FY 2027-28, the cross-subsidy level for EV charging stations is shown as minus 48.83%, while private lift irrigation is shown at minus 78.98%, making them the primary focus of the proposed reduction pathway.

Proposed Roadmap and Timeline

The Commission proposes that the roadmap begin in FY 2028-29, after the completion of the multi-year tariff period already determined through FY 2027-28. From that point, KERC proposes a six-year transition to bring both outlier categories within the -20% threshold prescribed in the Tariff Policy.

For EV charging stations, the draft proposes reducing the cross-subsidy level by 5 % points each year, gradually bringing the tariff closer to the cost of supply. For private lift irrigation, where the gap is materially larger, the proposal adopts a steeper correction, reducing the cross-subsidy level by 10 % points each year, so that the category can also be brought within the permitted range over the same six-year horizon.

KERC also addresses how tariff rationalization for heavily subsidised categories interacts with the broader tariff structure. The draft indicates that when cross-subsidy is reduced for subsidised categories, there will necessarily be readjustment in the cross-subsidy levels of other categories that currently subsidise them.

At the same time, the Commission states that it will endeavour to keep both subsidising and subsidised categories within the ±20% band, reflecting the tariff policy’s direction that the convergence process should be steady and predictable rather than abrupt.

Impact on Other Consumer Categories

To manage volatility, the draft includes a cap on how much cross-subsidy levels may be adjusted. For categories other than the two specifically covered under the roadmap clause, KERC proposes that any adjustment should not exceed 5% of the cross-subsidy level prevailing in FY 2027-28, and that such adjustments must not breach the ±20% band.

For the two roadmap categories, once the transition period is completed, the draft proposes that subsequent adjustments should not exceed 5% of the cross-subsidy level applicable in FY 2033-34, again subject to maintaining the band.

The Commission also clarifies that temporary power supply categories are excluded from the requirement of maintaining tariffs within the ±20% range.

Cross-Subsidy Surcharge Treatment

On cross-subsidy surcharge, which is levied on open access consumers to compensate distribution licensees for loss of cross-subsidy when consumers shift away from the utility supply, KERC does not set a separate state-specific trajectory in this draft. Instead, it states that the methodology and rates for cross-subsidy surcharge will be as prescribed in the Tariff Policy issued by the Government of India from time to time, signalling an intention to remain aligned with the central policy framework as it evolves.

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