Published On: August 17th 2025
Authored By; Kommuru Shanmuk Datta
O.P. Jindal Global University
ABSTRACT
This paper is a critical evaluation of Cross Subsidy Mechanism and Cross Subsidy Surcharge in the power sector. This system’s main purpose is to serve equitable access to power. Constitutionally valid and compliant with the Competition Act, this system raises ethical and practical issues. There are issues regarding economic liberty and fairness. This paper highlights the lack of visible sunset plan, potential distortion of consumer preference, and proposes gradual movement towards policies like Direct Benefit Transfers which balance legality, morality and practical efficiency.
INTRODUCTION
Think of a modern day Robin Hood, but this hooded guardian does not steal from the rich. Rather, he collects extra from wealthy consumers to provide electricity at a lower cost for economically challenged consumers. This is the same logic behind the Cross Subsidy. Even though the introduction of electricity has not marked a minimum of 200 years in India, the amenity of electricity is considered to be a fundamental right of life. Indian courts have interpreted that electricity is a part of the Right to Life under Article 21.[1] But this fundamental right does not cost the same for everyone. Powering factories may cost more than doing the same for households. The government uses Cross Subsidy Mechanism to make electricity affordable for domestic users and farmers. Agricultural and Residential users pay less than the Average Cost of Supply (ACS), whereas large commercial and industrial users pay more. The excess revenue generated by giving electricity at a higher price for large consumers is used to subsidize the tariffs of other consumers. This mechanism’s main purpose is to promote equity and support universal access.[2]
This balancing act is disrupted when a large consumer decides to buy electricity from private generators, this ability to choose is known as “open access”.[3] Even though open access allows consumers to choose cheaper prices and reliability, it reduces the income of local Distribution Companies (DISCOMs), which depend on these large consumers for providing subsidies to other categories. This is the reason why Cross Subsidy Surcharge (CSS) is collected. CSS refers to the compensatory charge levied on large consumers when they opt for open access. This is to ensure DISCOMs do not lose the financial support which is necessary for providing subsidized electricity. It is a way of keeping the model running even when the large consumers try to leave this system.
This system raises many questions—Is it fair to force a factory to pay extra for a household to get cheaper electricity? Is it constitutional to restrict businesses’ freedom to choose power sources? Is it reasonable to collect charges to protect monopoly of the state? These questions touch upon broader topics like fundamental rights, economic justice and the role of policies in maintaining equity.
It is important to examine the concept of cross subsidy surcharge and its compliance with fundamental rights under the constitution for making sure the system is not discriminatory in nature.
LEGAL FRAMEWORK
The Electricity Act, 2003 was introduced to bring major changes in generation, transmission and distribution. The main idea for introduction of this act is to make the electricity sector competitive, rather than a state controlled monopoly. Aim of achieving efficiency, transparency and competition is through “open access”.[4]
Section 42(2) of this act discusses the idea of open access. It is stated that State Electricity Regulatory Commission (SERC) determines the surcharge that is to paid to DISCOMs, and it is important to know that SERC must gradually reduce both cross subsidy and surcharge[5]. Tariff Policy elaborates the same, SERC must try to match electricity prices with the cost of supplying it. The goal is that all users must pay ±20% of average cost.[6] This indicates that the Cross subsidy and surcharge are transitional mechanisms, rather than permanent features.
While this looks appealing in theory, it is not effectively translated into reality. A study in 2019 found that households and farmers were charged less than 80% of the supply cost, whereas industries were charged over 120%. This was the situation in 12 out of 31 states and union territories.[7]
CONSTITUTIONAL ANALYSIS
Article 14 of the Constitution guarantees the right to equality before law and equal protection of law. It acts as a protection for people within the state of India from arbitrary and discriminatory acts by the State. The principle consists of two major aspects. Equality before Law is the first aspect and it is a negative concept, which means no person in the state is above the law. The second aspect present is Equal Protection of the Laws and it is a positive concept, meaning that all people with similar circumstances are to be treated equally.[8] Article 14 allows the State to differentiate people if reasonable classification is present. The state can do that if there is reasonable classification. But the classification must not be random and dishonest, it must be based on real and reasonable differences. It also must have a reasonable nexus with the purpose of the law.[9]
The design of Cross Subsidization practice, which showcases the differential pricing on different customer segments, raises questions of compatibility with Article 14 of the constitution. For compliance with Article 14, there must be intelligible differences. Here, there is a reasonable difference in terms of type of consumers, level of usage and nature of supply. Classification on the basis of type of consumers and level of usage is the most common form of differentiation. For example, industrial consumers have greater capacity to pay tariffs and have higher demand, whereas, agricultural and residential consumers belong to economically weaker sections and consume seasonally or irregularly. This classification is not arbitrary.
Alongside intelligible differentiation, there must be a rational nexus. That means, the differentiation must be related to the object of law. On the face of it, it may seem that money charged on open access users or high tariffs doesn’t directly help domestic consumers, it protects DISCOM’s revenue. This claim simplifies the purpose of cross subsidy practice and surcharge. Revenue of DISCOM and consumer tariffs are directly related. Protection of DISCOM is not just about the revenue that it generates, it is about protecting the distribution company’s ability to provide electricity to domestic and agricultural users for a cheaper price. CSS is also not a penalty that is to be paid for choosing other power sources, it is compensation with the purpose of balancing the system. To sum up, the Cross subsidy mechanism or surcharge system is complying with Article 14 of the constitution and is legally correct.
COMPETITION LAW PERSPECTIVE
Competition Law in India is mandated through Competition Act, 2002. These are a set of rules created for promotion of fair and rational competition. This act prevents certain activities that prevent competition in a market. It is the duty of Competition Commission of India (CCI) to promote healthy competition and ensure that every business can freely enter the market.[10]
Section 4 of the Competition Act deals with the issue of abuse of dominant position. Imposition of unfair, discriminatory, and predatory pricing is considered to be one of the abuses. It is necessary to test whether there is a dominant position and whether unfair pricing practices exist.[11]
In the context of the Electric power industry, State run DISCOMs enjoy dominance and monopoly in most of the areas. Switching providers is not an easy task for consumers of electricity. It is a fact that, out of 70 distribution companies in the country, 54 of them are state run.[12] Considering these facts, it can be concluded that the first threshold of section 4 is satisfied.
Unfair or discriminatory pricing practices are prohibited under the Section 4(2)(a)(ii). But the cross subsidy model involves charging different consumers at different prices. The important question here is whether this differential pricing amounts to unfair or discriminatory practices as competition law does not prohibit all differential pricing, it prohibits abusive differential pricing.
This mechanism may not amount to violating Section 4 of the Competition Act when we observe the purpose of the system at core level. This model is aimed at achieving equity among citizens. This is intended for serving an honest welfare interest rather than market distortion. The intent of the system solely lies on serving justice and promoting equity. The pricing may also be considered a sovereign function as it is government directed, therefore there is no scope for arbitrary or discriminatory pricing.
ETHICAL DIMENSIONS
Cross subsidy practices and surcharges can be considered fair when we look at it through the Rawlsian Theory of Justice. This mechanism aligns with the Difference principle. The difference principle states that the existence of inequalities must be present only if the disadvantaged people are getting benefited.[13] Through redistribution, welfare of the disadvantaged and equity is being promoted.
From Libertarian perspective, the system may be seen as flawed. This is due to the compulsion placed on certain segments of consumers to bear burden for others without their consent. This can be seen as an infringement on an individual’s economic liberty.
CSS gently forces high performing consumers to not leave the system with moral coercion. Even though the system is for the broader purpose of collective welfare, it nudges consumer preference.
Cross Subsidy Mechanism can be considered as just, only if it runs with transparency, autonomy and is well targeted. Considering both the principles and moral understanding, it can be said that fairness and true justice can be achieved only when both collective upliftment without isolation and individual freedom are balanced.
POLICY CHALLENGES
While the charging of surcharge and the implementation of cross subsidy model are legally correct, it is not necessarily practically and ethically justified. Open access is an ability of consumers to choose a supplier of their choice to purchase power. It was introduced through the Electricity Act, 2003 with the purpose of establishing competition and consumer choice. But, the legally justified CSS discourages consumers from open access. This undermines the law itself and neutralizes competition.[14] This raises questions over its practical alignment. Even though there were policies made for the exit plan of Cross Subsidy, there is no visible sunset schedule for this system. Direct Benefit Transfer systems can be encouraged, where low income consumers are subsidized without dissorting electricity prices. DBT approach can be far more transparent than CS, but DBT has a risk of increasing burden on Government.
A phased approach can be taken, where DBT gets introduced into the system through pilot programs while Cross Subsidy is gradually reduced. For CSS, a strict time bound road map must be implemented in a phased manner for reduction of the surcharge.
CONCLUSION
The idea of Cross Subsidy to promote equity by redistributing costs holds merit and is legally sound. This system is well aligned with constitutional and statutory frameworks. However, it may not be supported by moral expectations of economic liberty and practical realities. There is a subtle difference between what is lawful and what is morally and practically fair. The gap between legality and morality or practicality does not necessarily mean that the system as a whole is unjust, but it showcases the need for policy evaluation. There is a need for a system, where all three, legality, morality, and real world needs are balanced. These dimensions can be balanced through a phased and transparent approach, where the systems are dynamic, fair and efficient.
REFERENCES
[1] Correspondent S, ‘Water, Power Integral Part of Right to Life, Says Kerala HC’ The Hindu (17 March 2021) https://www.thehindu.com/news/national/kerala/give-power-connectionwithin-a-month-hc/article34083968.ece accessed 9 July 2025.
[2] Saba, Ridhi and Digital B, ‘Cross-Subsidies in Electricity Sector’ (SCC Times, 19 February 2021) https://www.scconline.com/blog/post/2018/06/20/cross-subsidies-in-electricity-sector/ accessed 9 July 2025.
[3] Electricity Act 2003, s 42(2).
[4] Electricity Act 2003, Preamble.
[5] Electricity Act 2003, s 42(2).
[6] Tariff Policy, cl 8.3.2.
[7] N Chauhan, ‘[Title of the Document]’ (SPRF, December 2024) http://sprf.in/wp-content/uploads/2024/12/PS.pdf accessed 8 July 2025.
[8] Constitution of India, art 14.
[9] SV Bafna, ‘Doctrine of Reasonable Classification’ (2021) 4 International Journal of Law Management & Humanities.
[10] The Competition Act 2002, s 18.
[11] The Competition Act 2002, s 4.
[12] C Kay, ‘Tata Shows Interest in India’s Ageing State Power Distributors’ (18 August 2024) https://www.ft.com/content/b05bc0b9-7773-4131-9f8d-9ceeb31749db accessed 8 July 2025.
[13] John Rawls, A Theory of Justice (Rev edn, Harvard University Press 1999).
[14] N Agarwal and N Anwer, ‘An Analytical Study of Cross Subsidy Impact on Electricity Demand from Industries: Case of Electricity Distribution Utilities in India’ (2019) 9 International Journal of Energy Economics and Policy 305.
