By Somali K Chakrabarti

Tata Power claims to charge lowest tariff in Mumbai . The above article appeared in The Economic Times, on 27th Jan, 2014. Here is an excerpt: As the demand to reduce power tariff is gaining momentum in Maharashtra, private utility Tata Power today claimed that its tariff is the lowest in the metropolis. The company, which has a residential consumer base of 4.5 lakh in the city, charges a tariff of Rs 2.13 per unit from customers consuming power up to 100 units with a fixed charge of Rs 40 and Rs 3.62 per unit and fixed charge of Rs 75 for up to 300 units, the Tata Power Company (TPC) said in a statement issued here today. It said that while Reliance Infrastructure (RInfra) charges an average Rs 5.68 per unit within 250 units, BEST charges Rs 4.52.

Shortly after, Reliance Infrastructure (RInfra) also claimed that their customers can expect power bills to drop by 22% in the suburbs in the next 2 years.

Competition at play!

Living in a residential colony in Mumbai, I had seen a substantial reduction in our electricity bill after we migrated from RInfra to Tata Power. However, a discussion and some study on the recent developments helped me to understand that with the RInfra rates becoming equally or more competitive, this cost advantage due to migration from RInfra to Tata Power may not last for long.

In this post I look at two pertinent questions:

Why Tata Power had the lowest power tariff in Mumbai? For how long will Tata Power be able to maintain these competitive tariffs?

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Why Tata Power had the lowest power tariff in Mumbai?

A sequential order of events reveal some of the factors that allowed Tata Power to charge the lowest power tariffs.

Traditionally, Tata Power Company (TPC) was a bulk licensee and supplied energy in bulk to consumers like Railways, Refineries, Ports and other distribution licensees including BSES (subsequently renamed RInfra-D) and BEST.

In 2008, Tata Power forayed into retail power supply after a Supreme Court ruling that allowed Tata Power to supply electricity to retail consumers. The Supreme Court also allowed Tata Power to use RInfra-D‟s network to supply power after paying something known as ‘wheeling charges‘ for using the network. The Electricity Act, 2003, which laid down the foundation for introducing competition for power supply at the consumer end, allows one distribution company to use the existing network of other distribution companies under the provision of wheeling.

Though earlier TPC capacity was equitably distributed between RInfra-D, BEST and TPC-D, starting from April 2011, TPC discontinued supply of power to Reliance Infrastructure (RInfra) to service its own retail customers in Mumbai. [Source: MoneyControl, Apr 02, 2011]

R Infra was thus forced to buy power from the open market, which increased their cost of power purchase, thus causing them to charge higher tariffs.

The difference between the power purchase costs of the retail distribution companies rendered a cost advantage to TPC, allowing TPC to offer the most competitive rates to its customers.

TPC‟s competitive rates led to the surge in migration and subsequently around 1.2 Lakh retail customers (88% residential + 11% commercial segment) from Reliance Infra to TPC in Mumbai in the financial year 2011-12. [Source: Business Standard, 13 July 2012].

Now I move on to the 2nd question:

For how long will TPC be able to maintain these competitive tariffs?

Certain factors may lead to an increase in the tariff rates offered by TPC in the near future. Here I enlist some of those.

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1. Loss of Competitive Advantage as RInfra begins captive power sourcing

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The competitive advantage of Tata Power on account of its captive power sourcing is likely to decrease as R Infra starts procuring competitively priced power generated from its captive plants in Butibori near Nagpur. The captive power plant, being a coal fired plant is likely to be more cost efficient than the Tata power plants that are oil fired plants. This will lower their Power purchase cost and as a result, electricity is expected to become cheaper for the 28 lakh RInfra consumers in the suburban parts of the city. [Source: Times Of India, Jul 20, 2013]

2. Levy of Cross Subsidy Surcharge

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Currently in India, the Energy charges (Rs/Kwh) are levied on the basis of the capacity-to-pay considerations. As such domestic consumers with low consumptions and agricultural consumers pay tariffs lower than the actual cost of supplying power to them, whereas industrial consumers typically pay tariffs higher than their cost of supply, thereby cross-subsidizing other categories.

The transmission & distribution losses in Indian distribution companies are the highest for low-voltage consumers such as domestic households, and lowest for high-voltage industrial consumers.

However, there is a lack of consistency in determination of cross subsidy surcharges (CSS), due to unavailability of voltage wise data on cost and distribution losses. In the absence of proper data, cost of supply cannot be properly determined which affects the estimation of cross subsidy surcharge.

In Sept 2011, RInfra-D alleged that TPC did not have a varied consumer profile and was “cherry picking” the high end consumers. RInfra-D filed a petition before MERC with the contention that the shift of industrial high-paying (and cross subsidising) consumers out of RInfra-D was resulting in loss of subsidy which would ultimately burden low-end consumers, and demanded the applicability of CSS to consumer who switch over from RInfra network to TPC. They also appealed for redetermination of cross subsidy surcharge.

MERC allowed RInfra to recover revised Cross Subsidy Surcharge (CSS) for consumers who had migrated to TPC and were receiving supply from TPC-D through RInfra-D’s wires.

Additionally In Sept 2012, the MERC put restrictions on consumer migration and ordered that only the residential category of consumers, who consume electricity up to 300 units a month, would be allowed to migrate from RInfra-D to TPC. Tata Power has further approached the Supreme Court on this issue.

Levy of cross subsidy surcharge (CSS) reduces the tariff advantage to the migrated customers.

3. Levy of Regulatory Assets Charges

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In Mumbai, MERC fixes the tariff rates, and must keep consumer interest in mind, while doing so. When MERC fixed the tariff rates for R Infra, it resulted in RInfra absorbing some losses in the initial years for servicing customers at the decided tariffs rates (by MERC). To recover the losses, MERC allowed the recovery of arrears amounting to Rs 925 crore per year for the next 6 years from its Mumbai power customers.

However, the RInfra customers who had migrated to TPC did not have to pay this additional surcharge, so the customers who continued with RInfra were loaded more. RInfra approached MERC to put this RAC surcharge on R Infra customers who had migrated to Tata Power. This would further reduce the advantage to the migrated customers.

The case is pending before Appellate Tribunal for Electricity (APTEL).

These factors, coupled with the requirement for TPC to have their own network, point to an increase in the tariff payable by TPC consumers.

With the revised rates from 1st 1st April 2014, Reliance energy has become cheaper than Tata Power for residential consumers (above 409 units) and for commercial consumers. The existing RInfra customers may expect their power bills to drop further in the next 2 years. As such some commercial customers and residential customers with high consumption may consider switching back to RInfra for reducing their electricity charges.

Thus the introduction of competition in serving the retail segments increases consumer choice, mandates that power companies increase their efficiency of operations and also requires ironing out the regulatory and legal challenges on the way. Also, from the consumer perspective, a lot remains to be desired when it comes to the timelines for service repairs over the last mile.

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Reference: Introducing competition in retail electricity supply in India, Forum of Regulators , July 2013