One of the first test for AAM Aadmi Party as it takes power in New Delhi will be to bring down electricity prices, which it had promised will be brought down by 50% in its manifesto. Political parties are known to make outrageous claims to come to power, but AAM Aadmi Party, which it says is different from mainstream political parties, claims that it will deliver on its promises. The question is how?

While it is in the interest of every electricity consumer that tariffs come down, it should not be at the cost of quality. Distribution companies in Delhi have claimed that bringing down tariff's by 50% is an impossible task as they are already sitting on losses worth Rs 11,000 crore. Bringing down revenues but keeping cost constant will add to their miseries and make them unviable, resulting in further power outages. Reports say a 50% tariff cut would result in Rs 3,500-4,000 crore additional loss every year for these companies.

The assumptions made by Aam Aadmi Party is that power tariffs are higher by at least 50% and these can be cut and prices brought down.

In order to bring down tariff of a service or a good we need to understand the elements of cost that goes in the arrive at the price. Let's attempt to do that in the case of electricity tariffs.

A look at an electricity bill shows us the various constituents which are Energy Charges, Fixed Charges, Fuel Adjustment Charges (FAC), Electricity Duty, Tax on sale of electricity, Wheeling Charges and Delayed Payment Charges. While all these constituents exists for consumers across the country, their weight in the total bill differs from one distribution company from another.

A comparison of electric bills in Mumbai (Tata Power consumer) and Delhi (BSES Rajdhani Power Ltd consumer) shows that energy charges in mumbai accounts for nearly 41% of the total bill, while in Delhi it accounts for 84% of the bill. In Mumbai, wheeling charges, regulatory asset charges and electricity duty account for 47% of the bill. While in Delhi, surcharges and electricity tax accounts for 11.61% of the bill.

What the comparison shows is that in Delhi most of the bill amount is from energy charges. Energy charges is nothing but the units consumed multiplied by the unit rate. So if AAM Aadmi Party is to be believed the excess bill amount is due to higher energy charges.

The Consumer's electricity bill shows that the unit rate in Delhi for the first 206 units is Rs 3.90, for the next 206 units it is Rs 5.80 per unit and after that it is Rs 6.80 per unit. In Mumbai however, the rates are Rs 0.26 for the first 100 units plus a fixed charge of Rs 40 per month, Rs 1.75 for units between 101-300 plus a charge of Rs 75 per month and for units consumed between Rs 301-500 it is Rs 4.38 per unit plus a surcharge of Rs 75 per month.

One can get tempted to say that there is enough room for a sharp cut in Delhi, given the low rates in Mumbai. But in Mumbai there are other charges which are added to the unit rate which are more than double the energy charges. Further in Mumbai, the company generating power is selling it.

In Delhi, BSES has to purchase power from NTPC. The per unit charge includes the cost of power from the generating company and the wheeling charge of bringing the power to sub-stations in Delhi. In Mumbai, these two costs are shown as separate heads.

Power purchase accounts for 80% of the cost. Bulk Power Cost which companies like BSES Rajdhani pays to NTPC has moved from Rs 1.42 per unit in 2003 to Rs 5.71 per unit in 2013. Now if cost of purchase of power for BSES itself is Rs 5.71 and the minimum billing amount is Rs 3.90, the company is naturally making losses on the lowest consumer, it is breaking even by charging Rs 5.8 for the next 200 units charged, while it makes profit only on the high consumers who are consuming over 412 units. No doubt we have heard complaints of faulty meters running at break net speeds as they try to cross the 412 unit mark.

The problem of high power tariffs in Delhi was brought into focus as tariffs rose by 45% in the last 2 years. There had been no hike in Delhi for a period of 5 years before that. In the last 10 years, power tariff has increased by 65%, while its cost has shot up by 300%. Tariffs have caught up with costs only in the last two years.

There is thus little room for reducing rates without hurting the distribution companies financially. Power bills can be reduced by replacing the faulty meters, but even that would not bring the tariff down too much and definitely not by 50%. If the purchase cost accounts to 80% of the total cost, even auditing and finding inflated costs by the distribution companies would not help bring down the final tariff by 50%.

So has AAM Aadmi Party shot its mouth off by claiming the impossible. Is it like other parties making tall claims which are difficult to implement and hope that aam aadmi forgets it by the time of next elections. It does look like the party did not do its homework.

Irrespective of the cost, there is a small element of law. Power tariffs in Delhi is regulated by Delhi Electricity Regulatory Commission (DERC) and not by a political party. The rate fixed by them can either be rejected or accepted by the government of the state. In case if it rejects the rate, government will have to compensate the companies selling power.

The only way AAM Aadmi Party can bring down power tariff is by subsidising it below the rate set by DERC. Doesn't that sound like populist that we have seen over the years which is the cause of our present day problem? Where is the revolution that everyone is talking about?