Pricing Electricity in Delhi

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COMMENTARY

january 5, 2013 vol xlviIi no 1 EPW Economic & Political Weekly20

Kannan Kasturi ([email protected]

)

is an independent researcher and writes on

public interest and policy.

Pricing Electricity in Delhi

Kannan Kasturi

When Delhi’s electricity

distribution was privatised in

2002, power was allocated and its

cost set by the government. Power

purchase costs were considered

pass-throughs for the operations

of the distribution utilities.

However, with significant changes

in the electricity generation and

trading business in the interim,

Delhi’s consumers are paying notonly for the regulated guaranteed

profits of the state-owned

generation, the transmission

companies and the private

distribution companies, but also

for the unregulated profiteering

of the merchant producers and

other market players.

The price of electricity has gone up

between 51% and 63% for differ-ent classes of consumers in Delhi,

all in the space of one year.1 The highest

increase of 63% has ironically been

imposed on consumers who consume

the least – less than 200 units of electri-

city per month.2 Table 1 shows the last

three revisions of the energy tariff for

domestic consumers. In addition to

these charges, customers pay electricity

tax and a fixed connection charge.

Electricity distribution in all of Delhi,

with the exception of the New Delhi

Municipal Council (NDMC) area and the

cantonment, was privatised 10 years ago

and divided up between three distri-

bution companies (discoms) – the Tata

Po wer Delhi Distribution Limited (TPDDL)

belonging to the Tata group, and BSES

Rajdhani Power Limited (BRPL) and BSES

Yamuna Power Limited (BYPL), both

belonging to the Reliance Anil Dhirubhai

Ambani Group ( ADAG). The Delhi Electri-

city Regulatory Commission (DERC) fixesthe tariff that can be collected by these

entities. It will useful to recall the pro-

cess followed in fixing tariffs before

looking into the reasons for the large

hikes in quick succession.

The Electricity Act

2003 tasks the state

electricity regulator

with laying out the

principles for tariff fix-

ing, ensuring “safe-

guarding of consumers’

interest and at the same time, recovery

of the cost of electricity in a reasonable

manner”.4 In Delhi, these principles find

expression in DERC’s Multi-Year Tariff

(MYT) regulations for discoms.

Under these regulations, discoms

submit a multi-year plan stating their

annual revenue requirement, including

the cost of power, operation and mainte-

nance expenses, depreciation, and a

guaranteed return on capital employed. After review, and possible changes, the

DERC approves the requirement for each

utility and fixes a tariff structure that

will enable all the utilities to meet their

revenue requirements.

The actual performance of a utility may

differ from the planned performance

because of factors that are not in its

control. The MYT regulation distinguishes

between “controllable” and “uncontrol-lable” factors. Operation and maintenance

expenses, depreciation, return on capital

employed and collection efficiency are

considered “controllable” while power

purchase cost and sales are considered

“uncontrollable”. Every year, a utility is

expected to submit its audited accounts

to the regulator asking for a “true up”,

that is, recognition of the variation in

expenditure and revenue from planned

values. The true up of accounts provides

utilities an annual opportunity to argue

for tariff revision on the basis of increases

in uncontrollable costs.

Safeguarding consumer interests in such

a business model calls for a high degree

of regulatory expertise and vigilance. It

also requires that utilities be completely

transparent in their operations. Unfor-

tunately, the utilities have gone to court

against attempts to bring them under

the ambit of the Right to Information

(RTI) Act while the state governmentitself has been reluctant to recommend

a Comptroller and Auditor General

(CAG) audit of their accounts despite

recommendations from the regulator

(Ramachandran 2012).

Against this background, we can look at

the rationale for DERC’s recent tariff orders.

In the true-up exercise for 2009-10

carried out in August 2011, the discoms

argued for a price increase based on

higher than anticipated power purchase

costs. DERC revised tariffs and also

introduced a new component – a fuel

price adjustment surcharge – that would

allow the discoms to pass on a sub-

stantial part of increases in power pur-chase cost during the course of the year

to consumers.

Table 1: Electricity Tariff in Delhi for Domestic ConsumptionEffective from Slab-wise Energy Charges (Rs/unit) Power Price Deficit

Adjustment Surcharge0-200 Units 201-400 Units > 400 UnitsSurcharge (%) (%)

March 2008 2.45 3.95 4.65

September 2011 3.95 4.80 5.50 Variable

July 2012 4.65 5.70 6.50 Variable 8

Source: DERC tariff orders.3



COMMENTARY

Economic & Political Weekly EPW january 5, 2013 vol xlviIi no 1 21

In the next true-up exercise, this time

for 2010-11, carried out in July 2012,

DERC accepted that the revenue shortfall

of the discoms had cumulated to high

levels till the end of 2011, despite the

tariff increase of September 2011. It

revised tariffs upwards, after estimating

the power purchase costs for 2012-13 andsucceeding years and also added another

component to the tariff, a special sur-

charge to recover past shortfalls in reve-

nue, besides modifying the fuel price

adjustment surcharge to a power pur-

chase price adjustment surcharge.

It appears that DERC raised tariffs

both times in response to a single factor

deemed to be outside the control of the

discoms – the increase in the cost of

power purchased by them.

Operational Costs

The costs of discoms primarily engaged

in retail supply may be broken up into

the cost of power delivered to the distri-

bution network and the distribution cost

(including the discoms’ return on capital

employed). These are presented as aver-

age cost per unit (kWh) of power. The

quantum of power billed to customers is

less than the quantum of power pro-

cured by the utility because of distribu-tion losses.5 The cost of the lost power is

borne by the billed customers.

Table 2 indicates the build up of costs

for TPDDL. The figures till 2010-11 are

trued-up costs while the ones for 2012-13

are the projections that were used by

DERC for changing tariffs.

In 2008-09, the average cost of power

available with TPDDL for distribution to

its customers was Rs 2.83/unit. After

accounting for a 19% distribution loss,

the cost of power increased to Rs 3.50/

billed unit. Together with a distribution

cost of Rs 0.95/billed unit, the total cost

of power supplied to the customer

became Rs 4.45/billed unit. This was

also indicative of the average revenue

per billed unit that had to be recovered

from customers.7

As Table 2 indicates, the reduction in

distribution losses reached a plateau for

TPDDL and the benefits for customers

from loss reduction – a major argument

advanced for privatisation – have largely

run their course. Distribution costs haveremained largely under control except for

a blip in 2009-10, caused by staff salary

increases from the Sixth Pay Commission.

Without accepting that distribution costs

are at reasonable levels, it can still be seen

that increases in the cost of electricity

delivered to the customer is almost

entirely driven by increases in the cost of

purchased power.

The other discoms differ in their cost

details, but the above conclusion holds

for them, too.8

Adding Up the Cost of Power

The bulk of the power needed for Delhi

is procured through standing long-term

power purchase agreements (PPAs) with

central and state sector generation plants.9

If the power supplied from these plants

is inadequate, the discoms must make

their own arrangements to source power

from elsewhere. They must also make

arrangements to sell surplus power.

Selling power in the short-term is

pretty much unavoid-

able for Delhi’s discoms.

With consumption being

mainly domestic and

commercial, there is a

large variation in de-mand over the course of

a day. Thanks to Delhi’s

extreme climate, demand also varies by

season. The ratio of the same day peak

load to minimum load in 2011 moved

from 1.4 in summer to as high as 2.1 in

winter and the ratio of summer peak

load to winter minimum load was 3.1.10

Catering to peak loads through long-

term contracts will entail selling power when the load decreases.

Table 3 shows how sourcing of power,

transmission costs and losses and the

sale of surplus power build up to the

price of power available for distribution

to the customer.11

In 2008-09, TPDDL procured 89.7% of

its power through long-term PPAs at a

cost of Rs 2.59/unit and the rest through

short-term power purchases at Rs 4.35/

unit. After adding transmission costs,

the average cost of power was Rs 2.97/

unit. Transmission losses accounted for

4.1% of the power purchased and 10.8%

was sold to other utilities. Surplus power

could be sold at Rs 5/unit, much above

the cost of power procured. This kept the

cost of power available for distribution to

TPDDL customers at Rs 2.87/unit, only

10% above the cost of long-term power.

The situation changed dramatically

for the worse in 2009-10. Expensive

short-term power purchases were used

to a much larger extent and surplus

power was sold at rates below the short-

term purchase rates. These transactions

drove up the cost of power available for

distribution to Rs 3.68/unit, a 30% mark

up over the cost of long-term power.

Similar factors played out in 2010-11. Intwo years, TPDDL’s cost of power for dis-

tribution went up by a whopping 49%.

Table 2: Operational Costs of TPDDL2008- 09 2009-10 2010-11 2012-13 (P)

Power cost per input unit (A) 2.83 3.70 4.20 4.27

Distribution loss (B) (%) 19.00 16.51 12.39 12.06

Power cost per billed unit [C]=(A/(1-B)) 3.50 4.43 4.80 4.86

Distribution cost per billed unit (D) 0.95 1.21 0.95 1.03

Total cost per billed unit (C+D) 4.45 5.64 5.75 5.89

All costs in Rs/unit; (P) indicates DERC projections.

Source: DERC true-up orders.6

Table 3: Power Cost Build-up for TPDDL and BRPL2008- 09 2009-10 2010-11 2012-13 (P)

Amount (%) Rate Amount (%) Rate Amount (%) Rate Amount (%) Rate

TPDDL12 Long-term purchase 89.7 2.59 80.2 2.81 82.4 3.20 100.0 3.71

Short-term purchase 10.3 4.35 19.8 5.25 17.6 5.56 0.0 0.00

Transmission costs 0.20 0.22 0.28 0.26

Net purchase 100.0 2.97 100.0 3.52 100.0 3.90 100.0 3.97

Transmission losses 4.1 5.4 4.8 4.9

Excess sales 10.8 5.00 8.9 4.11 12.1 2.96 35.5 4.00

Net for customers 85.1 2.86 85.7 3.68 83.2 4.25 59.6 4.27

BRPL Long-term purchase 91.1 2.57 81.5 2.81 80.9 3.20 100.0 3.74

Short-term purchase 8.9 4.54 18.5 5.36 19.1 5.12 0.0 0.00

Transmission costs 0.22 0.23 0.31 0.32

Net purchase 100.0 2.96 100.0 3.51 100.0 3.88 100.0 4.06

Transmission losses 4.4 4.1 5.7 4.7

Excess sales 8.8 5.17 13.2 3.66 16.9 3.21 30.2 4.00

Net for customers 86.8 2.89 82.7 3.66 77.4 4.31 65.1 4.39Rates are in Rs/unit; amounts represent the percentage of total power procured; (P) indicates DERC projections.

Source: Discom true-up petitions13 and DERC true-up orders.



COMMENTARY

january 5, 2013 vol xlviIi no 1 EPW Economic & Political Weekly22

The poor realisations on sale of sur-

plus power have negative implications

for the cost of power in coming years.

DERC’s projections for 2012-13 show that

with the availability of power from newly

commissioned plants, Delhi’s utilities will

have a large surplus on hand.14 TPDDL,

for example, will have to dispose off over35% of the power it purchases. DERC has

optimistically assumed that this power

can be sold at Rs 4/unit when the reali-

sation was only Rs 2.96/unit for much

smaller amounts of power in 2010-11,

without giving any reasons for its opti-

mism.15 If these assumptions turn out

incorrect, Delhi’s consumers are in for

further sharp increases in tariff.

BRPL procurement costs display be-

haviour similar to TPDDL’s. In complete

contrast to these two, the state-owned

distribution arm of NDMC was able to

keep the cost of power available for dis-

tribution as low as Re 0.62/unit and

Rs 2.87/unit in 2008-09 and 2009-10 re-

spectively!16 The secret of this amazing

feat was that NDMC was allocated

enough “cheap” long-term power, obvi-

ating the need for short-term purchases.

Further, it was also able to sell its sur-

plus – 43% of its allocated power in

2008-09 and 39% in 2009-10 – at aprofit to other utilities.

Short-term power purchase and sales

were not the only reason for escalating

power costs of the discoms. An

examination of Table 3 shows

that the cost of long-term pow-

er went up by about 24% over

two years. Transmission costs

went up inordinately and trans-

mission losses too showed an

upward trend.17

The cost of power from the

central sector and state power

generators is regulated by the

Central Electricity Regulatory

Commission (CERC) and the

DERC respectively. It is a cost-

plus model, with assured re-

turns for the power producers. The for-

mula for the rate at which power is sold

has two components – a “fixed” part

and a part that varies with the cost of

fuel. Fuel cost increases are automati-cally passed on to the power purchasers

while fixed costs are revisited in tariff

orders by the regulators. The long-term

state-owned power producers have

been effectively inflation proofed!

Discretion in Power Trades

Since short-term trades have played a

huge role in escalating the cost of power

sold by the discoms, it will be useful toexamine them in greater detail.

Delhi’s discoms have several options to

meet their short-term power requirements.

They can procure power from each oth-

er (intra-state) or make power banking

arrangements with other utilities who

have complimentary needs, “depositing”

power with their partners when they

have it in excess and “withdrawing” the

power at a different point in time when

they are in deficit. These two are the

most cost-effective options.

Power can also be bought a day ahead

in power exchanges or based on bilateral

term agreements with private producers

at market prices. Finally, unscheduled

interchange (UI) – by deficit or excess

withdrawal of power – has the same cost

implications as a sale or purchase of

power but at rates that are related to the

instantaneous demand-supply balance

on the grid.

Table 4 shows how BRPL and TPDDL managed their short-term power require-

ments in 2010-11. The dominant form of

procurement was based on bilateral

agreements. These purchases were made

at rates far above the long-term contract

rate of Rs 3.20/unit prevailing in 2010-11.

A similar pattern is evident in the short-

term power purchases of 2009-10.Delhi’s discoms entered into bilateral

contracts mostly mediated by power

trading companies, and sometimes di-

rectly with the generation companies.

Their parent groups – Tata and Reliance

ADAG – have companies engaged in pow-

er trading and contracts were often

made through these companies. Compa-

nies in the “merchant power” market are

power companies that have not tied up apart or the whole of their output in long-

term contracts, or companies in other

industries that have captive power gen-

eration at their disposal.

A prominent supplier of merchant

power for Delhi has been Jindal Power

Limited (JPL), carrying a reputation as

the first company to operate a power

plant entirely on a merchant basis (Shar-

ma 2012). JPL’s high cost power is, ironi-

cally, fuelled by low-cost coal from captive

coal blocks that were allocated to it by

the government (Mohammad 2012).

Delhi has other merchant suppliers like

Lanco Infratech and GMR who have had

access to gas at government-controlled

prices from the Krishna Godavari basin

for their power plants (Narayan and

Mohammad 2012).

In several cases, the discoms show

purchases from power trading companies

and the actual supplier’s name is not

made public. There is also a wide variationin power purchase rates (in TPDDL’s case

for example, prices varied from Rs 5.48/

unit to Rs 7.59/unit in 2010-11).19 As

DERC observed in July 2012,20 contracts

were largely made by the utilities with-

out following any competitive process

and often many months in advance of

the power requirements.

All this points to the complete lack of

transparency in short-term power pro-

curement contracts and raises the suspicion

that the distribution utilities may not be

putting in their best efforts towards

reducing the cost of power procured.

The disposal of surplus power by the

distribution utilities confirms this suspi-

cion. A large fraction of this power is

not even actively sold, but simply not

withdrawn from the grid to realise UI

(under-draw) rates, which are lower

than any category of sale and far below

the average rates at which the power

has been purchased.DERC has been content with gently

chiding the utilities, stating that “there

Table 4: Short-term Power Purchase and Sales in 2010-11TPDDL BRPL

Amount Rate Amount Rate(%) (%)

Purchase Bilateral agreements 59.6 6.20 66.1 5.67

Banking 24.7 4.27 27.3 4.02

Intra-state 7.1 4.44 4.3 3.84

UI 5.9 5.26 1.5 3.33

Exchange 2.8 6.65 0.8 7.58

Sale UI 71.1 2.66 25.7 2.71

Exchange 10.5 3.67 44.1 3.16

Banking 15.1 3.76 9.0 3.50

Bilateral agreement 3.2 3.53 20.6 3.78

Intra-state 0.2 3.91 0.7 3.98

Rates are in Rs/unit; amounts represent the percentage of total purchases

or sales.

Source: TPDDL true-up petition18 and DERC true-up orders.



COMMENTARY

Economic & Political Weekly EPW january 5, 2013 vol xlviIi no 1 23

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was scope for better management of the

process of short-term power purchase

and sale of surplus power so as to signifi-

cantly promote the interests of the con-

sumers”,21 that too in July 2012, while

this process has been working against

the interest of customers from 2009-10.

The poor management of the purchaseand sale of power by the distribution

utilities is not particularly surprising,

considering that the cost of power is a

pass-through cost as far as the utilities

are concerned and in no way affects

their profits.

Concluding Remarks

Several factors – increases in long-term

power rates, non-availability of long-

term power in adequate quantities lead-

ing to purchase of expensive short-term

power and low realisation from sales of

surplus power – have contributed to the

massive increase in the cost of power

available for distribution.

When Delhi’s electricity distribution

was privatised in 2002, the focus of the

regulators was on controlling the costs

of distribution and reducing the techni-

cal and commercial losses in the net-

work. Power was allocated and its cost

set by the government; the cost of power was considered a pass-through as far as

the operations of the distribution utilities

were concerned.

Over the years, significant changes

have occurred in the electricity genera-

tion and trading business with private

producers, traders and exchanges coming

into play with merchant power. Trading

in electricity has become an important

part of the operations of a distribution

utility, especially one servicing a metro-

politan area, and involves significant

discretionary spending and sales. The

regulator has been slow to respond

to this changed environment and its

actions to bring greater transparency

into power trades by the utilities appear

ineffective.22

The larger problem however lies in

the unregulated electricity market. Delhi’s

consumers are paying not only for the

regulated guaranteed profits of the

state-owned generation and transmis-sion companies and private distribution

companies, but also for the unregulated

profiteering of the merchant producers

and other market players.

Notes

1 These numbers represent the increase in theper unit cost of electricity including deficit sur-charge, for domestic consumers in the highestand lowest consumption categories, between

August 2011 and August 2012. The increases forcommercial and industrial users fall in-between.

2 The government provides a subsidy of Re oneper unit for consumers using less than 200units per month.

3 Available on the DERC website: http://www.derc.gov.in/

4 Section 61 (d),Electricity Act, 2003.

5 Distribution loss refers to the power input intothe distribution network that the discom can-not account for, either because it has been lostduring transmission or stolen. It is calculatedas the fraction of the power that cannot bebilled to customers.

6 See note 2.

7 The actual average rate per billed unit would

be slightly higher as it would also need to in-clude any performance incentives for whichthe discom has qualified.

8 BRPL and BYPL continue to have high distri-bution losses, and as a consequence, highertotal costs per billed unit compared to TPDDL.However, in their case too, cost increases weredriven by the cost of purchased power. Of the increases in total costs per billed unitbetween 2008-09 and 2010-11 of Rs 1.85 forBRPL and Rs 2.74 for BYPL, distribution costsper billed unit accounted for Re 0.22 andRe 0.31 respectively.

9 This is set to change from 2012 with TPDDLsigning a long-term PPA with Jhajjar Power, aprivate power generation firm.

10 These figures have been taken from Section

3.1, of Prayas (2012: 6-7).11 Of the three private discoms, BRPL and BYPL

have the same management. In this and subse-quent sections examining the management of power purchases and sales, the data and analy-sis has been confined to TPDDL and BRPL.

12 The cost of electricity available for distributionto TPDDL customers reported in this table mar-ginally dif fers from the figures in Table 2 as thelatter uses DERC trued-up figures while theformer is based on figures reported by TPDDLin its true-up petition.

13 TPPDL “true up” petition for 2010-11 is availa-ble at its website www.ndpl.com. All other“true up” petitions are to be found (if at all) atthe DERC website.

14 Delhi government has “Surrendered” somelong-term power allocated to it (Press Trust of India 2012).

15 See Sections 4.126, 4.127 and 4.128 of the DERCTPDDL true-up order, July 2012, available onthe DERC website.

16 See NDMC true-up petition for 2008-09 andDERC true-up order for NDMC for 2009-10available on the DERC website.

17 The higher transmission costs are due to DelhiTransco, a state utility, hiking its charges. Largertransmission losses are due to a larger proportionof power being sourced from outside the state.

18 See note 11.

19 These figures were obtained from the TPDDLtrue-up petition for 2010-11 submitted to DERC.

20 See Section 3.86 of DERC TPPDL July 2012order and Section 3.103 of DERC BRPL July 2012 order.

21 Ibid.

22 Guidelines for short-term power trades by dis-coms were issued by DERC in January 2011.While the guidelines require that discoms up-date their annual requirements/surplus of electricity at the end of every month on their

website, a visit to the BRPL website (www.bses-delhi.com) on 12 November 2012 showed thatthe “anticipated shortage/surplus” information

was last updated on 30 July 2012. This latestdata is available at: http://www.bsesdelhi.com/pdf/Revised_Anticipated_Shortage_Sur-plus_Power_BRPL_2012-13.pdf

References

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www.financialexpress.com/news/jindal-power-ignores-coal-min-directive-on-merchant-sale-of-power/ 981306/2

Narayan, Subhash and Noor Mohammad (2012):“Lanco, GMR Plants Face Cut in Cas Allocation”,

Financial Express, 20 February, accessed on 12November 2012: http://www.financialexpress.com/news/lanco-gmr-plants-face-cut-in-gas-allocation/914245/0

Prayas (2012): “Electricity in Megacities”, Working

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Documents

Pricing Electricity in Delhi