COMMENTARY

Pricing Electricity in Delhi

Kannan Kasturi

When Delhis 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 signicant changes in the electricity generation and trading business in the interim, Delhis consumers are paying not only for the regulated guaranteed prots of the state-owned generation, the transmission companies and the private distribution companies, but also for the unregulated proteering of the merchant producers and other market players.

Kannan Kasturi (kasturi_kannan@yahoo.com) is an independent researcher and writes on public interest and policy.

he price of electricity has gone up between 51% and 63% for different 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 electricity 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 xed 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 distribution companies (discoms) the Tata Power 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 Electricity Regulatory Commission (DERC) xes the tariff that can be collected by these entities. It will useful to recall the process followed in xing tariffs before looking into the reasons for the large hikes in quick succession. The Electricity Act Table 1: Electricity Tariff in Delhi for Domestic Consumption Slab-wise Energy Charges (Rs/unit) Power Price Deficit 2003 tasks the state Effective from Adjustment Surcharge 0-200 Units 201-400 Units > 400 Units electricity regulator Surcharge (%) (%) with laying out the March 2008 2.45 3.95 4.65 principles for tariff x- September 2011 3.95 4.80 5.50 Variable 4.65 5.70 6.50 Variable 8 ing, ensuring safe- July 2012 guarding of consumers Source: DERC tariff orders.3 Against this background, we can look at interest and at the same time, recovery of the cost of electricity in a reasonable the rationale for DERCs recent tariff orders. In the true-up exercise for 2009-10 manner.4 In Delhi, these principles nd expression in DERCs Multi-Year Tariff carried out in August 2011, the discoms argued for a price increase based on (MYT) regulations for discoms. Under these regulations, discoms higher than anticipated power purchase submit a multi-year plan stating their costs. DERC revised tariffs and also annual revenue requirement, including introduced a new component a fuel the cost of power, operation and mainte- price adjustment surcharge that would nance expenses, depreciation, and a allow the discoms to pass on a subguaranteed return on capital employed. stantial part of increases in power purAfter review, and possible changes, the chase cost during the course of the year DERC approves the requirement for each to consumers.
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utility and xes 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 uncontrollable factors. Operation and maintenance expenses, depreciation, return on capital employed and collection efciency 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. Unfortunately, the utilities have gone to court against attempts to bring them under the ambit of the Right to Information (RTI) Act while the state government itself has been reluctant to recommend a Comptroller and Auditor General (CAG) audit of their accounts despite recommendations from the regulator (Ramachandran 2012).

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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 and succeeding years and also added another component to the tariff, a special surcharge to recover past shortfalls in revenue, besides modifying the fuel price adjustment surcharge to a power purchase 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 distribution network and the distribution cost (including the discoms return on capital employed). These are presented as average cost per unit (kWh) of power. The quantum of power billed to customers is less than the quantum of power procured by the utility because of distribution 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 gures 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
Table 2: Operational Costs of TPDDL
2008-09

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 benets for customers from loss reduction a major argument advanced for privatisation have largely run their course. Distribution costs have remained 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
Table 3: Power Cost Build-up for TPDDL and BRPL
2008-09 Amount (%) Rate

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 longterm 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.
2010-11 Amount (%) Rate 2012-13 (P) Amount (%) Rate

2009-10 Amount (%) Rate

TPDDL12 Long-term purchase Short-term purchase Transmission costs Net purchase Transmission losses Excess sales Net for customers BRPL Long-term purchase Short-term purchase Transmission costs Net purchase Transmission losses Excess sales Net for customers

89.7 10.3 100.0 4.1 10.8 85.1 91.1 8.9 100.0 4.4 8.8 86.8

2.59 4.35 0.20 2.97 5.00 2.86 2.57 4.54 0.22 2.96 5.17 2.89

80.2 19.8 100.0 5.4 8.9 85.7 81.5 18.5 100.0 4.1 13.2 82.7

2.81 5.25 0.22 3.52 4.11 3.68 2.81 5.36 0.23 3.51 3.66 3.66

82.4 17.6 100.0 4.8 12.1 83.2 80.9 19.1 100.0 5.7 16.9 77.4

3.20 5.56 0.28 3.90 2.96 4.25 3.20 5.12 0.31 3.88 3.21 4.31

100.0 0.0 100.0 4.9 35.5 59.6 100.0 0.0 100.0 4.7 30.2 65.1

3.71 0.00 0.26 3.97 4.00 4.27 3.74 0.00 0.32 4.06 4.00 4.39

Rates 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.

Power cost per input unit (A) 2.83 Distribution loss (B) (%) 19.00 Power cost per billed unit [C]=(A/(1-B)) 3.50 Distribution cost per billed unit (D) 0.95 Total cost per billed unit (C+D) 4.45
All costs in Rs/unit; (P) indicates DERC projections. Source: DERC true-up orders.6
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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 unavoidable for Delhis discoms. 2009-10 2010-11 2012-13 (P) 3.70 4.20 4.27 With consumption being 16.51 12.39 12.06 mainly domestic and 4.43 4.80 4.86 commercial, there is a 1.21 0.95 1.03 large variation in de5.64 5.75 5.89 mand over the course of a day. Thanks to Delhis
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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 shortterm 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. In two years, TPDDLs cost of power for distribution went up by a whopping 49%.
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The poor realisations on sale of sur- orders by the regulators. The long-term plus power have negative implications state-owned power producers have for the cost of power in coming years. been effectively ination proofed! DERCs projections for 2012-13 show that with the availability of power from newly Discretion in Power Trades commissioned plants, Delhis utilities will Since short-term trades have played a have a large surplus on hand.14 TPDDL, huge role in escalating the cost of power for example, will have to dispose off over sold by the discoms, it will be useful to 35% of the power it purchases. DERC has examine them in greater detail. Delhis discoms have several options to optimistically assumed that this power can be sold at Rs 4/unit when the reali- meet their short-term power requirements. sation was only Rs 2.96/unit for much They can procure power from each othsmaller amounts of power in 2010-11, er (intra-state) or make power banking without giving any reasons for its opti- arrangements with other utilities who mism.15 If these assumptions turn out have complimentary needs, depositing incorrect, Delhis consumers are in for power with their partners when they have it in excess and withdrawing the further sharp increases in tariff. BRPL procurement costs display be- power at a different point in time when haviour similar to TPDDLs. In complete they are in decit. These two are the contrast to these two, the state-owned most cost-effective options. Power can also be bought a day ahead distribution arm of NDMC was able to keep the cost of power available for dis- in power exchanges or based on bilateral tribution as low as Re 0.62/unit and term agreements with private producers Rs 2.87/unit in 2008-09 and 2009-10 re- at market prices. Finally, unscheduled spectively!16 The secret of this amazing interchange (UI) by decit or excess feat was that NDMC was allocated withdrawal of power has the same cost enough cheap long-term power, obvi- implications as a sale or purchase of ating the need for short-term purchases. power but at rates that are related to the Further, it was also able to sell its sur- instantaneous demand-supply balance plus 43% of its allocated power in on the grid. Table 4 shows how BRPL and TPDDL 2008-09 and 39% in 2009-10 at a managed their short-term power requireprot to other utilities. Short-term power purchase and sales ments in 2010-11. The dominant form of were not the only reason for escalating procurement was based on bilateral power costs of the discoms. An Table 4: Short-term Power Purchase and Sales in 2010-11 examination of Table 3 shows TPDDL BRPL Amount Rate Amount Rate that the cost of long-term pow(%) (%) er went up by about 24% over Purchase Bilateral agreements 59.6 6.20 66.1 5.67 two years. Transmission costs Banking 24.7 4.27 27.3 4.02 went up inordinately and transIntra-state 7.1 4.44 4.3 3.84 UI 5.9 5.26 1.5 3.33 mission losses too showed an Exchange 2.8 6.65 0.8 7.58 upward trend.17 Sale UI 71.1 2.66 25.7 2.71 The cost of power from the Exchange 10.5 3.67 44.1 3.16 central sector and state power Banking 15.1 3.76 9.0 3.50 generators is regulated by the Bilateral agreement 3.2 3.53 20.6 3.78 Central Electricity Regulatory Intra-state 0.2 3.91 0.7 3.98 Commission (CERC) and the Rates are in Rs/unit; amounts represent the percentage of total purchases DERC respectively. It is a cost- or sales. Source: TPDDL true-up petition18 and DERC true-up orders. plus model, with assured returns for the power producers. The for- agreements. These purchases were made mula for the rate at which power is sold at rates far above the long-term contract has two components a xed part rate of Rs 3.20/unit prevailing in 2010-11. and a part that varies with the cost of A similar pattern is evident in the shortfuel. Fuel cost increases are automati- term power purchases of 2009-10. Delhis discoms entered into bilateral cally passed on to the power purchasers while xed costs are revisited in tariff contracts mostly mediated by power
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trading companies, and sometimes directly with the generation companies. Their parent groups Tata and Reliance ADAG have companies engaged in power trading and contracts were often made through these companies. Companies in the merchant power market are power companies that have not tied up a part or the whole of their output in longterm contracts, or companies in other industries that have captive power generation at their disposal. A prominent supplier of merchant power for Delhi has been Jindal Power Limited (JPL), carrying a reputation as the rst company to operate a power plant entirely on a merchant basis (Sharma 2012). JPLs high cost power is, ironically, 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 suppliers name is not made public. There is also a wide variation in power purchase rates (in TPDDLs 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 without 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 procurement 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 conrms this suspicion. 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
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COMMENTARY

was scope for better management of the process of short-term power purchase and sale of surplus power so as to signicantly promote the interests of the consumers,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 purchase and 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 prots. Concluding Remarks Several factors increases in long-term power rates, non-availability of longterm power in adequate quantities leading 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 Delhis electricity distribution was privatised in 2002, the focus of the regulators was on controlling the costs of distribution and reducing the technical and commercial losses in the network. 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, signicant changes have occurred in the electricity generation 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 metropolitan area, and involves signicant 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. Delhis consumers are paying not only for the regulated guaranteed prots of the state-owned generation and transmission companies and private distribution companies, but also for the unregulated
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proteering of the merchant producers and other market players.

Notes
1 These numbers represent the increase in the per unit cost of electricity including decit surcharge, for domestic consumers in the highest and lowest consumption categories, between August 2011 and August 2012. The increases for commercial and industrial users fall in-between. 2 The government provides a subsidy of Re one per unit for consumers using less than 200 units 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 into the distribution network that the discom cannot account for, either because it has been lost during transmission or stolen. It is calculated as the fraction of the power that cannot be billed to customers. 6 See note 2. 7 The actual average rate per billed unit would be slightly higher as it would also need to include any performance incentives for which the discom has qualied. 8 BRPL and BYPL continue to have high distribution losses, and as a consequence, higher total costs per billed unit compared to TPDDL. However, in their case too, cost increases were driven by the cost of purchased power. Of the increases in total costs per billed unit between 2008-09 and 2010-11 of Rs 1.85 for BRPL and Rs 2.74 for BYPL, distribution costs per billed unit accounted for Re 0.22 and Re 0.31 respectively. 9 This is set to change from 2012 with TPDDL signing a long-term PPA with Jhajjar Power, a private power generation rm. 10 These gures 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 subsequent sections examining the management of power purchases and sales, the data and analysis has been conned to TPDDL and BRPL. 12 The cost of electricity available for distribution to TPDDL customers reported in this table marginally differs from the gures in Table 2 as the latter uses DERC trued-up gures while the former is based on gures reported by TPDDL in its true-up petition. 13 TPPDL true up petition for 2010-11 is available at its website www.ndpl.com. All other true up petitions are to be found (if at all) at the DERC website. 14 Delhi government has Surrendered some long-term power allocated to it (Press Trust of India 2012). 15 See Sections 4.126, 4.127 and 4.128 of the DERC TPDDL true-up order, July 2012, available on the DERC website.

16 See NDMC true-up petition for 2008-09 and DERC true-up order for NDMC for 2009-10 available on the DERC website. 17 The higher transmission costs are due to Delhi Transco, a state utility, hiking its charges. Larger transmission losses are due to a larger proportion of power being sourced from outside the state. 18 See note 11. 19 These gures were obtained from the TPDDL true-up petition for 2010-11 submitted to DERC. 20 See Section 3.86 of DERC TPPDL July 2012 order and Section 3.103 of DERC BRPL July 2012 order. 21 Ibid. 22 Guidelines for short-term power trades by discoms were issued by DERC in January 2011. While the guidelines require that discoms update their annual requirements/surplus of electricity at the end of every month on their website, a visit to the BRPL website (www.bsesdelhi.com) on 12 November 2012 showed that the anticipated shortage/surplus information was last updated on 30 July 2012. This latest data is available at: http://www.bsesdelhi. com/pdf/Revised_Anticipated_Shortage_Surplus_Power_BRPL_2012-13.pdf

References
Mohammad, Noor (2012): Jindal Power Ignores Coal Min Directive on Merchant Sale of Power, Financial Express, 30 July, http:// www.nancialexpress.com/news/jindal-powerignores-coal-min-directive-on-merchant-saleof-power/ 981306/2 Narayan, Subhash and Noor Mohammad (2012): Lanco, GMR Plants Face Cut in Cas Allocation, Financial Express, 20 February, accessed on 12 November 2012: http://www.nancialexpress. com/news/lanco-gmr-plants-face-cut-in-gasallocation/914245/0 Prayas (2012): Electricity in Megacities, Working Paper, Prayas Energy Group, Pune, accessed on 12 November 2012, http://www.prayaspune. org/peg/publications/item/176.html Press Trust of India (2012): Reallocate 1,700 MW Planned to be Surrendered by Delhi to TN, Business Standard, 24 October, accessed on 12 November 2012, http://www.business-standard.com/generalnews/news/reallocate-1700mw-planned-to-be-surrendered-by-delhi-to-tn/ 71962/ Ramachandran, Smriti Kak (2012): RWAs Want CAG Audit of Discoms Accounts, The Hindu, 4 October, accessed on 12 November 2012: http://www.thehindu.com/todays-paper/tpnational/tp-newdelhi/rwas-want-cag-auditof-discoms-accounts/article3963533.ece Sharma, Supriya (2012): Secret of Jindals Success: Cheap Coal, Costly Power, Times of India, 9 September, accessed on 12 December 2012: http://articles.timesofindia.indiatimes.com/ 2012-09-09/india/33713146_1_coal-blockspower-projects-coal-india

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