The Battle for Mumbai

Tata Electric Companies’ strategic decision to venture into the retail arena unleashed a bitter battle with its rivals for Mumbai’s high consumption customers. It threatened to upset the decades-old power equilibrium in the state and unseat the incumbents, BSES and BEST. This story talked about the power play between the rivals as they slugged it out for a greater share of electricity supply in Mumbai.

For over half a century, private utilities BSES and BEST have enjoyed almost uninterrupted control over electricity supply to Mumbai city. Tata Electric Companies (TEC) was content to take the back-seat, supplying two-thirds of its electricity to BSES and BEST, and the rest to 100-odd large customers including the Railways, a few textile mills, Bhabha Atomic Centre and Mumbai Port Trust. It had so far never tested the retail waters.

But two years ago, TEC decided to shake off its long years of passivity and venture into the retail arena. It took a strategic decision to target Mumbai’s higher consumption customers — the meat of its rivals’ business.

The move amounted to declaring war and had BSES and BEST instantly up in arms. Their concern is understandable. The TEC decision threatens to not only upset the decades-old power equilibrium in the state, but also to unseat incumbents, BSES and BEST.

From TEC’s point of view however, the sudden surge of activity was more a compulsion arising from a lack of alternatives. Most of its industrial consumers were moving away from Mumbai, and its prime bulk licensee, BSES, was consistently reducing its offtake from TEC ever since it set up its own 500 MW Dahanu plant. As a result, TEC was burdened with surplus capacity and had to find buyers to sell this surplus to.

Mumbai presented an attractive market. It consumes about 2,000 MW of electricity per annum and has a 4.5 per cent increase in demand each year. The present consumer base is wholly urban and the collections are good. Besides, there are quite a few areas in Mumbai where TEC has the transmission network to deliver power.

BSES and BEST are not underestimating the threat from TEC. TEC is eyeing their most prized clients, who in effect pay for the subsidy BSES and BEST offer their residential consumers. Moreover, given its older hydel plants, TEC is capable of supplying HT consumers at cheaper rates than either BSES or BEST. Last year, while TEC was charging Rs 2.70 per unit, BSES was charging Rs 3.10 per unit from HT consumers- and BEST was charging Rs 3.40 per unit.

There is also a question of mindset. Both BSES and BEST have become quite used to functioning in the quasi-monopolistic environment that has been in existence for 70 years, thanks to the unique licensing arrangement in place in Mumbai (see box).

Meanwhile, TEC has been aggressively moving on its new marketing strategy. It has already signed supply agreements with 280 large customers (totalling 500 MW). The first of the regions to be targeted by TEC was the upcoming Bandra-Kurla Complex in north Mumbai, which traditionally fell in BSES’s domain. To BSES’s consternation, TEC managed to clinch 19 of the 21 commercial units being set up there, including prestigious clients like ICICI and Unit Trust of India. It also made inroads into BSES’s other strongholds: Chandivli in Andheri (East), pockets of Goregaon (West),Thakur Village, Kandivli (East) and Borivili.

Nor did TEC spare BEST’s territories. It is selling power to seven of BEST’s large consumers, including Bengal Chemicals and Bradys Plaza.

Not willing to leave anything to chance, TEC has even put up duplicate infrastructure to reach out to consumers in these areas. This has particularly incensed BSES since this would mean not only losing its consumers to TEC, but also being denied the cost of carrying the power. “This has not happened even in countries where the supply business and wire business have been separated, where there is access to existing distribution infrastructure and customers have a choice of supplier,” says R.V. Shahi, chairman and managing director of BSES.

According to him, creating new infrastructure is an avoidable expense. “If TEC spends Rs 1 billion on creating this new infrastructure, its cost of power supply is bound to go up, which is why we as a major purchaser of its power need to be concerned.”

In an attempt to counter the threat from TEC, BSES had, some time back, asked the government to increase the dividing line of operations between TEC and the other two companies. “The 1,000 kVA limit was fixed over 50 years ago when we were supplying in the range of 20 MW. This figure has now risen to 1,200 MW, and therefore the 1,000 kVA limit between TEC and BSES should accordingly be increased to 10,000 kVA,” says Shahi. No decision has so far been taken on the issue by the government.

However, TEC officials contend that no such 1,000 kVA limit exists. According to them, TEC is legally entitled to supply electricity to the entire territory of Mumbai. If the company decides to target residential consumers in the city, the fight will escalate into a no-holds-barred battle between the rivals. But this is rather unlikely, given that the supply to residential consumers is at a lower rate and that TEC may not have the requisite infrastructure to do so.

Meanwhile, in a more proactive attempt at damage control, BSES has slashed its HT charges continuously to hold onto its customers in this segment. In October 1998, it reduced its tariffs to this segment by 55 paise per kWh. In November 1999, it slashed its tariff by a further 49 paise per kWh to this category of consumers, almost matching TEC’s rates. As a result, the Monopolies and Restrictive Trade Practices Commission (MRTPC) recently issued a show cause notice to BSES for giving consistent rebates to only one class of consumers while ignoring the others. (As per the Electricity Supply Act, rebates can be given to consumers only if the licensees make profit over and above reasonable return, and this has to be passed on to all consumers equitably.)

But, according to Shahi, MRTP does not apply in this case as the charges have decreased, not increased. “It was possible to reduce rates by improvements in plant load factor (PLF) of the Dahanu plant from 76 per cent in 1998 to 90 per cent in 2000, and reduction in distribution losses from 15 per cent to 11.5 per cent during the same period,” Shahi justifies.

TEC has not been watching these moves idly. Last year, it lodged a protest with the state government for showing unseemly haste in approving BSES’s 495 MW power project in Saphale, Palghar. TEC’s concern is that if BSES continuously adds to its own generation capacities, it would reduce the offtake from TEC’s plants. “The decision could affect our interests,” TEC sources point out. “The company has already made investments worth several million on generation, transmission and distribution with the help of the World Bank and FIs for ensuring reliable power supply. The Maharashtra government and the centre had guaranteed to the World Bank that no action would be taken which would affect TEC’s ability to repay the World Bank loan.”

What has further soured relations between the two utilities is the issue of “standby charges”. Standby charges are available to generators to provide a reliable back-up supply and continuity when the generating units are down. The companies have been fighting over the issue for over two years now. While BSES feels it was paying an adequate charge, TEC feels it is way too low. MSEB supplies standby power of 550 mVA to TEC, and half this amount is then provided by TEC to BSES. While TEC has paid its 50 per cent share to MSEB, BSES is yet to pay its entire share to TEC, which will in turn be paid to MSEB. In March this year, the state government directed BSES to pay TEC Rs 1.82 billion as standby charges. BSES now owes the difference of Rs 1.4 billion to TEC. BSES, which has raised objections to paying this amount, has now been asked by MSEB to file a petition with the MERC so that the issue can be settled as early as possible.

Interestingly, it is such mutual insecurities that have driven BSES and TEC to the war-path. The tariff pressure on BSES’s HT consumers was quite high and was nowhere near what TEC was charging its large consumers. BSES knew that if and when TEC decided to go retail it would have a clear competitive advantage over it.

Yet there was little BSES could do given its consumer mix. Of its 2 million consumers, 1.5 million are residential consumers, who had to be subsidised. In order to do this and ensure a reasonable return, the tariff for the HT consumer had to be kept high. Another reason for the high tariffs was that it had little control over its costs as it was buying power at a fixed bulk rate from TEC.

Therefore, BSES took a conscious decision to backwardly integrate by putting up its first generation plant at Dahanu in Maharashtra. “The power from this plant costs BSES Rs 2 per unit, as it operates at 90 per cent PLF. Had Dahanu not been created, we wouldn’t have been able to contain our tariffs for about four years,” says Shahi. As opposed to Dahanu’s Rs 2 per unit, BSES pays Rs 2.50 per unit on a two-part tariff for TEC power.

Quite naturally, BSES’s reliance on TEC has been continuously decreasing. Today, BSES buys only 2,500 million units from TEC compared to the 2,900 units it bought from it three years ago. Conversely, BSES’s decreasing reliance on TEC has forced it to go retail. And this vicious cycle may continue for some time. “Any customer they take away from us will further reduce our offtake from TEC,” says Shahi.

Taking its cue from BSES, BEST too is now following the same strategy — of reducing its dependence on TEC power. It is planning to put up a 750 MW plant of its own. So far it has relied entirely on TEC for its power requirements. BEST cannot afford to lose income from its power distribution as this cross-subsidises its transport business, which is otherwise incurring huge losses.

For now, both BSES and BEST are putting up a brave front. “We are not afraid of competition. And the customer should have a choice. We will be able to prove better in customer service because of our greater distribution strength. With 100 bill collection centres, 45 complaint centres, and five major consumer centres, infrastructurally, we have everything to take care of our 2 million consumers,” says Shahi confidently.

Meanwhile, TEC too is beefing up its distribution network. It has set up about 125 consumer substations at different load centres in Mumbai.

All the bravura apart, the players realise that the only viable option now is to look beyond Mumbai. While Mumbai may be a more lucrative market than other cities, it has a large and fast-growing segment of residential consumers who need to be subsidised. In the last seven years, BSES’s residential consumers have grown from 43 per cent to 53 per cent. Shahi sums it up thus: “No one needs to feel threatened. There is a shortage of power supply in the country. All of us have to now look beyond Mumbai.” Both TEC and BSES have asked the government to increase their licence areas beyond the city. MSEB has also agreed to buy surplus power from TEC. And there have been reports of TEC negotiating with KEB to sell power to it.

While Mumbai’s Big Three continue to slug it out and rewrite Mumbai’s power equations, it is clear that the growing competition between them will work to the benefit of the consumer. Already, TEC’s move to go retail has forced BSES to lower its energy prices by making operational improvements. More such positive developments can be expected soon.