Last week the Appellate Tribunal For Electricity (APTEL) passed an order that will increase the electricity bill for the Indian Railways. So in today’s Finshots, give you an oversimplified explainer on why that happened.
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The Story
The Railways is India’s largest electricity consumer!!! It spends a whopping ₹20,000 crores a year on the electricity needed to run the trains and offices.
And it looks like the number will only head north. Because they have lost a legal battle to a bunch of state electricity discoms (distribution companies).
What’s going on, you ask?
Over the past few years, the Indian Railways has bought electricity from two main sources.
- Directly from the open market through a competitive bidding process. This means that power-generating companies or gencos bid or offer to sell electricity to the Railways. And the Railways chooses the one that quotes the best price.
- They also trade excess electricity on the Indian Energy Exchange (IEX). Simply put, they sell their surplus power during the day on the exchange. And they buy back power at night when the demand peaks and tariffs are low. That’s simply because the Railways consume more power at night since that’s when most trains run. Whereas power consumption is lower during the day since that’s when most of the maintenance or repair work happens.
But wait…it wasn’t like this before 2015.
Back then, the Railways sourced their power only from state electricity supply companies or discoms. But they realised that it was an expensive affair — because a discom is like a middleman and buying it from them cost the Railways 20% more.
So, the Railways had a brainwave. They thought “Hey, how about we buy power directly from the gencos through the bidding system? It could help save at least ₹3,000 crores over the next few years!”
They wrote an application to the Central Electricity Regulatory Commission (CERC) and asked for permission. And the CERC not only gave them a green signal but also certified them as a deemed distribution licensee.
What’s that?
It simply meant that the Railways didn’t need to apply for a separate licence to source and supply electricity to its sub-stations, maintenance areas, railway stations and other vendors in different states who fetched electricity from the Railways. They were as good as a discom!
But you can imagine discoms weren’t happy with that, right?
Because whenever a big entity buys power directly from the market, discoms lose out. Think of it this way. You’re a food vendor at the Railway station who sources electricity from the Railways. This means that the state discom loses out on electricity revenue that it’s supposed to get from you. Now imagine this situation pan India. The losses could add up quickly for these discoms.
So the ones in states like West Bengal and Punjab complained to the APTEL (an authority that listens to appeals from the power, oil and gas industry) that they were losing out on huge chunks of revenue because of this convenient arrangement for the Railways. They demanded compensation.
See, when a big commercial user procures electricity from places other than from the discoms, they still need the discom’s infrastructure. That’s what helps them move the electricity from one place to another. So discoms need to be compensated. There’s something called an Additional Surcharge (AS). And there’s also a Cross Subsidy Surcharge (CSS) that’s paid so that discoms can provide subsidised power to underprivileged consumers.
But naturally, the Railways didn’t think that it was liable to pay this simply because of its tag as a deemed distribution licensee. It felt that if it paid these extra charges its electricity costs would go up again. And that would mean that these costs would be passed on to passengers, increasing their ticket prices. At least that’s the argument that the Railways made before the APTEL.
And now that the ball was in APTEL’s court, here’s how it looked at the case. It split the case into two parts.
- It had to confirm if the Railways was really a deemed distribution licensee.
- If it was, would it still have to pay these extra charges to discoms?
To figure out the answer to the first question, the APTEL had to check if the Railways actually had an electricity distribution system and if it supplied electricity to consumers.
Obviously, the Railways distributed electricity through its electricity lines to different substations and businesses at the railway stations. However, the APTEL didn’t think that this really was a supplier-consumer relationship. It was rather a landlord-tenant relationship. And that meant it didn’t quite involve the sale of electricity.
So, it quashed the deemed distribution licensee status that the CERC had given it back in 2015. And that meant the Railways had to compensate the discoms.
But let’s say the Railways was still considered a deemed distribution licensee. Would it still have to pay up?
Yes.
And that’s simply because the Railways used all the electricity it sourced for its own operations. It didn’t save up anything and sell this excess electricity to other consumers.
Besides, if the Railways didn’t pay discoms it would mean that discoms would make up for this loss by increasing electricity prices for its other consumers like you and me.
So yeah, that’s why the railways will see their electricity bill rise by around ₹2,500 crores a year. And that could even mean higher ticket prices. What do you think?
Until then…
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