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Mumbai power consumer: The political scapegoat

Aug 9, 2000

The Maharashtra government's recent decision to levy an 'electricity duty' of 10 paise on per unit of electricity sold, is an effort to improve its financial condition. This would mean an additional Rs 1.1 bn for the state exchequer. The Maharashtra State Electricity Board (MSEB) and Enron's Dabhol Power Company have been spared this levy. The duty is applicable to bulk licensees like BSES and Tata Electric Companies' (TEC). It seems that the state government has spared MSEB and Dabhol Power Company because they supply to the rural heartland in Maharashtra. Any effort by these two to pass on this hike to consumers will meet with a lot of resistance by the farmer's lobby. Considering the fluid political situation in Maharashtra the government could not risk raking up another controversy. But it also needed funds, so it took the easy way out.

BSES and TEC operate in Mumbai and its suburbs. The circle is considered lucrative and the realisations per unit sold are also higher compared to the average realisations across the country. At the moment the state government has not indicated whether TEC and BSES will be allowed to pass on this duty to consumers. But in all probablity they will be allowed to do so, because for one, the Mumbai circle consumers will be able to absorb it. Also, if BSES and TEC do not pass on this hike to consumers it will shrink their bottomline drastically.

Electricity sold ( m units) 8,456 5,563
Net profit estimates (Rs m) 2,424 2,984
10 paise electricity duty (Rs m) 846 556
Net profit after electricity duty (Rs m) 1,578 2,428
Decline in profits (%) 54% 23%
EPS before duty 21.0 21.6
EPS after duty 13.6 17.6

As you can see from the table, TEC's profits in FY01 will be squeezed by about Rs 846 m and BSES's by Rs 556 m. This will change their whole valuation paradigm, which these companies will not take lightly. So in all probablity the Mumbai consumers will end up taking the whole burden and fill the coffers of the state exchequer, which is not fair.

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