Differential Pricing: Case of State Electricity Board Introduction: Price discrimination or differential pricing refers to the charging of different

prices for different quantities of a product, at different times, to different customer groups or in different markets, when these price differences are not justified by cost differences. Few examples of price discrimination include: y Power companies charging higher tariffs to commercial than to domestic users. y Entertainment companies charging lower prices for afternoon shows than for evening shows of theatre, movies, sports events etc. y Service industries charging lower prices for children and elderly customers for haircuts, public transportation, airline tickets etc. y Hotels charging lower rates for conventions. Three conditions must be met for a firm to be able to practice price discrimination: 1. Firm must have some kind of control over the price of the product. i.e the firm must be an imperfect competitor. Perfectly competitive firm has no control over the price and hence cannot practice price discrimination. 2. Price elasticity of demand for the product must differ for different quantities of the product, at different times, for different customer groups, or in different markets. If price elasticity of demand are equal then a firm cannot increase its profits and revenues by practicing price discrimination. 3. The quantities of product or service, the times when they are used or consumed and the customer groups or markets for the product or service must be separable. Otherwise individuals or firms will purchase the product or service where they are cheap and resell them where they are more expensive. Different types of price discrimination: I. First-degree price discrimination: y It involves selling each unit of the product separately and charging the highest price possible for each unit sold. By doing so, the firm extracts all of the consumers surplus from consumers and maximizes the total revenue and profits from the sale of the particular quantity of product. y First-degree price discrimination is seldom encountered in the real world, because to practice it, the firm needs to have the precise knowledge of each consumers demand curve and charge the highest possible price for each separate unit of the product sold. II. Second-degree price discrimination: y This refers to charging of uniform price per unit for a specific quantity or block of product sold to each customer, a lower price per unit for a additional batch or block of product, and so on. By doing so the firm will extract part, but not all, of the consumers surplus. y Second-degree price discrimination is more common than first -degree price discrimination but it is also somewhat limited to the cases where products and

By MBA I, SIBM Pune

services are easily metered such as kilowatt hours of electricity, cubic feet of gas and water, number of copies duplicated etc. III. Third-degree price discrimination: y This refers to the charging of different prices for the same product in different markets until the marginal revenue of the last unit of product sold in each market equals the marginal cost of producing the product. y Electric power companies generally practice third-degree price discrimination. They charge higher rates to commercial then to residential users of electricity. The reason being price elasticity of demand for electricity is higher for the latter than for the former, because though residential users have no alternatives if the prices rise, they could reduce the consumption, where as commercial users have to be dependent on the electricity company and they cannot even reduce their consumption.

Maharashtra State Electricity Board: Following is the case of differential pricing in Maharashtra State Electricity Board: Demand Charge: Demand charges reflect the utilities' fixed costs of providing a given level of power availability to the customer, and Energy Charge: Energy charges reflect the variable portion of those costs as the customer actually uses that power availability. Regulatory Liability Charges: RLC has been introduced to compensate the cost of excess losses, i.e. cost of additional power purchase required on account of higher energy input requirement. The Regulatory Liability Charge (RLC) is being levied and recovered from consumers belonging to subsidizing categories viz. Low Tension Commercial, Low Tension General Motive Power, High Tension HTP- 1 and HTP-II and Railway Traction Supply.

By MBA I, SIBM Pune

HTP 1: Applicability:Industries and other High Tension consumers exclusively situated in Mumbai Metropolitan Region (MMR) and Pune Metropolitan Region (PMR) as defined by the State Government.

BAS E TARIFF: Category Demand C harge Energy C harge Regulatory Liability Charge (paise/unit) 215 50

(Rs./KVA/Mon th) (paise/unit) HTP-I TO D TARIFF:(in addition to Base Tariff) Consumption during following hours of the day 2200hrs-0600 hrs 0600hrs-0900 hrs 0900hrs-1200 hrs 1200hrs-1800 hrs 1800hrs-2200 hrs 350

Energy Charge (paise/unit) (-)85 0 60 0 100

HTP II: Applicability:Unless otherwise specified, this tariff will be applicable for all High Tension industries and other General High Tension consumers other than those covered under HTP-I.
BAS E TARIFF: Category Demand C harge Energy Ch arge Regulatory Liability Charge (paise/unit) 210 Energy Charge (paise/unit) (-)85 0 60 0 100 50

(Rs./KVA/Month) (paise/unit) HTP-II TO D TARIFF:(in addition to Base Tariff) Consumption during following hours of the day 2200hrs-0600 hrs 0600hrs-0900 hrs 0900hrs-1200 hrs 1200hrs-1800 hrs 1800hrs-2200 hrs 330

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HT Seasonal: Applicability:Applicable to Seasonal consumers, who are defined as "One who works normally during a part of the year up to a maximum of 9 months, such as Cotton Ginning Factories, Cotton Seed Oil Mills, Cotton Pressing Factories, Salt Manufacturers, Khandsari / Jaggery Manufacturing Units, or such other consumers who opt for a seasonal pattern of consumption, such that the electricity requirement is seasonal in nature.
BAS E TARIFF: Category Demand C harge Energy C harge Regulatory Liability Charge (paise/unit) 300 Energy Charge (paise/unit) (-)85 0 60 0 100 0

(Rs./KVA/Month) (paise/unit) High Tension Seasonal 350 TO D TARIFF:(in addition to Base Tariff) Consumption during following hours of the day 2200hrs-0600 hrs 0600hrs-0900 hrs 0900hrs-1200 hrs 1200hrs-1800 hrs 1800hrs-2200 hrs

HTP III: Applicability:This tariff is applicable to all High Tension Public Water Supply Scheme consumers situated exclusively in Mumbai Metropolitan Region (MMR) and Pune Metropolitan Region (PMR) as defined by the State Government.
BAS E TARIFF: Category Demand C harge Energy Ch arge Regulatory Liability Charge (paise/unit) 215 Energy Charge (paise/unit) (-)85 0 60 0 100 0

(Rs./KVA/Month) (paise/unit) HTP-III TO D TARIFF:(in addition to Base Tariff) Consumption during following hours of the day 2200hrs-0600 hrs 0600hrs-0900 hrs 0900hrs-1200 hrs 1200hrs-1800 hrs 1800hrs-2200 hrs 350

By MBA I, SIBM Pune

HTP IV: Applicability:Unless otherwise specified, this tariff will be applicable for all High Tension Public Water Supply scheme consumers, other than those covered under HTPIII.
BAS E TARIFF: Category Demand C harge Energy Ch arge Regulatory Liability Charge (paise/unit) 210 Energy Charge (paise/unit) (-)85 0 60 0 100 0

(Rs./KVA/Month) (paise/unit) HTP-IV TO D TARIFF:(in addition to Base Tariff) Consumption during following hours of the day 2200hrs-0600 hrs 0600hrs-0900 hrs 0900hrs-1200 hrs 1200hrs-1800 hrs 1800hrs-2200 hrs 330

HTP V: Applicability:Applicable to Railways for Traction supply only.

BAS E TARIFF: Category Demand C harge Energy C harge Regulatory Liability C harge (paise/un it) 335 50

(Rs./KVA/Month ) (paise/un it) For Railway Traction Supply only 0

HTP VI: Applicability:Applicable for HT Residential & Commercial Complexes, taking supply at one point and sub-distributing further.
BAS E TARIFF: Category Demand C harge Energy C harge Regulatory Liability Charge (paise/unit) 220 350 0 0

(Rs./KVA/Month) (paise/unit) Residential complexes Commercial complexes 125 125

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HTP VII: Applicability:Applicable for High Tension Agricultural Pumping loads, including HT Lift Irrigation Schemes (LIS) irrespective of ownership and also for (i) Poultry (exclusively for Layer & Broiler Activities), (ii) High Tech Agricultural (Undertaking Green Houses, Tissue Culture, Mushroom, etc) purpose and (iii) Pre-cooling & Cold Storage for Agricultural Produce of Farmer's Co-operative Societies.
BAS E TARIFF: Category Demand Charge Energy Charge Regulatory Liability C harge (paise/unit) 130 0

(Rs./KVA/Month) (paise/unit) M etered Tariff 25

HTP IX: Applicability:Applicable for power supply to M/s. Tata Power Company Ltd.
BAS E TARIFF: Category Demand C harge Energy C harge Regulatory Liability C harge (paise/un it) 299 0

(Rs./KVA/Month ) (paise/un it) M /s Tata Power Company Ltd. 600

M/s. Mula-Pravara Electric Co-operative Society Ltd.: Applicability:Applicable for power supply to M/s. Mula-Pravara Electric Co-operative Society Ltd.; Shrirampur, District Ahmednagar
BAS E TARIFF: Category Demand Charge Energy Charge Regulatory Liability C harge (paise/unit) 150 0

(Rs./KVA/Month) (paise/unit) M /s. M ula-Pravara Electric 200

Tariff for inter-state power supply: Applicability:Applicable for power supply to other States.
BAS E TARIFF: Category Demand C harge Energy C harge Regulatory Liability C harge (paise/un it) 260 0

(Rs./KVA/Month ) (paise/un it) Power supply to other state 0

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Pricing strategy adopted: Third-degree price discrimination. Segmentation of Customer Base The MSEB has segmented its Customer Base and offered Base Tariffs with respect to those segments

Key Observations and Inferences: 1) Seasonal Consumers pay a higher Demand Charge as well as Energy charge as compared to round-the-year Industrial consumers. It is, thus, penalizing the seasonal consumers for the irregular demand. 2) Railway Traction Supply does not need to pay any Demand Charge but a higher Energy charge. MSEB has thus subsidized power to Railway traction supply to give it a boost. 3) Demand charge for Residential and Commercial complexes is relatively less. This should be due to the fact that higher Power Tariffs to these consumers would directly raise the cost of living and adversely affect the poorer people. Also peak demand of residential and commercial complex must be relatively less than that of industrial installation. 4) Both Demand and Energy charges are highly subsidized for the Agricultural sector. This must be to support the Agricultural sector which is the mainstay of the Indian Economy. 5) The charges, especially Demand Charge, are high for power supply to Tata Power as it is itself a power supplier and any subsidy will have no meaning. Also peak demand might be very high. 6) Tariffs for supply to other states are nominal. This might be due to the fact that the recipient states electricity board will levy the further required charges while supplying to its consumers. Segmentation based on Time-of-Day of Consumption MSEB has also offered Differential Prices with respect to the Time-of-Day of Consumption. Key Observations and Inferences: 1) Additional Energy charge during the peak hours (1800 hrs to 2200 hrs) is highest to normalize the peak demand. 2) The same charge is negative in the least-demand hours (2200 hrs to 0600 hrs) to encourage demand. Both these tariff strategies help in reducing the difference between the maximum and minimum power demand so that MSEB can better forecast demand and consequently minimize its risks and energy-storage costs.

By MBA I, SIBM Pune