When Maharashtra Energy Secretary Jayant Kawle stepped down from the boards of Tata Power Company and BSES, the move hardly attracted any attention.

But Kawle had an excellent reason for his move: as the sparks began to fly between the two companies he wanted to get out of the line of fire.

"He stepped down before fingers could have been pointed at him for taking sides," says one of his aides in Mantralaya.

This is a clash between two titans of power and it has been a long time brewing. For seven years it was a low-profile feud but it has suddenly turned into a battle royale between two giants.

Both sides are hurling thunderbolts of accusations at each other. They've also dragged each other before the Maharashtra Electricity Regulatory Commission and the courts for mediation.

At last count, power experts say that MERC was sifting through almost a dozen pending cases filed by the two companies as the bitter battle escalates.

At the heart of the matter are a knotty tangle of issues file, both market and regulatory related.

BSES (which is soon to be renamed Reliance Energy) accuses Tata Power Company of poaching its customers. Tata Power, meanwhile, says that BSES owes it around Rs 900 crore (Rs 9 billion) of dues that have built up over the years.

Why has the battle suddenly turned ballistic? BSES has had a dispute about how much it owes Tata Power for almost seven years.

But the Tatas didn't really worry about the money until the Ambanis took full control of BSES earlier this year. The Ambanis, for their part, would obviously not like to pay a paisa more than they have to.

The Rs 3,489 crore (Rs 34.89 billion) Tata Power (which got its licence back in 1907 when electricity was almost as new as the Internet is today) is different from other power companies in one important way: it's primarily a bulk supplier of electricity.

Its main customers are BSES, the Bombay Electric Supply & Transport and the Railways. Together these three customers buy 85 per cent of Tata Power 's electricity.

BSES is also a key player in the Maharashtra power scenario. It operates a 500-MW generation station at Dahanu, outside Mumbai which began generating power back in January 1996.

Between them, BSES and Tata Power supply around 2,300 MW power to greater Mumbai and its suburbs.

At the same time, BSES also buys 41 per cent of its power from Tata Power. In 1998, BSES signed a deal under which Tata Power would keep 275MW as standby power for it.

However, the deal was never formalised and turned into a full power purchase agreement. It's important to remember that Mumbai is one of the few electricity surplus regions in India.

Peak demand in the city is about 2,200MW and supply around 2,600MW.

To understand the roots of the dispute, it is necessary to understand the complex workings of the Maharashtra power industry.

Tata Power has been the central agency which buys standby power from the Maharashtra State Electricity Board and routes it to BSES and BEST, if they have a sudden shortage.

When Dahanu became operational seven years ago, BSES reduced its purchases from Tata Power which in turn reduced its standby quota from MSEB.

To make up its losses, MSEB hiked its charges. Tata Power, in turn, upped its monthly bill to BSES from Rs 3.5 crore (Rs 35 million) to Rs 15 crore (Rs 150 million). BSES says it has been adhering to the earlier deal and paying Rs 3.5 crore (Rs 35 million). It disputes the revised figure.

Tata Power says that as per the deal, it kept about 275MW as standby power for BSES. And it says that BSES utilised the facility 65 times in the last four years.

Says Tata Power's vice president S Mohan Gurunath, "As per the principles of agreement between Tata Power and BSES signed on January 30, 1998, the standby charges were to be revised at the next tariff revision in October 1998. However, BSES has been refuting this and therefore the dispute."

BSES took the matter to the Mumbai High Court in May. On June 3, the court ruled that BSES and Tata Power would have to pay 50 per cent each out of the total standby charges levied by MSEB since January.

It also ruled that BSES would have to pay 80 per cent of the Rs 380 crore (Rs 3.80 billion) arrears due to MSEB which have piled up over the last three years.

Tata Power would have to bear the balance 20 per cent. It also said that all such matters should be handled by MERC in future.

BSES appealed against this ruling in the Supreme Court and hearings are currently underway. Says Gurunath: "The whole problem with BSES is they want a situation where 'you keep backing me but I will use only as much as I want'. So what happens? Our capacity remains idle. So I have a situation where I am being treated like a balancing power provider since 2000."

Reliance managers have a raft of charges against Tata Power. They say that Tata Power's standby charges are not transparent. Gurunath denies this.

"This issue has been in the public domain for the last three years and there is total transparency. Tata Power has furnished all the details to MERC, the Bombay High Court and recently to the Supreme Court. BSES has received all the correspondence," he says.

Adds an analyst tracking the sector, "It's very clear that BSES wants to buy cheaper power."

At the moment, Tata Power is selling power to BSES at Rs 3.37 a unit. By comparison, the Calcutta Electric Supply Company (CESC) sells power to consumers at Rs 2.38, Bangalore Electric Supply Company sells for Rs 2.

Tata Power 's costs are higher as its plants are largely hydel and thermal-based unlike the cost-effective coal-based plants which are in operation elsewhere.

BSES contends that Tata Power will continue to be its supplier in future provided it is competitive.

But if the dues were piling up, why didn't Tata Power just turn tough and shut off its supplies to BSES?

Gurunath makes it clear that the company was loath to pick a fight with one of its main customers: "We are first a consumer-friendly entity. So while we have our commercial disputes with BSES, we do not want the consumer in Mumbai to suffer," he says.

"But now we have said enough is enough and have taken up the matter with the MERC."

If that isn't enough Tata Power has also opened a second battlefront. About 18 months ago, Tata Power, the bulk power supplier decided to shed its slothful image and become aggressive.

It went retail with a vengeance. It ventured deep into BSES territory to places like Mumbai's upcoming Bandra-Kurla complex and began to woo housing societies and office complexes.

By then, the Ambanis stake in BSES was substantial and there was no way they would take it lying down.

BSES argued that Tata Power's licence issued almost a century ago only allowed it to be a bulk supplier selling over 1000kW and that it could not enter the retail field.

Therefore, it was violating its licence conditions supplying power in BSES territory.

Does it? Analysts say that the licence is open to interpretation. "Nowhere is it said that Tata Power can't supply power below 1000 kW. And if they are cherrypicking customers what's wrong in that? It is a competitive scenario," says an analyst.

Adds Tata Power 's Gurunath: "My licence dates back to 1910 and I have been selling retail power to industries. I have the option but not the obligation to sell below 1000 kW retail. Today, I sell about 240 million units in the retail market which BSES claims was their area."

Today, Tata Power has 17,000 retail customers compared to BSES' 2.2 million (of which 1.7 million are slums).

"I know what they are getting at. They are saying that we have a large slum base and we need these high-paying customers to subsidise them," adds Gurunath.

The question is why did it take Tata Power so long to go retail? "I have always been selling retail power to industries. When they set up their own, we had idle capacity and we had the retail tariff then as well but hadn't used it," says Gurunath.

Adds an analyst, "Tata Power became aggressive when Reliance entered BSES. Until then, it did not upset the applecart hoping the issues would be resolved eventually."

But it was BSES which took the matter to MERC. In July, the commission restrained Tata Power from supplying power to customers below 1000 kW. And last week, Tata Power apologised to MERC.

It said that it didn't mean to commit any breach but if the commission felt it was a breach, then it was purely unintentional and tendered an unconditional apology for the same.

Once again, analysts say that it is open to interpretation. "Tata Power has played safe. It is not owning up but says that if MERC thinks it has done wrong, then it is sorry," says a power expert.

Now the situation in set to change in an important way. The Electricity Act 2003 has completely delicenced generation, except in the hydel and nuclear power sectors, and removed restrictions on captive power by 2004.

Under the provisions of the new Electricity Act, there is no concept of standby charges and this gives BSES the flexibility to purchase electricity from any generating company.

Already, BSES which recently put out advertisements inviting players to present bids for supplying it power in future, claims it has got around 50 offers.

Tata Power executives say it refused to put in a bid even after BSES asked it to. Tata Power executives say this was because it was already supplying power to it.

Despite the battle in the courts, both sides are now talking about big investments. And Tata Power is looking at ways of slashing costs. Four years ago, it didn't use any coal to generate power.

Today, cheaper coal-based power (the coal is imported) accounts for 25 per cent of its power generation. Gurunath says that it will go up to 30 per cent by 2005.

"All we are saying is that I am not generating power from oil because of love and affection for oil. We are doing it because it is clean and environmentally good."

Its generation cost based on oil is Rs 3.60 per unit compared to Rs 2.20 with coal and Rs 1.80 with gas and lower for hydro.

BSES and Tata Power both have ambitious national-level plans. But that isn't stopping them from battling it out in the courts.

But as an analyst says, "Like in fast moving consumer goods, cut-throat competition in this sector will see us get power dirt cheap soon."