The Supreme Court judgment last week allowing Tata Power [Get Quote] to retail power to consumers in Mumbai could pose a few regulatory challenges, experts feel.

Efforts by Tata Power to wean away customers from Reliance Infrastructure or expand its distribution network are likely to put the regulator in a spot, they say.

"It's going to be interesting. For the first time, the market has been thrown open. The regulator will have a difficult job,'' said S L Rao, a former chairman of Central Electricity Regulatory Commission, who also serves as an  independent director on the board of Reliance Infrastructure, but spoke to us as an expert tracking the power sector.

The SC order was over a dispute in which Anil Ambani's Reliance Infrastructure (formerly Reliance Energy [Get Quote]) had contended that Tata Power had the license to supply power only to bulk customers and the regulator and electricity appellate tribunal had ruled in favour of it. The problem is that Tata Power is a supplier to Reliance Infrastructure, and will now be able to poach on its customers.

"The regulator has to see if the supplier is using its clout to cut tariff for selective customers. The regulator has some real work to do as it is raising issues, which are thorny," said an expert.

"Tomorrow, Reliance Infrastructure could say that 'if you take away my cream, how you are expecting me to service the low-end customers?'" said another expert.

Interestingly, utilities in Maharashtra are not allowed to charge a "surcharge" for meeting the cost of cross-subsidising power as the state faces a huge deficit.

The Electricity Act, 2003 allowed open access, except where the network is owned by a municipality. Tatas can apply for open access and ride Reliance's network to reach out to customers.

"The regulator has to see the tariff keeping in mind that Tata Power is also a wholesale supplier," said an expert.

Customers wanting to buy from Tatas in Reliance's licence area will have to pay a wheeling charge (for using the latter's network). Like a fuel surcharge, this is a pass-through, and will be have to be borne by the customer.

What's not clear is the extent to which this charge will make Tata's power more expensive. The Tatas plan to expand its network in Mumbai, but it's not clear if the regulator will allow it to duplicate the network, as the cost will be eventually borne by the customer in tariff?

"It's unlikely the regulator will allow that," said another expert tracking the power sector. "If the utilities invest Rs 100 with a debt-equity ratio of 70:30 they make a 16-per cent return on the equity component.

This is recovered from customers as a component of tariff. The regulator may not allow it to duplicate the network,'' explained an analyst with a brokerage firm.