Regulatory Institution and Regulatory Practice: Issues in Electricity Tariff Determination in Reformed Electricity Industry in India

Abstract

This paper examines the practice of tariff determination process in a newly created regulatory institutional framework in India. The Indian electricity regulation provides an opportunity to do comparative analysis of the approaches taken by state (provincial) regulators while fixing prices for electricity distribution. I analyse the process of price determination for electricity distributors by the State Electricity Regulatory Commissions (SERCs) in four different states. This covers 12 distribution companies. Impact of regulatory practice on the operating costs of the distributors and consequently on the prices paid by consumers is addressed. The findings suggest that prices for consumers have increased but not in the same proportion as the costs have been allowed to increase. The main reasons for increasing costs in addition to normal inflation rates are substantial distribution loss which are added to power purchase costs and little improvement in the operating and financing costs enforced by the regulators. The regulators limited success to effect significant improvements in two periodic reviews analysed here can be partly attributed to information asymmetry, lack of appropriate databases and regulatory approach resorting to simplistic historical analysis of distributors' cost rather than relying on more sophisticated cost analysis and benchmarking. I argue that limited success is partly attributed to regulators because wider institutional changes in property rights institutions (the industry operators remain in public sector), entrenched subsidies and political interests have not been addressed at state level leaving regulatory commissions with limited real power to influence the behaviour of players. However, a key but limited positive development is stakeholder participation encouraged by regulators.