The Evolution of Electricity Tariffs in India: 1975-2010

ABST A!T

For economic efficiency, the price of any good should be decided by the supply and demand conditions. This has however not been the case in the electricity sector for several reasons. Electricity is typically perceived as a decreasing average cost industry, and therefore economic efficiency was guided more stipulating prices that recovered the costs of production and operation. Till the early 1990s, most power utilities were monolithic government controlled monopolies, and for the whole period studied from 19 ! to "010, almost all utilities failed to meet their costs of production. Electricity supply happens to be a sector where both #nion and $tate governments are involved, and given the diverse nature of the %ndian geographical conditions, the e&perience of different states in pricing and cost recovery have been different over the years. ' review of the e&isting literature reveals that the e&periences of only a few ma(or states have been discussed in this conte&t. The primary focus in this paper is on how the prices have evolved in seventeen ma(or %ndian states during the period 19 ! to "010. )e loo* into the price cost data for the states over three periods+ first, the pre,reform period from 19 ! to 1990, where the public sector controlled all the three aspects namely, generation, transmission and distribution+ second, the period from 1991,"000 where some states witnessed private sector entry in generation and the regulatory commissions were formed in some states, the final from "00 to "010, which would have encompassed the changes which occurred post the Electricity 'ct "00-, which allowed for open access to utilities and consumers which is seen as a move towards mar*et determined prices. This study provides some interesting insights into how the states have shifted their relative positions with respect to their electricity prices and the underlying cost. For instance, we find that .erala moved from a situation of low cost, low tariff utility to a high cost, high tariff one mainly due to power purchases and the burgeoning demand. 'nother e&ample is the relative shift of )est /engal from a relative position of high cost, high tariff state to a low cost, high tariff state during the latter half of "000 indicating an improvement in the relative profitability over the years. The study also highlights the worsening position of utilities in the states of 0a(asthan, 1aryana and Tamil 2adu.