Incentive regulation and multi-year price controls: an application to the regulation of power distribution in India

Article type: Research Article

Authors: Alexander, Ian | Harris, Clive

Affiliations: Regional Coordinator, East and South Asia, PPIAF (Public-Private Infrastructure Advisory Facility), Singapore

Note: [] Senior Private Sector Development Specialist, Private Sector Advisory Services Department, The World Bank, Washington, DC, USA

Abstract: There is a perception among potential investors in electricity distribution projects in India that the price-setting methodologies employed by regulatory agencies are not conducive to long-term investments. Although regulators acknowledge the problem that present approaches lead to, they believe that the available information base does not support the development of credible multi-year tariffs. This paper evaluates whether this constraint is a barrier to the implementation of an incentive-based methodology and shows that this need not be the case. An IBRC (incentive-based revenue and cost pass-through) hybrid methodology that rewards companies for improvements in efficiency for cost items under their control is developed. The robustness of this approach is evaluated given the database of information available to regulators in India. These results are more generally applicable across other sectors and in other countries.

DOI: 10.3233/IJR-120005

Journal: International Journal of Regulation and Governance, vol. 1, no. 1, pp. 25-46, 2001