X - FACTOR EVALUATION UNDER RPI-X REGULATION FOR INDIAN ELECTRICITY DISTRIBUTION UTILITIES

Abstract

With regulators’ growing interest in improving operational efficiency and quality supply, the time is nearing when performance based regulation will become norm for regulating the distribution tariff in Indian electricity distribution sector. In this context, the State Electricity Regulatory Commissions proposed replacing rate-of-return regulation with most commonly used performance based regulatory regime, i.e., Price Cap regulation also known as RPI-X (Retail Price Index - Productivity Offset) regulatory framework. However, the potential problem associated with applying price cap regulation scheme in practice is the determination of productivity offset or X factor used in price caps setting. This paper proposed an approach to calculate the X-factor for 58 government-owned and privately-owned electricity distribution utilities in India during a five year period from 2007/08 to 2011/12. A Stochastic Frontier model through an input distance function is first applied to compute the Malmquist Total Factor Productivity (TFP) and the estimated TFP is then used to calculate the utility-specific X-factor. With rely on calculated X-factor, the distribution utilities would be able to cap either on prices or revenues thus accounting the inflation in the tariff determination. This will be more realistic approach as compared to cost plus approach.

Keywords

• Price cap regulation
• RPI-X regulation
• Performance based regulation
• Malmquist total factor productivity
• Indian energy distribution utilities