Efficiency of electricity distribution utilities in India: a data envelopment analysis

• Published date: 01 June 2016
• DOI: http://doi.org/10.1111/opec.12072
• Date: 01 June 2016
• Author: Shibalal Meher,Ajoy Sahu

Efficiency of electricity distribution utilities

in India: a data envelopment analysis

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Shibalal Meher* and Ajoy Sahu**

*Reader in Industrial Economics, *Nabakrushna Choudhury Centre for Development Studies Bhubaneswar

Odisha 751013 India. Email:smeher62@rediffmail.com

**Joint Director, **Odisha Electricity Regulatory Commission Bhubaneswar Odisha 751012 India. Email:

ajoy.sahu@gmail.com

Abstract

The study makes an effort to measure the relative efficiency of electricity distribution utilities

(DUs) of 17 unbundled states in India using a Frontier tool, viz. data envelopment analysis. The

model with constant returns to scale is applied to evaluate the relative efficiency of different

sample DUs. The input-orientation measure has been used to calculate the efficiency score of 40

DUs for the year 2012–2013. It is observed that there is existence of inefficiency in 29 out of the

40 sample utilities. These inefficient utilities have the potential to become efficient utilities by

benchmarking against the most efficient utilities. In order to supply the same output, these utilities

need to reduce their use of inputs to the level of most productive scale size. The regulators need to

pay special attention to enhance the efficiency of these inefficient DUs by exploring alternative

approaches like incentive-based regulation.

1. Introduction

Efficiency analysis has played a crucial role in defining regulatory policies in industries

characterised by natural monopolies such as electricity. It has played a particularly

important role in the liberalisation process towards a competitive industry structure and

market-oriented regulation, both in electricity transmission and electricity distribution

(von Hirschhausen et al., 2006). The objective of the present analysis was to assess the

relative efficiency of electricity distribution utilities (DUs) in order to develop a

benchmark and analyse the inefficiencies of the existing utilities in the policy context of

making them efficient. The measure of relative efficiency of electricity DUs is motivated

by several factors such as cost efficiency, operational efficiency, managerial efficiency,

etc. among which this paper is confined to operational efficiency measurement by using

data envelopment analysis (DEA).

1

The views expressed in the paper are those of the authors and not the institutions they belong. The

authors express their thanks to the referees for their valuable comments.

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Many authors concentrate on scale effects, and the optimal size and relative

efficiency of utilities. Jamasb and Pollitt (2001) give an extensive comparison of

international efficiency studies for electricity structure, stressing the importance of

proper variable choice. Using panel data of 59 Swiss distribution companies over

8 years, Farsi and Filippini (2004) argue that different methodologies may lead to

different results. Similarly, using panel data for six Latin American countries, Estache

et al. (2004) show that national regulators can reduce information asymmetry through

cross-country efficiency analysis.

Efficiency analysis in electricity distribution in India faces issues in determining

whether there are significant returns to scale. The question arises whether or not smaller

utilities do have systematically lower efficiency scores than larger ones, implying

increasing returns. Studies by Filippini (1998) and Filippini et al. (2004) suggest

significant economies of scale in small electricity distribution systems. Smaller utilities

could reduce costs by merging and thereby extending their suboptimal service territory

size. Second, in the wake of liberalisation, the Indian electricity industry is undergoing

structural change from local monopolies to regulated competition and the DUs are

privatised, showing the possibility of increase in efficiency.

This paper is organised as follows. After a brief introduction, Section 2 presents a

description of power sector reform in the light of efficiency and the challenges of

electricity DUs in India. Section 3 presents the methodolo gical aspects and data used in

the present study, while Section 4 presents the results and discussion. Section 5 gives

the concluding remarks and policy implications.

2. Electricity reform in India and challenges of distribution utilities

Before the initiation of power sector reforms in India, electricity distribution in most

parts of India was done by public utilities, namely the State Electricity Boards, which

were owned fully by the respective state governments. These were not even corporations

registered as companies, but were functioning mostly under the direct control of the

respective state governments. The major part of the generation (i.e. about two-third of

total generation) and transmission of electricity was also carried out by these boards.

Most of these electricity boards had become financially non-viable by the 1990s

(Government of India, 1996; Morris, 1996; Rao et al., 1998). The commercial losses of

major state electricity boards along with some other key financial indicators are provided

in Table 1. It is evident that out of the 17 state boards, seven were reporting net

operating profits (after government compensation of subsidy provided to certain sections

of society) in 1992–93 but that number declined to 2 in 1996–97. Financial difficulties

are mainly due to the burden of providing power at subsidised rates to a few sections of

consumers (mainly farmers and residential households) without adequate compensation

OPEC Energy Review June 2016 ©2016 Organization of the Petroleum Exporting Countries

156 Shibalal Meher and Ajoy Sahu