A Stochastic Frontier Approach for Performance Assessment of Indian Electricity Distribution Licensees

Pavan Khetrapal, Tripta Thakur, Alok Gupta

Abstract


Indian power sector has witnessed significant progress in recent times particularly in generation and transmission. However, the distribution licensees today are facing different challenges in terms of huge financial losses caused by several factors including inadequate tariff, high aggregate technical and commercial losses, operational inefficiencies, regulatory infirmities etc. Thus, there is a need to effectively assess the efficiency and overall performance of distribution utilities and provide solution for improvement. The present study analyses the performance of 59 Indian electricity distribution licensees (including both public and private owned) by working out the technical efficiency using the mathematical model of Stochastic Frontier Analysis (SFA). In the present research, the authors estimated a translogarithmic inefficiency effects stochastic frontier model using consumer density, consumer structure and distribution loss as determinants of inefficiency. The quantitative estimates obtained from the production function shows the mean technical efficiency score of 0.81 indicating that on the average, the electricity distribution licensees were able to obtain about 81% of potential output from a given mix of inputs and there was 19% allowance for improving efficiency of electricity distribution utilities. This framework would be practical for policy makers and individual state electricity regulatory commission to rank their distribution licensees and formulate performance based incentive mechanism to improve their operational and financial performance.


Keywords


Benchmarking, Stochastic frontier analysis, Data envelopment analysis, Efficiency analysis, Productivity, Technical efficiency.

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References


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