Should Regulators Make Electric Utilities Pay Customers for Poor Reliability?

India’s Power Outage Compensation Policies

Overview

In September 2017, the Delhi Electricity Regulatory Commission (DERC) required that the city’s regulated electricity distribution utilities pay compensation to customers experiencing power outages of three hours or longer. The measure was intended to incentivize the utilities to invest in the infrastructure and management practices needed to deliver higher levels of service quality. In 2019, India’s central government announced that it was considering rolling out a similar policy for utilities across the country. Can outage compensation policies help India’s power system achieve better reliability for all customers?

This policy brief describes the persistent challenge of poor electricity reliability in India and how it interacts with key regulatory policies, analyzes Delhi’s experience with outage compensation since 2017, and highlights areas for additional economic and policy research on this topic.

Main Findings

• Poor electricity reliability in India persists in part because retail pricing policies that subsidize consumption for the poor also tend to disincentivize utilities from investing in higher levels of service quality, particularly for the most generously subsidized customers.
• Delhi’s experience suggests that outage compensation policies can counteract these incentives but cannot circumvent the tradeoff between keeping prices low and incentivizing higher levels of service quality.
• Additional research is required to understand how much customers in developing countries like India value electricity reliability, to better inform pricing and related policies that affect the incentives of utilities.

Shefali Khanna and Kevin Rowe are Ph.D. candidates in Public Policy at Harvard Kennedy School. This brief is part of Khanna and Rowe’s ongoing research collaboration as recipients of the 2018-2019 Joseph Crump Fellowship.