Effect of Electricity Act on tariff gap within the subsidizing sector: The case of India

Highlights: • Effect of Electricity Act on tariff gap between industrial and commercial consumers. • Tariff gap reduces in states that have focused on effective implementation. • Unbundling and establishing an independent regulatory authority narrows tariff gap. -- Abstract: The current study examines the effect of a set of Electricity Act, adopted by India in 2003, on the price gap between two specific consumer groups-industrial and commercial. Paying a higher tariff than the other consumer groups, these two groups have been referred to as the 'subsidizing' groups of consumers in the Indian context. While the effect of reforms between the 'subsidizing; ' and subsidized' groups has received attention, research on the effect of reforms on the tariff gap within the 'subsidizing' sector has been under-addressed. Using data on all major states of the country spanning from 2004-2014, the study uses a graphical exposition, excerpts of policy document and panel econometric modelling technique. The study focuses on six aspects of the policy and emphasizes on adoption and implementation extent and finds that mere policy adoption has no strong effect on tariff gap. Instead, effective implementation may be beneficial in narrowing the tariff gap within the subsidizing sectors as well. Specifically, unbundling of the electricity sector into three different segments and establishment of an independent regulatory authority in the state may lead to narrowing tariff gap if implemented effectively.