Efficient Tariff System in the Electricity Distribution: Evidence from Uganda

Abstract

This study investigates incentive regulation to foster an efficient tariff system in the electricity distribution subsector in Uganda. This study seeks to find empirical evidence to support the argument that regulation is associated with efficiency among distributors. It seeks to design an appropriate model of incentive regulation within the distribution subsector. It assesses the efficiency of existing tariff setting system with a view of guiding policy on how best incentives should be appropriated. It uses the data envelopment analysis and stochastic frontier analysis to investigate how distribution firms use input costs to come up with an efficient end user tariffs. Quarterly data used is from Electricity Regulatory Authority (ERA) covering the period 2013-2019. The findings are that distribution firms cost inputs are inconsistent with the way they their operational and maintenance costs are generated and transmitted to end user tariff. The regulator should be keen on the way tariff is set such that it is fair to all players in the electricity markets. Incentive regulation has a positive influence on cost efficiency and end user tariff. A reduction in energy losses and energy purchases from transmitter makes up the most efficient cost drivers. Lastly, tariff regulation has increased efficiency in operations through in improved quality and reliability of power distribution. First and foremost is reduced load shedding, secondly is more reliable power distribution to end users. Appropriate Incentive regulation has a direct effect on cost of utility and in increasing access of vulnerable groups.