Fiona Burlig, UChicago

Abstract:
Electric utilities in developing countries are characterized by poor financial health, stemming in large part from tariffs that are set below the marginal cost of supplying power to consumers, as well as rampant underpayment. Standard economic theory suggests that we should allow these natural monopolies to charge prices equal to marginal cost, and raise other necessary revenue through non-distortionary measures. Regulators have been resistant to this in part because of concerns that raising prices will disproportionately impact low-income consumers. In this paper, we estimate the price elasticity of demand for electricity consumption among the universe of households in one of Delhi’s three electric utilities. Preliminary results suggest that households are perfectly inelastic with respect to marginal prices. We also see no contemporaneous response to fixed charges or average price, but when consumers experience a large bill shock (driven by consuming enough that they lose a large government subsidy), they (A) reduce consumption slightly in the following month and (B) increase arrears, which triggers interest payments with substantially higher-than-market rates.