Abstract: There is a perception among potential investors in electricity distribution projects in India that the price-setting methodologies employed by regulatory agencies are not conducive to long-term investments. Although regulators acknowledge the problem that present approaches lead to, they believe that the available information base does not support the development of credible multi-year tariffs. This paper evaluates whether this constraint is a barrier to the implementation of an incentive-based methodology and shows that this need not be the case. An IBRC (incentive-based revenue and cost pass-through) hybrid methodology that rewards companies for improvements in efficiency for cost items under their control…is developed. The robustness of this approach is evaluated given the database of information available to regulators in India. These results are more generally applicable across other sectors and in other countries.
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