Operational efficiency and service quality of Indian electricity distribution utilities: A three-stage DEA and Malmquist Index analysis

The Indian power sector has progressed through distinct phases of reform and restructuring to attract private investment and enhance both operational and financial performance. Despite two decades of reforms, the sector's financial stability remains closely tied to the performance of electricity distribution utilities. The tariff-setting framework for distribution utilities largely relies on cost-of-service regulation, incorporating performance improvement targets. However, the prudence checks for approving distribution utilities' costs often lack a benchmarking approach. Distribution utilities exhibit variability in costs, service quality, and operational efficiency. Previous studies on Indian distribution utilities have focused on operational and financial parameters while neglecting the service quality dimensions of utilities. This paper considers service quality in the form of reliability indices of Indian distribution utilities for the first time, in addition to traditional parameters. This study employs a novel three-stage data envelopment analysis (3S-DEA) approach to evaluate operational efficiency, while the Malmquist Index is implemented to analyse efficiency and technological change from 2016–17 to 2019–20. Significant differences in the performance of distribution utilities within the same state were observed. Improvements in efficiency scores are observed for the distribution utilities after considering service quality parameters. The findings highlight the importance of considering service quality parameters when evaluating the operational efficiency of distribution utilities. The results obtained from this study will be helpful for policymakers, regulators, and utility management in identifying inefficiency determinants and designing effective strategies to improve operational performance. Furthermore, such periodical benchmarking exercises could be incorporated into the review process by Indian state regulators to better incentivise or penalise utilities based on their performance.