costbenchmark = Rbenchmark – (capex + opexbenchmark) = 0, signaling that the revenue of an efficient utility fully covers its cost. The revenue at current performance by contrast is tariffcurrentxQx(0.9 – TDL)x(1 – BL).

Using  to designate unit underpricing, tariffbenchmark – tariffcurrent, the quasi-fiscal deficit becomes Rbenchmark – (capex + opexbenchmark) – (Rcurrent – capex – opexbenchmark– overstaffing) = Overstaffing + tariffbenchmarkx0.9Q – tariffcurrentxQx(0.9 – TDL)x(1 – BL) = Overstaffing + tariffbenchmark x 0.9Q – (tariffbenchmark – )xQx(0.9 – TDL)x(1 – BL).

The quasi-fiscal deficit can be decomposed into four hidden-cost components as

- xQx(0.9 – TDL)x(1 – BL)      + tariffbenchmarkxQL            + tariffbenchmarkxQx(0.9 – L)xBL + Overstaffing.

Underpricing Transmission & distribution losses Bill collection losses At benchmark performance, the last three terms are zero, leaving only underpricing.

In the above

- TDL is transmission and distribution losses in excess of 10 percent;

- BL is bill collection losses;

- capex represents new replacement values of existing assets and is annualized using a real discount rate of 10 percent, as in the AICD (see section A1.4 in annex 1 for more details);

- opex is the sum of opexbenchmark and overstaffing cost; and

- overstaffing is the excess number of employees relative to the benchmark number of employees, as described in section A1.6 annex 1.

Opex, alternatively called operations and maintenance (O&M) costs, are those reported in utilities’ financial statements inclusive of taxes and spending on power purchases, including power from independent power producers (IPPs), emergency power, and imports, but exclusive of rebated taxes such as value-added tax (VAT). For the purposes of estimating the cost overstaffing represents to utilities, this analysis assumes staff costs could be reduced by 50 percent of the overstaffing level. This reflects two parameters the utility can choose to adjust: salaries and staff numbers. At one end of the spectrum, the utility could reduce staff numbers to the optimum level and increase salaries to attract higher capacity staff, which would be cost neutral. At the other end of the spectrum, the utility could choose to reduce staff numbers to the optimum and keep salaries constant, which would reduce staff costs in proportion to the staff reductions. The assumption in this study considers a mix of these two approaches.

It is worth noting that financial accounting for large companies is on an accrual basis, and as a result revenue is not cash collected but totals the amounts billed. For the remainder of this paper, revenue (amounts billed) is the amount before collection losses are factored in. By contrast, cash collected is on a cash basis and captures collection losses. Because revenue is on an accrual basis and cash collected is on a cash basis, they are usually not equal even if the bill collection rate is 100 percent.

Because capex and opex are not derived on a common basis, estimating the unit cost under benchmark performance used in the calculation of underpricing requires using different denominators: Unit cost= <u>(</u>  Overnight investment costs for power generation and HV+MV lines annualized)+US$100 ×no.of new customers + kWh dispatched×(100%−10%) US$0.023kWh × % urban share+ US$0.042kWh × % rural share+ reported annual okWh billedperating costs , 13