counterfactual consumption under the assumption of a linear price elasticity of electricity demand. The range of these elasticities serve as bounds for the welfare estimates under counterfactual schedule, as the structural demand model suggests that household level own-price elasticities will be within this range.

Finally, the short-run welfare consequences of tariff reforms can be studied using changes in consumer surplus as a proxy for household level compensating variation. In the short-run, household level demand is assumed to be constant and changes in prices cause the consumer to move up or down its demand curve. With changes in incomes in the long-run, the household may adjust its bundle of consumer durable appliances. Ownership of these new appliances can considerably expand the household’s energy choices and lead to a shift in the household’s short-run demand curve. Therefore, in the short-run, changes in consumer surplus serves as a sufficient indicator for studying householdlevel welfare changes (Wilig (1976)<sup>19</sup> ).

# • **COUNTERFACTUAL 1: Tariff schedule proposed by the Ministry of Power**

In 2018, India’s Central Ministry of Power (MOP) issued a notification to simplify tariff categories and rationalize tariff rates across states. The notification proposed an IBT structure consisting of fixed and energy charges. The energy charges in the plan varied over five consumption tiers: 0 to 200, 201 to 400, 401 to 800, 801 to 1200 and greater than 1201 units. The fixed charges varied by the sanctioned load of the household under the following categories: 0 to 2 kW, 2 to 5 kW, 5 to 10 kW, 10 to 25 kW and greater than 25 kW. The proposal however did not specify the level of the energy and fixed charges and left the determination of these prices to state level regulators.

The paper uses the consumption categories proposed in MOP’s notification to construct the first counterfactual tariff schedule. To illustrate the welfare impacts of this tariff schedule, we assign energy charges from JVVNL’s 2016-17 tariff order to the consumption tiers in the notification. This illustration also uses the consumption tiers of the notification to assign fixed charges instead load categories varying by the sanctioned load. This is because the sanctioned load variable in JVVNL’s data set is either missing or noisily estimated, rendering it unusable for fixed cost imputations at the household level. Since the range of consumption in each tier of MOP’s notification is larger than the range in JVVNL’s tariff order (for instance, the first tier of consumption in JVVNL’s tariff order ends at 50 units, whereas the first tier in MOP’s proposal ends 200 units) for the same energy and fixed charge, one can expect this tariff design to result in higher consumer surpluses across all households but also lead to a revenue shortfall compared to the current tariff.

To study the welfare impacts of this tariff schedule and all other counterfactual schedules thereafter, the following methodology is used. A short-run linear demand curve is calibrated for each household using estimates of electricity demand own-price elasticities in the range of -0.1 to -0.4, which are consistent with the magnitudes estimated from our structural demand model. The calibrated household demand curve passes through the household consumption observed in household level billing data set and the corresponding marginal prices observed in JVVNL’s 2016-17 tariff order. Using this demand curve, consumer surplus at current tariff rates and under counterfactual tariffs can be calculated as the area under the short-run demand curve and above the step-wise marginal price curve, less the applicable fixed charges. The marginal price faced by a household includes the energy charges,

> 19 Willig, R. (1976). Consumer's Surplus Without Apology. The American Economic Review, 66(4), 589-597.

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