electricity duty and urban cess. Fixed and energy charges are adjusted for subsidies provided to the household.

The difference between current and alternative tariff measures the welfare impact of counterfactual tariffs. If consumer surplus under the counterfactual tariff is greater than JVVNL’s current tariff order, the counterfactual price design to be welfare enhancing over the current tariff order. Conversely, a lower consumer surplus indicates loss of welfare relative to the current tariff order.

Next, JVVNL’s FY16-17 financial disclosure statements are used to calculate the average revenue requirement per unit of energy sales. This metric is used to test for the revenue sufficiency implications of the alternative tariff schedule for the utility. JVVNL sold 19.48 billion kilowatt-hours (kWh) with an annual revenue requirement of rupees 150.76 billion across all consumers in FY16-17. This translates to an average revenue requirement of Rs. 7.74 per kWh of energy sold (inclusive of taxes, subsidies and cess). A counterfactual design that achieves this price for each unit sold to the residential sector will be revenue neutral and will eliminate cross-subsidization of power from commercial or industrial consumers.

Figure 14 shows the difference in average monthly consumer surplus over the income distribution using MOP’s proposed prices and JVVNL’s current tariff schedule. As expected, MOP’s recommended price schedule increases welfare for all households across the income distribution. Table 11 shows the gain in consumer surplus in rupees per month for a median household in each quintile. Expectedly, welfare gains are higher when demand is more price-elastic. Even though all households are better off under MOP’s proposed tariff design, welfare gains are regressive over the income distribution. This is because the per-unit price reduction under the MOP’s tariff is higher for top quintiles than the bottom ones.

In addition to being regressive, the schedule also results in significant revenue losses. The reduction in marginal prices under MOP’s design reduces the gross revenue generated from the residential sector to Rs. 3.017 billion (at an own-price elasticity of -0.1). This represents a 31.2% loss in revenue under the current tariff (which is currently at 4.465 billion rupees). Adapting MOP’s pricing proposal would therefore require cross-subsidy transfers from commercial and industrial consumers. At more elastic demand levels, the amount of revenue shortfall and cross-subsidy requirements will be even larger.

# • **COUNTERFACTUAL 2: An efficient retail price of electricity**

Under an efficient price schedule, the amount a consumer pays for an additional unit of consumption (her marginal price) is equal to the cost of supplying the additional unit of energy incurred (the utility’s marginal cost). The cost of supplying the additional unit of energy includes the cost of power purchase, the technical losses incurred in transmitting electricity through power lines and the social cost of carbon embedded in the generation of power. In Rajasthan, this cost also includes the state level taxes and cess incurred by the utility that are passed through to the final consumer. In situations where the marginal price of residential energy exceeds its social marginal cost (SMC), households consume too little energy and vice-versa. The determination of an efficient retail pricing structure in Rajasthan therefore requires an estimate of SMC in the state. This section with the estimation of Rajasthan’s SMC, followed by a dead-weight loss analysis to quantify the distortionary effects of current energy prices. It concludes by analyzing alternative schedules that set marginal prices 16