Role of Regulatory Body in Attracting Private Investment: A Case of Indian Power Sector

Electricity production is characterized by scale economies and sunk investments. This is why an effective regulatory system is crucial for both investor confidence and consumer protection. At the same time, because electricity is viewed as an essential public service, local and central governments have incentives to intervene in price, output and investment. Public ownership becomes the default mode of organization if it is not possible to create an efficient and credible system of private-sector regulation. The primary purpose of well-designed regulatory system is to protect consumers from monopoly abuse, while providing investors with protection from arbitrary political action alongside incentives for efficient operation and investment. Carefully designed regulation can be expected, therefore, to be a key component of a successful process of electricity privatization.