Regulating Electricity Distribution Tariffs in Ethiopia: An Efficiency Perspective

Regulation of electricity distribution tariffs in Ethiopia is important to ensure economic efficiency and equitable pricing in a natural monopoly market. The Ethiopian Electric Utility (EEU) monopolizes electricity distribution, raising concerns about potential inefficiencies and higher consumer costs. The Ethiopian Petroleum and Energy Authority (PEA) regulates electricity tariffs through a hybrid price-cap approach, designed to balance cost recovery with incentives for operational efficiency. This paper investigates whether Ethiopia’s electricity distribution tariff regulation approach, the hybrid price-cap approach, is economically efficient. Using a qualitative research approach and a descriptive and exploratory research design, data were collected through semi-structured interviews with experts in PEA, EEU, and electricity consumers. The findings indicate that the hybrid price-cap approach generates benefits, costs, and incentives. The benefits include incentives for operational efficiency, flexibility and innovation, customer protection and cost recovery, and stability and predictability. The associated costs include regulatory complexity, risks of inadequate cost recovery, potential inefficiencies, and higher tariffs. The paper concludes that Ethiopia’s hybrid price-cap approach has the potential to improve both productive and allocative efficiency. Its success, however, relies on clear regulatory processes, proper cost recovery, and maintaining an appropriate balance between efficiency and consumer welfare. The paper suggests making the regulatory framework stronger by setting clearer rules for tariffs, reviewing tariffs regularly and openly, improving monitoring of cost adjustments, and adding specific consumer protections. These measures aim to improve affordability without weakening efficiency incentives.