This study analyzes empirical outcomes to understand the causal linkages between the rule of law, regulatory quality, and electricity theft in regulated industries. It provides a brief and explicit theoretical framework on the rule of law and its impact on electricity theft, using panel data for income groups. When the rule of law is not well established, poor governance in the regulatory process leads to larger social and economic costs associated with electricity theft. The analysis demonstrates that the rule of law has a uni-directional causality effect on transmission and distribution losses across all income groups. In the upper-middle and low-income panels, transmission and distribution losses granger cause regulatory quality, while this relationship cannot be validated in the high and lower-middle-income samples. These findings highlight the significance of the rule of law in reducing electricity theft by emphasizing regulatory quality as a transmission channel.
TopIntroduction
The connection between economic growth and electricity consumption is widely tested in empirical studies. The institutional framework of a country and energy efficiency underlie the growth-electricity nexus. Electricity losses are widely considered one of the important factors that harm energy efficiency, distort competition, and increase social and economic costs of end-users or distribution companies (Ozturk, 2010; Payne, 2010; Omri, 2014; Tiba & Omri, 2017).
Electricity losses refer to the difference between generated and delivered electricity. It takes two basic forms as technical and non-technical losses. Technical losses generally occur in the transmission grid due to the characteristics of the network, such as geography, transportation, length of lines, and the quality of the grid. Technical losses cannot be eliminated fully in the current technological environment. These losses fluctuate around 6 to 8 percent for transmission and distribution networks (Jimenez et al., 2014)1. Any losses beyond this level are considered non-technical losses or pilferage2.
Non-technical losses can also be named financial losses for electricity companies. Because, these types of losses include non-payment bills, energy theft, energy fraud, billing errors, and other kinds which induce revenue losses. According to studies estimates, the cost of electricity theft and fraud is as much as USD101.2 billion across 138 countries (Northeast-Group, 2021). A major component of non-technical losses is electricity theft. The economic cost of electricity theft reaches high levels in both developing and developed countries3. Even if illegal usage is limited in developed countries, the size of total consumption makes it an important social problem when compared to the costs of other illegal activities. For example, Ofgem (2014) estimates that the cost of electricity theft in the UK is around £ 250 million annually. In Canada, illegal drug producers use substantial amounts of illegal electricity, and electricity theft reaches high levels4. In the USA, the cost of electricity theft and fraud is USD6 billion in 2020.5
In developing countries, illegal usage of electricity rates is much higher. Countries such as India, Pakistan, Bangladesh, and Latin American countries do particularly have very high electricity theft levels. For example, the cost of electricity theft is estimated at USD16.2 billion in India6. Brazil and Russia also suffer from illegal usage. Half of Latin America and the Caribbean countries’ losses are approximately 20%, and it costs almost USD 15 billion (Jimenez et al., 2014). The annual worldwide economic cost of non-technical electricity losses is estimated to be around USD 100 billion (Glauner et al., 2018).
Illegal electricity usage is not considered a major criminal issue in the developing world (Min & Golden, 2014; Joseph, 2010). As an example, electricity theft in Türkiye is accepted as a social issue rather than a strictly criminal one (Yurtseven, 2015). Governments in these countries tend to use the term ‘illegal use of electricity’ rather than calling it ‘theft.’ In many developing countries, illegal use is usually tolerated by governments, and society usually overlooks the issue as a social problem (Smith, 2004; Depuru et al., 2011).