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The cost of equity capital is a key input used by regulators to fix permissible rates of return and determine regulated tariffs. Investors also need an appropriate hurdle rate to make investment decisions. Regulators worldwide often use a single-factor model to estimate the cost of equity. The empirical literature shows that such a model has limited efficacy in explaining stock returns, while other factors also capture the risk involved in the market. This study is perhaps the first to apply three asset pricing models—the capital asset pricing model (CAPM) and the Fama-French three- and five-factor models—to estimate the cost of equity for the Indian energy and infrastructure sectors. We find that the reasonable rate of return fixed by the respective regulator based on the CAPM is often higher than this study's estimated cost of equity (using CAPM). The spread between the regulated return across the identified energy and infrastructure sectors is estimated using a single-factor model, and our estimation using the three-factor model is relatively lower. The spread increases when we apply the recent five-factor model for regulated utilities. The study can guide policymakers and regulators in estimating and fixing reasonable rates of return for the infrastructure sectors. • Estimation of cost of equity using the three asset pricing models for publicly listed Indian energy and infrastructure firms. • Applications of three asset pricing models: the capital asset pricing model, Fama-French three-and five-factor models. • A review of framework regulated return across key energy and infrastructure sectors. • The regulated rate of return set by the respective regulator is found to be higher, in general, than those estimated in this paper. [ABSTRACT FROM AUTHOR]

This paper has studied electricity pricing under a regulated structure during post power sector reform in Odisha, India. It is found that Odisha has adopted the average cost pricing principle for determining electricity price with the rate of return regulation. This process of tariff determination not only takes a long time but also involves huge cost. Further, actual tariffs levied by the Odisha Electricity Regulatory Commission (OERC) are at variance with the broad principles of rational pricing policy. This uneconomic pricing policy has adverse impact on the financial health of the distribution companies. However, the Electricity Act of 2003 has brought about a radical change in the power scenario across the country, including the state of Odisha, by introducing open access and trading of power. [ABSTRACT FROM PUBLISHER]