Review of Maharashtra's regulatory framework in electricity distribution CAPEX regulation

The power sector is a highly capital intensive sector. The capital cost admitted by the regulatory commission forms the basis for determination of tariff. Depreciation, reasonable return, tax on profit, interest on long term loans, insurance etc are capital related costs, which are embedded in the tariff. A utilities profitability generally increases if it invests more in capital assets, leading to what is called `Gold plating' of investment. In this context usefulness and prudence tests are crucial at the time of approval of investment. In this paper statutory obligations which drive licensee's capital investment plans are analyzed and regulatory treatment to licensee's capital expenditure (CAPEX) plans in state of Maharashtra is reviewed.