Valuation Principles and Tariff Setting Framework
Abstract
The asset valuation process adopted within the tariff setting activity for regulated utility systems is one that goes directly to the bottom lines, in significant fashion, of both the asset owners and the customers who have to pay for transmission and distribution of services such as gas and electricity.
We have seen that the asset valuation can underlie 80% of the tariff to be applied.
Despite its importance, significance and the number of regulated systems that have had tariffs applied via the asset valuation approach, it is of note that there is no final deterministic algorithm for conducting a valuation yet accepted.
The opportunity is taken in this paper to:
- Overview the methodology and where it fits in to the tariff generated. This is largely for completeness as others will cover the economic approaches and theories
- List some of the ‘hot issues’ currently in the industry
- Identify some of the possible anomalies in the methodologies adopted