Costing fixed assets in Swedish municipalities: Effects of changing calculation methods

Abstract

When pricing public utility services Swedish municipalities are not allowed to charge more than their full cost. A dominant cost component in operations such as energy distribution or handling water and wastewater is the cost of fixed assets—depreciation plus interest, here referred to as “capital service cost” (CSC). The maximum acceptable price for the services is the full cost, i.e., variable cost plus fixed cost, which is mainly CSC. For CSC the sum of the present values (PV) should not exceed the investment value. Several different CSC methods meet such a PV criterion but allocate the CSC differently over time. To achieve a better match with the generated services, costing practice has changed, shifting among several alternate CSC methods. As these alternates all meet the PV criterion, the issue of charging more than full cost has not been given much attention. However, it is not enough to focus on the internal consistency of the methods. The implementation of changes and the choice of parameter values, such as interest rates, have to be considered. Such wider analysis reveals that Swedish municipalities have overestimated the full costs in public utilities by a total of several tens of billions SEK (several billions USD) giving rise to a corresponding overcharge.