Determining the regulatory asset base for utility price regulation

Abstract

Price controls for regulated utilities determine the revenue streams, which cover costs, returns to shareholders and depreciation of assets. Allowable profits and depreciation depend on the regulatory asset base, and determining this for capital-intensive utilities privatized at a discount has been contentious. The paper argues for discounting both the original assets and their depreciation by the market-to-asset ratio. The efficiency problem is less that capital is thereby underpriced than that efficient prices may be inversely related to average costs for lumpy assets, a problem unrelated to asset valuation.