Research Journal of Economics

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Approaches to Asset Valuation in Regulatory Asset Base Determinations: Lessons for the Review of the Tariff Methodology for Petroleum Storage and Loading Facilities

The purpose of this review is to explore asset valuation methodologies available in regulatory accounting frameworks in the determination of the Regulatory Asset Base (RAB). The Energy Regulator’s decision of 25th March 2020 has sanctioned the development of a series of concept papers on elements of the allowable revenue formula. These papers feed into the process of reviewing the tariff methodology to for petroleum storage and loading facilities. The RAB is a key factor in the allowable revenue formula as profits earned by licensees and depreciation (as return of capital) depend on its value as approved by the energy regulator. This in turn has an effect on required revenues of regulated entities in the petroleum sector and the tariffs that the energy regulator may approve for licensees to make profit that is commensurate with risk. Guidance obtained from the theory of corporate finance suggests that the choice of asset valuation method anchors the capital maintenance motive in place and the desired tariff regime. Rate of return regulation supports asset valuation choices driven by financial capital maintenance, economic capital maintenance or physical capital maintenance. Financial capital maintenance motive leads to the adoption of historical cost-based asset valuation method to estimate the cost that was incurred to acquire the asset with or without inflation indexation minus its cumulative depreciation. The economic capital maintenance motive leads to the adoption of current value-based asset valuation methods, in the form of the economic value or the optimized deprival value approach. The value of an asset is established through the determination of the present value of future net cash flows expected to be generated by the asset.

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