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Which asset valuation and depreciation method should be used for regulated utilities? An analytical and simulation-based comparison

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  • Küpper, Hans-Ulrich
  • Pedell, Burkhard

Abstract

Capital charges constitute the major share of costs in regulated network industries; in regulatory practice, however, no universally accepted method of depreciation exists. This paper compares the most commonly used asset valuation and depreciation methods according to their provision of adequate investment incentives, their compatibility with market developments, and their consistency with financial accounting principles. Current replacement-cost and annuity depreciation are found to be the most advantageous methods. The structural differences between these two methods are presented in detail. A simulation analysis indicates that the differences among the depreciation methods are less pronounced for sets of multiple assets but remain very large for certain parameter constellations, particularly those with substantial asset price changes and long asset lives.

Suggested Citation

  • Küpper, Hans-Ulrich & Pedell, Burkhard, 2016. "Which asset valuation and depreciation method should be used for regulated utilities? An analytical and simulation-based comparison," Utilities Policy, Elsevier, vol. 40(C), pages 88-103.
    • Handle: RePEc:eee:juipol:v:40:y:2016:i:c:p:88-103
    DOI: 10.1016/j.jup.2016.05.001
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    Cited by:

    1. Jennergren, L. Peter, 2018. "A note on the linear and annuity class of depreciation methods," International Journal of Production Economics, Elsevier, vol. 204(C), pages 123-134.
    2. Jennergren, L. Peter, 2017. "A Note on the Linear and Annuity Class of Depreciation Methods," SSE Working Paper Series in Business Administration 2017:1, Stockholm School of Economics.
    3. Mengjie Zhang & Lei Wang & Huanhuan Feng & Luwei Zhang & Xiaoshuan Zhang & Jun Li, 2020. "Modeling Method for Cost and Carbon Emission of Sheep Transportation Based on Path Optimization," Sustainability, MDPI, vol. 12(3), pages 1-23, January.
    4. Guthrie, Graeme, 2020. "Regulation, welfare, and the risk of asset stranding," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 273-287.

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