Regulated assets

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Asset valuation for regulated assets

Understand the right approach for valuing regulated assets including utilities and infrastructure

For those operating in the electricity, gas, railways, telecoms and water sectors who need Regulatory Asset Base (RAB) valuations to assist with Financial Capital Maintenance (FCM) so that they can:

  • Manage their exposure to financial risk
  • Provide comfort to investors
  • Comply with the regulatory guidelines

Hickman Shearer’s team:

  • Has the specialist knowledge needed to follow the required complex formulaic approach, that encompasses specific data and indices
  • Has an in depth understanding of the latest rules governing the approach to valuation

Background to regulated assets valuation

The requirement for regulatory asset valuation arose as a result of the privatisation of utilities and infrastructure operating companies in the 1990s. It was initiated in the water industry but subsequently broadened its scope to include electricity, gas, railways and latterly telecoms privatisations.

Each regulated industry operator owns a Regulated Asset Base (RAB), which is valued to assist with Financial Capital Maintenance (FCM).

Different approaches to regulated assets valuation

Differing potential approaches to the valuation of the RAB can have a material impact upon FCM.

Generally, there is a consistent approach to the valuation of capital assets, albeit not set by legislation, based upon depreciated replacement cost (DRC). This approach aggregates the NBV of the pre-privatisation assets, adjusted annually for inflation. Also any post-privatisation capital expenditure less depreciation to provide the RAB value.

Obtain the correct approach to regulated assets valuation

Pivotal to these valuations is the distinction between current and historic cost and effective useful lives, which have been effectively played out in the telecoms sector.

In 2005, after establishment of valuation principles in 1997, Ofcom changed the approach to valuation from current replacement cost to historic cost, adjusted for inflation for pre-1997 assets.

This coincided with a change in asset accounting lives creating a windfall gain and an immediate over-recovery of costs for the operator, clearly demonstrating the impact of cost and asset life on RAB valuations and hence FCM.

The debate continues today in relation to the valuation of copper vs fibre assets and how the metrics of high raw material inflation and longer useful lives for copper measure up against fibre impacting upon an operator’s economic model to upgrade a network.

Your quality guarantee

Understanding capital asset valuation issues requires insight, expertise and experience.

Hickman Shearer is a RICS regulated firm employing high calibre experienced RICS qualified professionals, each of whom has a successful track record of providing asset owners and their advisors with:

  • Robust and relevant asset valuations
  • Supporting detailed market analysis
  • Technical guidance and impartial, authoritative advice

The standards Hickman Shearer’s team works to are both demanded and recognised around the world, ensuring a trusted universal approach and a set of consistent skills globally.

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Relevant experience 1

Interpreting the cost and value of a regulated asset

These engagements were performed by the Directors of Hickman Shearer in either their current or previous employment

Tim Chapman wide
Tim Chapman FRICS, MSc
+44 (0) 7508 909961
+44 (0)1844 215755