The Regulatory Challenge of Asset Valuation: A Case Study from the Brazilian Electricity Distribution Sector

Given the capital intensity of network utilities, the remuneration of both historic and new investments is a major determinant of consumer prices, typically accounting for around two thirds of total costs. In order to derive the annuity required to sustain infrastructure investments over time, the cost of capital and depreciation rules are applied to the Regulatory Asset Base (RAB), a number which captures the value of all past investments in the company. The RAB used to calculate return on capital and depreciation need not necessarily be the same, as different considerations may arise in measuring the capital stock used in each case. For example, if historic investments were entirely subsidized by the tax-payer, while new investments are to be funded by the private sector, the government may choose to accept a discount on the RAB when calculating a return on historic investments. However, even if this were to be the case, the full value of the RAB should still be used to calculate depreciation charges, ensuring that the capital stock is maintained over time.