The integrity of and confidence in the regulation and rules plays an important factor in providing the assurance needed to attract investments in utilities and consumer acceptance in the resulting approved rates.
RAB is therefore very crucial in the calculation of the allowed annual revenue. The value of the assets included in the RAB could be based on historical cost or re-evaluated values. The historical cost approach values the RAB using the costs actually incurred by the entity in building the utility network. On the other hand, the re-evaluated values represent the costs expected to be incurred to replace the assets.
The adoption of ODRC as valuation methodology assures protection to investors that they would fully recover the cost of their investments by compensating them for the loss in value of their investment due to inflation. However, there should be an awareness that the compensation is only done ONCE—either through the RAB or through the WACC BUT NOT IN BOTH AT THE SAME TIME.
It must be also considered that while there is a fixed formula to determine WACC and ARR, regulation should be flexible enough to recognize that there are other alternatives or options that may be considered. The definition of RAB is one such example. Accounting-wise, the net book value of the RAB may equate to the total of debt net of repayment plus equity. The latter viewed as the opposite of the other in the accounting equation ASSETS=DEBT plus EQUITY.
The elimination from the RAB of contributions from third parties. This is based on the argument that to the extent the identified asset was not financed by the regulated entity, it should not be included in the RAB remunerated.