VALUATION OF ASSETS

1. Valuation of assets of utility is the next stage in the determination of tariff by the Commission. In case of Board, as per section 59 of the Electricity (Supply) Act, 1948, the value of fixed assets of the Board in service at the beginning of the year means the original cost of such fixed assets as reduced by the aggregate of the cumulative depreciation in respect of such assets calculated in accordance with section 68 of the said Act with such principles as the Central Government may lay down from time to time and the consumers’ contribution for service lines. In respect of licensee, the issue is addressed in sections 57, 57A & the Sixth Schedule of the Electricity (Supply) Act, 1948. However, as per section 30 of the Act, the Commission may, if it thinks fit, depart from the provisions referred to above, after recording the reasons. The values of assets of the utility are required to be accounted for in the process of determination of the tariff under the PBR and RoR systems of costing. Any under-valuation or over assessment of the assets may lead to losses or undue enrichment of the utility or its successor in interest.
2. There are various methodologies or basis for valuation of assets. The commonly used methodologies are:
3. ORIGINAL COST MINUS DEPRECIATION
   1. The calculations take into account the book value of assets of the utility and deduct there from the depreciated value on the basis of the norms prevailing in the power sector at the relevant point of time. This method is still widely used because it lends itself to convenience of estimation based on documented records and also because it leaves some incentives for the utility to earn returns on the original investment. However, the results of valuations may be different due to the difference in the economic and the depreciated cost of assets.
4. REPRODUCTION OR REPLACEMENT COST OF ASSETS LESS DEPRECIATION
   1. Under this methodology, the present value of assets as reflected in reproduction costs (i.e. the cost of rehabilitating the same assets in the present time frame) or replacement costs i.e. the cost of procuring a new asset (based on current technology), needed for performing the same function, is calculated and depreciation at appropriate rates is deducted therefrom. In this approach the difficulties likely to be encountered are (i) proper fixation of current costs, which are again subject to market forces and tend to display fluctuating tendencies, (ii) difficulty in selection of appropriate replacement items which may be taken as base for costing and (iii) the results produced by resorting to costing at current rates may lead to unduly high costs in comparison to marginal costing approach and may, thus, be detrimental to the interest of the consumer.
5. VALUATION OF ASSETS BY INDEPENDENT ASSESSOR
   1. The utility has an option to appoint an independent assessor for evaluation of assets on basis of market value or historical costs plus suitable adjustments to account for subsequent depreciation or appreciation. This method also has the same draw-back i.e. absence of standard parameters for assessment of market value for plants, equipments and systems which were purchased 30 to 40 years back. The evaluator in the present time frame does not have the option of resorting to competitive bidding. The utility shall have to proceed with a note of extreme precaution since any doubt about under valuation or over pricing of assets is bound to invite adverse public reaction creating difficulties in finalization of tariff.
6. Among the methodologies mentioned above, having regard to the need to ensure reliability and acceptability, the Commission proposes to follow the methodology of original cost minus depreciation