could be expected to is that it would clearly increase network charges. open the issue of the economically appropriate Networks rapidly substituting level of the new asset base. operating for capital That is, it cannot be expenditure would be likely to presumed without evidence lead to a shock’ for ‘price that a value lower than the consumers, because existing level is operating costs are unambiguously more efficient recovered in full from current than an alternative consumers within each value. In these regulatory period. By circumstances, there would contrast, the costs of be potentially strong capital network arguments to revisit the investments are (typically) original asset valuation recovered over 30-40 years processes undertaken for the from both current and future most part in the late 1990s, to consumers. This particular establish a satisfactory basis impact is additional to any of for a view of whether they the network or final price represented an economically outcomes estimates detailed efficient starting point for in this analysis. It is difficult price and revenue setting to quantify because the purposes. There is certainly existence and scope of these evidence to suggest that substitution possibilities will electricity distribution only be known with any networks operate a certainty by network owners, significant range of assets and will differ according to that were not actually the characteristics of each recognised in original asset electricity network. valuation processes. There A further issue relevant to the are credible economic implementation of any efficiency arguments to regulatory asset write-down recognise and incorporate
could be expected to increase network charges. Networks rapidly substituting operating for capital expenditure would be likely to lead to a ‘price shock’ for consumers, because operating costs are recovered in full from current consumers within each regulatory period. By contrast, the costs of capital network investments are (typically) recovered over 30-40 years from both current and future consumers. This particular impact is additional to any of the network or final price outcomes estimates detailed in this analysis. It is difficult to quantify because the existence and scope of these substitution possibilities will only be known with any certainty by network owners, and will differ according to the characteristics of each electricity network. A further issue relevant to the implementation of any regulatory asset write-down is that it would clearly the issue of the economically appropriate level of the new asset base. That is, it cannot be presumed without evidence that a value lower than the existing level is unambiguously more efficient than an alternative value. In these circumstances, there would be potentially strong arguments to revisit the original asset valuation processes undertaken for the most part in the late 1990s, to establish a satisfactory basis for a view of whether they represented an economically efficient starting point for price and revenue setting purposes. There is certainly evidence to suggest that electricity distribution networks operate a significant range of assets that were not actually recognised in original asset valuation processes. There are credible economic efficiency arguments to recognise and incorporate open
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