OTAG Makes Recommendations to EPA
Does cleaner air mean lighter pockets?
The Ozone Transport Advisory Group has recommended that the EPA should let states adopt a range of...
set the value of the property based on the owner's use rather than its fair market value or by valuing intangible assets. Fair market value is based on hypothetical buyers and sellers in the marketplace. If the only buyers would be independent power producers, their purchase price would be based only on the value of the tangible assets. Only the utility (em not an independent power producer (em would have the ability to collect both income from rate base or stranded costs. This situation may be analogous to the homeowner installing an expensive swimming pool; the home's value-in-use to the owner has risen but its market value may have fallen. There is a related issue for non-utility generators.
Under most state laws, prices from above-market power purchase agreements should not be used to project income, since doing so will value the non-taxable intangible contract rights rather than the tangible property comprising the power plant.
REPLACEMENT COST LESS DEPRECIATION. Generally speaking, an investor will not pay more for an old plant than what it would cost to build or purchase a substitute plant with equal operating characteristics. That idea underlies this approach, which will set the upper limit on the value of the plant: Even if the plant can make substantial profits at the market price of electricity, an investor will not pay a price based on its discounted income stream if the investor can purchase and operate a brand new plant for less.
Historically, under traditional regulation, net book cost or rate base has approximated the correct cost indicator for utility property, because it incorporates the physical deterioration and elements of functional obsolescence recognized by yearly depreciation rates allowed by the regulatory agency, and the external obsolescence caused by limiting the property's earning ability to a return on its net book cost. Deregulation requires different adjustments, however. (See Table 2, giving an example of using replacement cost less depreciation and obsolescence to calculate property tax value for a coal-fired steam generating plant.)
First, the appraiser calculates the capital cost per kilowatt-hour of producing the equivalent amount of electricity. This step can be done through industry publications, vendor proposals, or more appropriately, by an independent engineering firm. The capital cost should be increased by startup costs, necessary spare parts, and interest expense during the construction period, among other factors. From this cost for a new plant must be deducted an amount appropriate for the physical deterioration suffered by the appraised plant. This step can be performed by comparing the useful life of the new facility to the useful life of the appraised plant.
Next, fuel costs are compared. If the appraised plant is oil- or gas-fired, then the replacement gas plant's lower heat rate and lower overall fuel costs will be reflected by a reduction in value of the appraised plant. If the appraised plant is nuclear or coal-fired, an addition of value of the appraised plant (relative to the replacement plant) likely will be required, because coal costs less than natural gas per megawatt-hour of electricity produced. Nuclear fuel costs less as