Regulators in emerging markets sometimes struggle with how to let utilities handle concessionary financing (e.g., grants and low-interest loans). Regulators allow utilities to place their capital investment amounts in what is called the “rate base” or “regulatory asset base (RAB).” Utilities are then allowed to earn an appropriate return on these investments. Customers pay for that return on capital through the tariff. The investment principal is also returned to the utilities through repaid depreciation, which also comes from customers through the tariff (called the return of capital).
But, when a utility receives a grant or low interest loan, should ratepayers be forced to pay the utilities a return on money the utilities did not invest? Further, should the utilities receive that money back through a depreciation allowance when it was not their investment in the first place? After all, the grant or low-cost loan is usually being offered specifically to keep the tariff as low as possible.
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.