Asset Valuation and the Fascination with Efficiency

Asset valuation typically plays an important role in determination of regulated tariffs, and accordingly the methodology employed in valuation of such assets provides a rich source of academic analysis and applied case study. The topic of asset valuation is made more interesting given the range of valuation methodologies to choose from - that the choice of methodology often has a significant impact on deemed prices – and that there is not a professional consensus or standard in which to guide practitioners needing to determine cost based prices or tariffs. Further motivated by the June 2015 judgment in the matter between Sasol Chemical Industries Ltd and the Competition Commission (Competition Appeal Court of South Africa, the Honourable JP Davis) we review competing asset valuation methodologies within the context of economic value, optimality, price signalling, investment incentives, and subsidy – and in doing so identify some common myths and misconceptions gleaned from this case, and in regulatory decisions where tariffs are determined based on the cost of supply of a notional efficient operator.