Tariff Toolkit - Depreciation Expense: A Primer for Utility Regulators

May 2021 – With the support of the United States Agency for International Development (USAID) Energy Division, Center for Environment, Energy, and Infrastructure, Bureau for Development, Democracy, and Innovation (DDI), the National Association of Regulatory Utility Commissioners (NARUC) is working on the development of a Cost-Reflective Tariff Toolkit consisting of primers developed specifically to support electricity regulators in emerging markets.

As the latest addition to the Toolkit, "Depreciation Expense: A Primer for Utility Regulators" is designed to assist energy regulators working in emerging economies with building their understanding and knowledge of key concepts related to depreciation. It presents key factors affecting allowed depreciation costs as well as alternative approaches and regulatory considerations when determining allowed depreciation in the context of cost-reflective tariffs for regulated entities operating in monopolistic market segments (e.g. network companies).

It is divided into the following key sections:

Section 2 places depreciation in the context of tariff regulation.
Section 3 presents fundamental concepts and principles of regulatory depreciation.
Section 4 presents alternative cost allocation methods.
Section 5 presents the components of age-life methods.
Section 6 discusses alternative approaches for determining asset value.
Section 7 presents common techniques for calculating the service life of an asset.
Section 8 describes common methods for determining the depreciation rate.
Section 9 explains alternative asset grouping procedures.
Section 10 discusses overarching regulatory considerations concerning depreciation.
Section 11 concludes with final remarks.

In addition, it contains two annexes. Annex I presents numerical examples, while Annex II provides case studies of how regulators in Georgia and Tanzania determine allowed depreciation for electricity transmission systems as part of the utility’s tariff-setting process. 

Access the primer here.

Additional primers from the Tariff Toolkit include:

This primer focuses on developing a set of recommendations that regulators in countries with emerging economies may want to consider when designing a communications strategy, particularly with regard to engaging the public and key stakeholders during a pending tariff change.

This primer is a guide to the structure and function of a system of accounts that regulated utilities can use to ensure they are accurately recording and categorizing financial transactions and presenting coherent data to the regulator.

This primer is a guide to helping utility regulators around the world understand the capital markets and estimate the cost of capital, which is one of the elements of effective cost-based ratemaking and developing cost-reflective tariffs.

This primer is a resource for electricity regulators and utilities outlining the fundamental principles of cost-reflective rate design and describing key rate design processes. Additionally, it offers regulators and utilities a practical guide for adopting, reviewing, and assessing rate structures based on core principles, international case studies, and widely accepted practices.

This primer is designed to help utility regulators around the world understand the primary drivers of electricity tariffs based on the revenue requirement concept, with a specific focus on the expenses that are incorporated into revenue requirements. These components are primary drivers of effective cost-based ratemaking and developing cost-reflective tariffs.

Upcoming Primers

To further the Toolkit, NARUC is currently preparing additional primers on the following topics:

  • The Impact of Electricity Tariff Reforms on Infrastructure Investment and Economic Development
  • Impact and Treatment of Grants, Donor Assistance and Concessional Financing


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