Abstract:
Often, analysts using convential approaches and methods for valuing a water utility quickly find themselves overwhelmed. This is particularly true of accounting principles and practices unique to rate-regulated water utilities. It also pertains to applied microeconomics which is virtually ignored in typical valuation studies. As an illustration, in one assignment, just overlooking a water utility’s arsinic problem resulted in a $90 million error!

Very little information exists regarding valuing utilities. For instance, in Dr. Shannon P. Pratt’s 1,098-page book, Valuing a Business, The Analysis and Appraisal of Closely Held Companies (considered the “Bible” for valuation analysts), less than one page is devoted to public utilities.

Usually, utilitiy economic regulators (e.g., state public service commissions) must find the transfer of ownership (either assets or stock) to be in the “public interest.” Even if the buyers and sellers of utilities reach an agreement regarding the transaction they often face an uphill battle to gain regulatory approvals.