Presentation - Workshop 4: Cost recovery, Paul Arnoldus, DG Environment, European Commission

1. Introductory remarks
on depreciation methods & cost recovery
OECD – ENV workshop “Cost Recovery”
1st session – Tuesday 29 May
Paul ARNOLDUS
ENV C.1 - Sustainable Freshwater Management
European Commission – DG ENV
1
This presentation is on personal title and does not necessarily
reflect the position of the European Commission.

2. 2
A refresher on terminology
Three types of costs of a water facility :
1. Operational costs: production inputs (labour, energy, …) varies with volume
|
2. Capital costs: the use of the capital asset |
> do not vary with volume
3. Overheadcosts: maintenance costs |
administration cost |
The capital asset has a lifetime as it is not used up in the daily production process:
from investment / installment to write-off / replacement investment
[ investment costs ] [ new investment costs]
Capital (expenditure) costs := the allocation of the costs of the asset
over the periods within the asset’s lifetime

3. 3
Depreciation as method to recover capital cost
Setting sufficient financial means aside
to be able to carry out the replacement investment
at the end of the asset’s lifetime
(assuming identical technology, lifetime, earning capacity, and thus asset price)
• 100% own funding: set price over operational costs
to arrive at the asset’s investment sum at end of lifetime
• 100% funding by loans: set price over operational costs
to have fully paid back the loan(s) and interest at the end
• But: how to take account of government and EU grants?
ignore / exclude: recoup the asset’s full value OR
include: recoup the remaining funding
(note the latter assumes the replacement investment gets an identical grant)

4. 4
Choosing a suitable depreciation scheme
An actual depreciation scheme of water assets underpinning water tariffs
• has considerable degrees of freedom to vary the depreciation costs over time,
BUT…
• needs to build up the necessary financial capacity allowing new investments
( = relaxing the assumptions of identical technology, lifetime, earning capacity, & thus asset price,
thus allowing to take account of risks of premature obsolesce, price changes, et cetera )
• needs to respect the WFD requirements (article 9):
contribute to adequate cost recovery;
contribute to the “adequate incentives” for efficient use water resources;
take account of the effects on affordability, competitiveness etc.