By Joseph M. Heaney
While most people may have a general sense of the market value of a home or business, it’s not as easy to apply accurate values to a utility.
Not only do prices change across markets, but decades of adding to these systems may mean municipalities or private owners lose track of built assets sprawling across (and under) a cityscape or rural area.
Although a utility valuation may not be something a municipality seeks out on a regular basis, there are several beneficial reasons to go through this process. Consider the following five reasons to conduct a utility valuation:
1. Maximize sale value
Perhaps the best-known reason to seek a valuation is to get the best price from the sale of a utility asset. Much like selling a house or car, the starting point for a utility sale is understanding how much an asset is worth. A seller or buyer who consults an industry partner will have a much more realistic sense of their asset’s value and be able to plan financing and strategies accordingly. A thorough review of the available reports, inspections, and other documents is the first step in homing in on the true value of a utility asset.
2. Avoid transaction risks
When a municipality has a utility valuation, it has a stronger place from which to negotiate in the event of a sale. The risk of not conducting a utility valuation is that the seller is subject to the terms set by the other side of the transaction. Becoming an educated partner helps sellers determine whether or not they’re getting a good deal. Without an accurate valuation, owners could miss out on a significant amount of value from the transaction.
Equally important, an inaccurate sale price could mean beginning a transaction only to have regulatory agencies stop it in its tracks due to an inappropriate market value.
3. Know before you dig
Planning to build new infrastructure or buy adjacent assets? Considering consolidation, regionalization, or another cooperative venture with other nearby systems? Before you begin drawing up those plans and agreements, it pays to take a step back and understand what you already have in place. An asset valuation can often demonstrate that it’s more cost-effective to buy or consolidate assets than to build them. In many cases, municipalities are not fully aware of the extent of their assets or other nearby facilities. Part of valuation work is looking for missing data and potential consolidations or regionalizations— for example, buried or separate assets that have been forgotten over time or weren’t documented correctly.
Even if the valuation process doesn’t uncover forgotten assets, it can help lay the foundation for new projects. Municipalities can leverage an accurate utility system valuation for more favorable financing conditions for a new build or new partnerships.
4. Correct taxation values
A valuation can help a municipality ensure it’s levying an appropriate amount in property taxes upon privately-owned utilities and other assets within its corporate limits.
Municipalities rely heavily on property taxes, which are directly related to the value of the assets within their corporation limits. Many utilities, including electric utilities, telecom or even private solar farms, self-report the value of their assets, which then represents their tax burden. An asset valuation performed on behalf of the taxing authority or municipality of those utility assets can serve as a due diligence check to ensure assets are being appropriately taxed for public services, safety, and costs of public education.
5. Secure accurate coverage
In the event of a disaster, one would assume that insurance will cover the replacement of assets — but this assumption can cost municipalities. By conducting a detailed valuation, municipalities can ensure their assets are appropriately insured. This process can also provide proof of property value and be particularly valuable in making a future claim.
Know your value
Ignorance may be bliss, but knowing the full value of owned assets makes for a stronger all-around position from which to make strategic decisions. By doing the legwork today to understand utility asset value, municipalities can make better decisions for their citizens and rate payers.
Joseph M. Heaney III is the principal at Walden Environmental Engineering. With 30 years as a professional engineering, Joe is an expert at managing the environmental compliance needs of municipalities, industrial clients and law firms.