Equipment Appraisal Blog | Understanding Machinery Appraisals

How Deregulation has Affected Electrical Equipment Appraisal Values

Posted by Equipment Appraisal Services on Wed, Sep 02, 2015 @ 10:30 AM

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When you're talking to anyone in the electrical production sector, deregulation is a topic that virtually everyone has an opinion about. It's good for competition and fosters private industry, it's bad because it can cause problems with keeping the grid functioning properly, it's a bit of both. Whichever your opinion on the matter, there's no doubt that deregulation has made broad, sweeping changes to production and distribution of electricity. But has it changed how electrical equipment appraisals are performed? Absolutely. Here's why:

The primary purpose of deregulation was to put electrical production and distribution onto the open market, making it possible for private companies to compete against local and regional utility companies. But that also meant that price regulation was also put by the wayside, leaving competition to decide market prices for electricity. This has made a big difference between what kind of plants and equipment were being used and makes a big change in how equipment appraisers have to approach machinery valuation as many more market factors may come into play. This can include fuel prices, deregulation differences by state, investment opportunities and similar effects.

As an example, if one state has high natural gas costs, a machine appraisal for equipment from a natural gas power generation plant may not have a high value, because many plants were built when natural gas costs were low. But in a nearby state, fracking operations may have begun that is producing a lower local price for natural gas, making natural gas plants more affordable to operate and creating a higher equipment value for that particular area.

Approaches to Electrical Equipment Appraisal

There are three approaches typically taken to electrical equipment appraisal - market, income and asset. Here are the basics of each approach:

  • A market approach looks at the value in terms of buyer and seller actions. Sales of similar plants are analyzed and then adjusted down to the plant being appraised with size, production expenses, the time that has passed since the comparable sale, the ages and technology levels of the plants and the economic differences between the plants' locations.
  • The income approach involves basing the value on the future income. The income appraoch often is not used in machinery and equipment appraisal due to the number of factors that the methodology does not take into account.
  • A cost approach determines the cost to reproduce the plant or a modern rendition of it. The cost of replacement includes deductions for physical deterioration of the existing plant, economic obsolescence which is affected by fuel prices, functional obsolescence caused by technological advances and obsolescence caused by necessary capital expenditures, such as payments nuclear plants are required to pay for decommissioning trust funds.

Obviously, the effects deregulation has had to electrical equipment appraisal is a complex and many-faceted issue that requires the appraiser to look at many diverse issues when calculating machinery value. Having a qualified machine appraiser with experience in the industry evaluating your equipment who knows how to research the current market is the best way to ensure you're getting a fair value for your equipment.

Tags: equipment appraiser, electrical equipment appraisal