I agree with Martins comprehensive response, especially the observation that infrastructure businesses "can indeed be valued using an approach other than depreciated replacement cost……. but implementing alternate methods may take some effort and client support".
In terms of WHO does this in the water industry, I think you'll find that Yarra Valley Water use a business-based estimate of their assets (and I'm pretty sure that Hunter Water used to do so as well but I think they switched back – or reconciled the asset value to fair value as discussed below). What tends to happen is that water business that apply a commercial measure of "fair value" tend to have a lower "value per connection" than those who use a replacement value. One explanation of this is that it may reflect the tendency of water businesses to keep their pricing lower than they might be if they were fully commercialised. To put it another way, the price isn't seen as the best measure of a business in an industry whose outcomes are fundamental to a raft of social, economic and environmental policy outcomes.
If you compare water businesses to a listed infrastructure business like Transurban you'll find marked differences in the capital structure (level of debt) and associated pricing. This is not a criticism of Transurban but an observation that they are far more commercially attuned than the water business may be.
It's a vast oversimplification but, if your business earnings are tied to its asset value (i.e. revenue = operating cost + rate of return x regulated asset base (RAB); therefore earnings = revenue – operating cost = rate of return x RAB) and assuming you earn the rate of return then the valuation question can become a circular argument as fair value = RAB.
So, regarding the applicability of "fair value" as a DCF of earnings vs depreciated asset costs. We know that the water business is capital intensive (i.e. capital decisions can define 80% or more of the businesses cost structure). So, if you are a water business that has a lot of new assets (and hence the Op X and Cap X (particularly renewal) is likely to be low for a long period) then a shift to "fair value" is likely to be justified. If youre not in that situation then, as Martin said…" implementing alternate methods may take some effort and client support"
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