(1) The income capitalization approach to
unit value estimates the market value of the
operating property by dividing the
income stream generated by the operating assets by a market derived
capitalization rate based on the costs of the various sources of capital
utilized or available for use to purchase the assets generating the income
stream. The purpose and intent of the income indicator of value is to match
income with sources of capital and, therefore, every source of capital used or
available to be used to purchase assets should be reflected in the
capitalization rate determination as well as all operating income.
The net operating income to be capitalized for pipeline
companies shall be a weighted average net operating income. The weighted
average net operating income shall consist of an average of the three 12-month
periods immediately preceding the valuation date. Each of the three preceding
12-month periods shall be weighted by multiplying the first preceding period by
three, the second preceding period by two, and the third preceding period by
one. The income stream for pipeline companies shall be further reduced by
deducting the current year net adjustment expense for investment tax
credits.
If the utility company has no income or has a negative
income, the indicator of value set forth in this subrule shall not be
utilized.
If the utility company is one which is not allowed to earn a
return on assets purchased with sources of capital such as the company's
deferred income taxes, the income will not reflect the earnings on those
assets, and as a consequence, a separate adjustment to the income indicator of
value must be made to account for the value of those assets. In such instances,
the income indicator of value shall be increased by an amount equal to the book
value of the source of capital involved, such as the accumulated deferred
income taxes. The adjustment to the income approach for accumulated deferred
income taxes shall not be made for pipeline companies. If any other operating
property is clearly not income producing and, therefore, not reflected in the
income stream, the value of that asset shall be determined separately and added
to the value of the other operating property as determined using the income
indicator of value. The capitalization rate shall be adjusted, if necessary,
for the market rate of return for the sources of capital utilized to purchase
such non-income-producing properties where the sources can be clearly
identified. Otherwise, the cost of the sources of capital shall be presumed to
be equal to the overall market weighted costs of the identified sources of
capital.
(2) If the
utility
company is one which can earn a return on assets purchased with sources of
capital such as the company's deferred income taxes, the income will reflect
the earnings on those assets, and as a consequence, a separate adjustment to
the capitalization rate is required. The capitalization rate shall be
determined by utilizing, where appropriate, market rates of return weighted
according to a market-determined capital structure, with the exception of
deferred credits whose market value shall be equal to its value on the
company's books and whose cost shall be zero. All sources of capital shall be
considered in the capital structure as well as market costs associated with
each source of capital, otherwise, the cost of the sources of capital shall be
presumed to be equal to the overall market-weighted costs of the identified
sources of capital. The following is an example of the application of this
rule:
|
(1)
|
(2)
|
(3)
|
(4)
|
|
Market
Value
|
Market Rate of
Return
|
% to Total
|
Component (Col. 2 × Col.
3)
|
|
Common Stock
|
60,000
|
15%
|
62.50
|
9.38
|
|
Preferred Stock
|
5,000
|
13%
|
5.21
|
.68
|
|
Debt
|
25,000
|
12%
|
26.04
|
3.12
|
|
Deferred Credits
|
6,000
|
-0-
|
6.25
|
-0-
|
|
96,000
|
|
100.00
|
13.18
|
This rule is intended to implement Iowa Code sections
428.29,
433.4,
437.6,
437.7, and
438.14.
