Fair value in the price regulation of natural monopoly

This paper deals with the regulation of the prices of natural monopoly in Czech Republic namely in the area of distribution of electricity. Monopoly is the sole supplier of the product on the market faces competition from other companies supplying the same or similar product and can sell at higher prices than in the markets of perfect competition. Therefore, there is a need for regulation by the State to ensure an adequate level of profit for manufacturers and sufficient quality of service for customers. In the Czech Republic is responsible for the functions of the electricity regulator Energy Regulatory Institute, which uses method price regulation by the form of allowed revenues. The goal of a specific research conducted by Faculty of Economics and Administration at Masa- ryk University was to identify the theoretical methods that allow the establishment of regulated pri- ces and to analyze factors influencing the amount. The methodology of Energy Regulatory Institute consists in the calculation of allowed costs, depreciations and profit. The base for calculating of depreciation of fixed assets are historical costs, which do not price developments and thus can not create sufficient resources for the reproduction of consumed assets. Similarly, in the calculation of the profit is used regulatory asset base, which represents the residual value of operating assets, taken from the firm‘s accounting for the year. It is obvious that the value of the assets taken from the balance sheet the company does not take into account possible investment opportunities for the company, which forms part of its market value. The result of the research is to propose a model of fair value revaluation, which eliminates the shortcomings of historical costs (of purchase price) and allows included the existing fixed assets in the calculation of allowed revenues and also the present value of its investment opportunities. The model of fair value is preferred also by International accounting standards because brings the accounting near to actually existing market conditions and eliminates the underestimation of business assets and depreciations