Public Utility Valuation for Purposes of Rate Control

By John Bauer; Nathaniel Gold et al. | Go to book overview

CHAPTER IX
DEPRECIATION

So far we have discussed the primary basis of valuation, particularly construction cost of physical property. An amount thus derived represents the property as if new. But the utility property in service is mostly not new. Used property may be subject to appreciation or depreciation. The Supreme Court has held explicitly that adjustments must be made in the initial cost appraisal that would result in valuation of the property in its present condition. This chapter will be concerned with this next step in the valuation process.


APPRECIATION FACTOR IN VALUATION

The factor of appreciation is of minor importance. Property may appreciate, first, because of higher price and cost levels, and, second, because of improvement with passage of time. The first is recognized in the extent that the primary valuation is based upon reproduction cost. If prices and costs have risen and the new levels appear stable, they are reflected in the unit prices. There is no need for further adjustment, except as to land which will be considered in a later chapter. There is left, therefore, only the second factor, physical improvement that renders used property more serviceable than new. Some types of property do not have immediately upon construction or installation their full measure of efficiency. They must first be "broken in." This is found even in equipment which has rather limited service life, but particularly in facilities of long life or practically permanent classes of construction. The question is, whether and to what extent such improvement in serviceability shall be recognized as appreciation in final determination of "fair value."

For ordinary machinery, this factor has little importance.

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