Public Utility Valuation for Purposes of Rate Control

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

CHAPTER XIV
RATE OF RETURN

IN the preceding chapters, consideration has been given exclusively to valuation for rate making. The ultimate purpose of valuation, however, is not to establish fair value in and by itself, but to determine the fair return to which a utility is entitled. To reach the final result of fair return, requires the establishment of a fair rate of return to be applied to the fair value.


ULTIMATE OBJECTIVE IS PROPER RETURN

The real quantum sought is fair return on the properties used in public service. For this final determination, the fixing of the fair value is only one of two necessary processes. The second is the establishment of a proper rate of return. Multiplying the valuation by the rate yields the product desired for the fixing of reasonable rates. This product, moreover, is only one of the three principal elements which must be provided for in the service rates paid by consumers. Besides the return on the properties, the consumers must also pay through rates all reasonable operating expenses and taxes, but these matters do not come within the scope of this study.

The present volume is devoted broadly to consideration of the return element in rate making. While up to this point it has been practically limited to valuation, its final object nevertheless is consideration of return. The emphasis upon valuation is due to the vastly preponderant attention given to it not only by courts in passing upon rate cases, but also by commissions in fixing reasonable rates. While in all cases the final result sought has been fair return, actually the great bulk of the discussion, controversy and effort has been devoted to valuation. In ultimate quantitative significance the rate of return ranks equally with the amount of fair value,

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