Public Utility Valuation for Purposes of Rate Control

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

CHAPTER XII
WORKING CAPITAL

BESIDES structures, equipment, land and incidental rights, -- all considered in the preceding chapters as fixed capital -- a utility needs also liquid, current, or working capital with which to carry on its operations. For example, a gas company must have in addition to the more permanent property used in operation, coal and other materials for the manufacture of gas. It must have cash funds to pay wages and salaries. It must maintain a balance in the bank for current transactions. It must have materials and supplies ready for maintenance and repair as they are needed.

All these items are comprehended in the concept of working capital. This must be included in the rate base with the other elements considered up to this point. While there is no doubt as to the necessity of providing working capital and as to its proper inclusion in the rate base, there is usually considerable difficulty in determining the specific amount in a particular case. First, it is largely a matter of judgment as to how much working capital is needed in each instance for efficient operation and management. Second, it is also difficult to determine from particular facts the amount actually supplied and used in public service.

For clear conception, working capital should be viewed in relation to fixed capital. The latter is conceived as property of a more or less permanent character devoted to public service, while the former consists of liquid assets to meet current operating costs. Units of fixed capital have comparatively long service lives, usually many years or even permanence; units of working capital are used up directly in operation. With few exceptions, such as land, both kinds of property must be replaced, but the items of the one are chargeable

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