Public Utility Valuation for Purposes of Rate Control

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

CHAPTER XVI
CRITERIA FOR PROPER RATE BASE AND RETURN

ADMINISTRATIVE FEATURES
THE establishment of systematic control of industries vested with public interest requires consideration of criteria in relation to objectives. In this chapter and the next, we shall be concerned with basic tests applicable to adoption of valuation as part of a comprehensive policy of public control.
STANDARDS FOR PROPER RATE BASE
We shall consider particularly how "reproduction cost" or "fair value" as against "prudent investment" or "fixed rate base" would suit the purposes of effective control. The following standards are offered for the adoption of a desirable rate base and the consequent determination of return to the utilities.
1. The rate base, with the entire method of determining the return, must be capable of systematic administration.
2. It must provide for definite protection of both investors and consumers.
3. It must maintain the financial stability of the companies to the extent possible through rate control.
4. It must make available new capital as needed for public service, but prevent dislocation or distortion of capital additions.
5. It should encourage progressive development in the industries and service to the public.
6. It should provide rate flexibility for development purposes and permit accumulation of reserves in prosperous years for stabilization of rates and return when earnings decline.

These standards of a rate base and method of determining

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