Certain Principles of Valuation in Rate Cases
| Author | Robert H. Written |
| DOI | 10.1177/000271621405300118 |
| Published date | 01 May 1914 |
| Date | 01 May 1914 |
| Subject Matter | Articles |
182
CERTAIN
PRINCIPLES
OF
VALUATION
IN
RATE
CASES
BY
ROBERT
H.
WRITTEN,
Librarian-Statistician
of
the
Public
Service
Commission
for
the
First
District,
New
York.
As
the
valuation
problem
develops
it
becomes
increasingly
clear
that
the
term &dquo;value&dquo;
may
be
properly
used
in
several
different
senses,
and
that
what
is
value
for
one
purpose
is
not
necessarily
value
for
another.
The
best
results
are
undoubtedly
obtained
when
the
problem
of
valuation
is
worked
out
solely
with
reference
to
what
is
just
and
reasonable
with
regard
to
the
specific
purpose
for
which
the
valuation
is
to
be
used.
Certain
facts
and
certain
elements
of
value
will
doubtless
be
considered
in
arriving
at
a
judgment
as
to
value
for
tax
or
rate
or
purchase
purposes.
This
is
particularly
true
of
the
important
fact
of
cost
of
physical
property,
both
actual
cost
and
reproduction
cost.
But
the
degree
of
consideration
given
to
certain
facts
may
vary
greatly
with
the
purpose
of
the
valuation,
and
certain
facts
and
elements
may
be
considered
for
one
purpose
and
entirely
excluded
for
another.
This
principle
seems
to
be
fully
recog-
nized
in
almost
all
of
the
recent
court
and
commission
decisions
in
relation
to
fair
value
for
rate
purposes.
Standard
of
Value
It
has
frequently
been
stated
that
there
can
be
no
rule
or
formula
for
the
determination
of
fair
value
for
rate
purposes.
Each
case
must
be
considered
on
its
own
merits,
and
such
result
or
value
arrived
at
as
may be
&dquo;just
and
right
in
each
case.&dquo;
&dquo;It
is
not
a
matter
of
formulas,
but
there
must
be
a
reasonable
judgment
having
its
basis
in
a
proper
consideration
of
all
relevant
facta. &dquo;1
The
supreme
court
has
gone
no
further
than
to
state
that
it
is
present,
as
distinct
from
past,
fair
value
that
is
to
be
determined,
and
to
mention
certain
of
the
elements
to
be
considered
in
such
determination.
The
court,
how-
ever,
has
given
no
indication
as
to
how
these
various
elements
should
be
combined
to
produce
the
final
result.
It
does
not
indicate
the
1
The
Minnesota
Rate
Cases,
230
U.
S.
353,
434,
June
9,
1913.
183
relative
weight
to
be
attached
to
the
various
elements
nor
does
it
indicate
that
in
a
particular
case
any
weight
need
attach
to
certain
elements.
In
view
of
the
complexity
of
the
problem
it is
probably
fortunate
that
the
courts
have
not
as
yet
attempted
a
more
illumi-
nating
definition
of
fair
value.
It
is
recognized
that
the
entire
prob-
lem
is
in
a
developmental
stage
and
that
there
is
danger
of
creating
precedents
that
may
compromise
future
action
when
the
entire
prob-
lem
has
been
more
fully
disclosed.
In
considering
fair
value
for
rate
purposes
it is
important
to
bear
constantly
in
mind
that
the
determination
of
fair
value
is
a
part
of
the
process
of
determining
a
reasonable
rate
of
charge.
By
reasonable
rate
as
here
used
we
mean
the
reasonableness
of
the
rate
schedule
as
a
whole
and
not
the
adjustment
of
the
various
specific
rates
that
go
to
make
up
the
complete
rate
schedule.
A
reasonable
rate
of
charge
in
the
sense
of
a
reasonable
rate
schedule
is
a
rate
that
gives
the
com-
pany
reasonable
compensation
for
the
entire service
which
it
renders
the
public.
In
the
case
of
an
appropriate
and
normally
successful
public
utility
enterprise,
reasonable
compensation
is
equivalent
to
the
normal
cost
of
production.
Normal
cost
of
production
includes
normal
operating
expenses
plus
a
normal
rate
of
returnonanormal
capital
cost.
The
aim
of
public
regulation
is
to
accomplish
what
in
other
industries
is
assumed
to
be
accomplished
automatically
by
free
competition,
that
is,
to
limit
the
price
charged
to
the
normal
cost
of
production.
There
is
no
reason
why
in
the
case
of
a
virtual
monopoly
the
public
should
be
required
to
pay
more
than
the
normal
cost
of
production,
and
sound
reason
why
in
the
long
run
the
public
cannot
pay
less.
Normal
cost
of
production
is
the
amount
which in the
long
run
it
is
necessary
to
pay
to
secure
the
utilities
demanded
by
the
public.
It
is
the
amount
that
will
secure
an
equilibrium
between
de-
mand
and
supply.
In
the
case
of
a
commodity
requiring
a
large
fixed
investment
the
determination
of
a
normal
cost
of
production
is
a
complex
process,
in
the
working
out
of
which
there
is
room
for
a
wide
divergence
of
opinion.
To
the
normal
cost
of
labor
and
materials
there
must
be
added
a
fair
estimate
for
depreciation
and
a
fair
return
on
capital
cost.
The
determination
of
a
normal
return
upon
a
normal
capital
cost
requires
the
determination
of
two
very
difficult
and
complex
problems:
(1)
What
is
the
amount
of
the
normal
capital
cost,
and,
(2)
what
constitutes
a
normal
return on
such
amount.
Normal
capi-
To continue reading
Request your trial