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Fair Value Versus Original Cost Rate Base Valuation During Inflation

Author

Listed:
  • Walter J. Primeaux Jr.
  • Edward L. Bubnys
  • Robert H. Rascke

Abstract

Valuation of public utility property for rate-making purposes has been controversial since the beginning of public regulation. Despite much academic research and practical experience, there is no consensus of academicians or practitioners concerning the appropriate value of physical property used for providing service to customers. In public utility rate making, the value of this physical property, net of depreciation, is called the rate base. An important question is how well regulatory processes adjust the rate base for price level changes during periods of inflation. Statutes of the individual states determine how public utility property will be valued for rate-making purposes. Three basic methods are employed. Original cost jurisdictions set the rate base at the value of the property when it was first installed in a public utility application; the fair value method attempts to adjust the base to a level that more correctly reflects its current value; and the reproduction cost approach tries to establish a value that would permit reproduction of the property. Because the reproduction cost approach is not now being used by any state, this study focuses on the original cost and fair value methods.

Suggested Citation

  • Walter J. Primeaux Jr. & Edward L. Bubnys & Robert H. Rascke, 1984. "Fair Value Versus Original Cost Rate Base Valuation During Inflation," The Energy Journal, , vol. 5(2), pages 93-108, April.
    • Handle: RePEc:sae:enejou:v:5:y:1984:i:2:p:93-108
    DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-6
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    References listed on IDEAS

    as
    1. C. O. Ruggles, 1924. "Problems of Public-Utility Rate Regulation and Fair Return," Journal of Political Economy, University of Chicago Press, vol. 32(5), pages 543-543.
    2. Primeaux, Walter J, Jr, 1978. "Rate Base Methods and Realized Rates of Return," Economic Inquiry, Western Economic Association International, vol. 16(1), pages 95-107, January.
    3. Rock, Steven M, 1979. "Rate Base Methods and Realized Rates of Return: Comment," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 297-299, April.
    4. Robert L. Hagerman & Brian T. Ratchford, 1978. "Some Determinants of Allowed Rates of Return on Equity to Electric Utilities," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 46-55, Spring.
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