Opinion ID: 1443207
Heading Depth: 1
Heading Rank: 2

Heading: Present Value Rate Base:

Text: Let us first examine the present value rate base theories as advanced during the testimony of the Utility's witnesses. It was asserted by Mr. Davis that there are in general two methods followed by engineers and economists in establishing the cost of a facility expressed in terms of the current purchasing power of the dollar. He testified that one is a determination of the cost of reproducing in new condition the exact facilities presently existing generally on the theorem that the property would be reproduced in its entirety as a single construction project (termed the reproduction cost method), and that the second method is the establishment of current nominal dollar cost of constructing existing facilities in new condition in a manner similar to that used by the company in the actual construction of its facilities. The reproduction cost new method, as explained by Mr. Davis, involves detailed inventory of plant and facilities in service; development of unit costs at current material prices and labor rates, to be applied to the inventory quantities; and establishment of appropriate engineering and administrative overhead charges which would be incurred in the event the theoretical construction of the property were to be carried forward on a single project or single impulse basis. He testified that this method is very expensive as it involves a tremendous volume of detailed work and because of this fact there has developed a tendency to the use of the other method. The actual cost related to current price method was described by this witness as one in which the actual costs of plant in service are adjusted by various appropriate methods, to reflect changes in the purchasing power of the dollar. He testified that the total original cost of plant in service of the Utility on December 31, 1949, (as computed by the Utility at $38,401,189) adjusted to reflect the reduced purchasing power of the dollar at the approximate levels existing during 1949 was $56,055,450, an average upward adjustment of 43 per cent over actual original cost. To derive a rate base on this method he testified that the gross value so derived must be reduced by an appropriate amount to reflect the actual loss in value incurred by physical deterioration, obsolescence, inadequacy, inability to meet changed conditions and requirements, and decline of economic usefulness due to loss of markets. Later in the proceedings he testified that if a present value rate base is adopted capital invested in the business over the period of its development is permitted to receive a return having a purchasing power substantially similar to that existing on the average over the period during which capital was committed to the business. And in discussing three types of rate base (historical cost or prudent investment, original cost, and present value), he testified that due to the wide fluctuations that have occurred in the purchasing power of the dollar it is not probable that the present value rate base would at any time be the same as either the original cost or the historical cost bases.