Ex ante rates of return for regulated utilities

Journal Article · Sun May 01 04:00:00 EDT 1977 · Land Econ.; (United States)

DOI:https://doi.org/10.2307/3145922· OSTI ID:7108260

Sherman, R

Carleton (Land Economics, 50: 145-51 (May 1974)) demonstrated some subtle difficulties in the rate-of-return regulation of public utilities. Accounting rather than genuine opportunity costs influence the rates that are set. And because there is no way to undo the consequences whenever regulatory lag prevents immediate adjustments to changes in the cost of capital, there simply is no way to reflect genuine market effects on firms' values. The main cause of these difficulties demonstrated by Carleton is the impossibility of continuously maintaining through administrative machinery an allowed rate of return in real terms. But the regulatory task is also made more difficult by the fact that a mixture of nominal and real returns is supposed to determine the allowed rate of return, according to the influential Hope Natural Gas Co. decision (FPC vs. Hope Natural Gas Co. (1944)). The author illustrates the role of this latter provision by contrasting the effects of a change in bond interest rates on a regulated versus an unregulated firm. And, to avoid the consequent difficulties, he suggests an alternative regulatory procedure similar to that proposed by Justice Brandeis in the Southwestern Bell Telephone Co. case (1923). He proposed reliance on nominal rather than real returns in public utility regulation; the author urges negotiation of returns on an ex ante rather than an ex post basis.

• Research Organization: Univ. of Virginia, Charlottesville
• OSTI ID: 7108260
• Journal Information: Land Econ.; (United States), Journal Name: Land Econ.; (United States) Vol. 53:2; ISSN LAECA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200* -- Energy Planning & Policy-- Economics & Sociology
293000 -- Energy Planning & Policy-- Policy
Legislation
& Regulation
CAPITAL
FINANCING
INCOME
PUBLIC UTILITIES
REGULATIONS