Valuation, depreciation and the rate base

Bibliographic data

Monograph

Identifikator:: 174667931X

URN:: urn:nbn:de:zbw-retromon-119897

Document type:: Monograph

Author:: Grunsky, Carl Ewald http://d-nb.info/gnd/10180959X

Title:: Valuation, depreciation and the rate base

Edition:: 2. ed., revised and extended

Place of publication:: New York

Publisher:: Wiley

Year of publication:: 1927

Scope:: X, 500 Seiten

Digitisation:: 2021

Collection:: Economics Books

Usage license:: Get license information via the feedback formular.

Chapter

Document type:: Monograph

Structure type:: Chapter

Title:: Chapter IX. Possible procedures when the rates for a public service are to be fixed

Collection:: Economics Books

166 VALUATION, DEPRECIATION AND THE RATE-BASE article. The annual amortization installment is estimated from the original cost of an article less residual value and its probable life, by dividing the cost less residual value by the number of years of probable life. This method, like any other amortiza- tion method, is justified on the theory of the immediate applica- tion of the annual depreciation installment to the retirement of capital. In this respect both this method and the Equal Annual Payment Method differ essentially from the Sinking Fund Method and from the Unlimited Life Method, under neither of which any retirement of invested capital is taken into consideration. Unlimited Life Method. — The “ Unlimited Life Method ” of procedure, when rates are to be fixed, is justified by the fact that public utilities may generally be regarded as having per- petual life and that, ordinarily, capital need not be retired un- less the property is to be purchased. A public service property taken in its entirety may be treated, therefore, as though it had unlimited life. The property is kept in good condition by the repair of its parts and by replacements, as these parts become useless and have to be discarded. No part of the investment, if there be unlimited life, need be returned to the owner, but as the plant grows old and one part after another has to be replaced, he must be allowed to recover in the earnings the cost of each article as replaced. It is on this principle that many complex and, particularly, publicly owned properties are operated. In the early years of the life of a property made up of many parts, such as rails and ties, the replacement requirements will be small. As the property acquires age, the replacements — pro- vided that extensions are relatively unimportant and negligible in comparison with the extent of the property under considera- tion — will gradually increase to nearly the amount indicated by the Straight Line Method. The departure from this amount will be dependent upon the annual extensions of the system in relation to the entire investment. There will be ultimate agree- ment between the replacement requirement and the amount estimated by the Straight Line Method if the plant is one that has ceased to grow. The valuation for rate-fixing purposes

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