THE FIXING OF RATES 3
“ The actual rates which may have been charged heretofore,
and the actual earnings, are both admissible and material in
determining the value of the plant. The value of the evidence,
however, will depend upon whether the appraisers shall find that
the rates charged have been reasonable.”
The Basis of the Calculation when Rates are to be Fixed. —
Enough has been said to show that, when an appraisal is to be
made as a basis for establishing the rates to be charged for the
commodity or the service output of a public utility, something
else is needed besides value. The starting point in the last
analysis is not the value of the property, but the amount of the
legitimate investment necessary to establish the business sup-
plemented by the volume of the business transacted. The
legitimate investment is not necessarily the actual cost of con-
structing and developing the property and bringing it to a paying
basis, but it is the amount which may reasonably be assumed to
have been properly and legitimately invested in the public ser-
vice. This amount may for convenience be called the * rate-
base,” and as here defined is to be distinguished from “ value.”
It is to be understood that this definition of the rate-base is
more or less academic and has not yet obtained general recog-
nition. The ordinary practice has been to attempt to make
“ present value ” the basis of the calculation when fixing rates.
The endeavor to do this, with inclusion in the amount on which
an interest return is to be computed, of certain elements of
value which can have no existence unless created by adequate
earnings, has met with only indifferent success and has led the
rate-fixing bodies into much confusion from which there now
appears to be a strong desire to escape.
The “ rate-base,” as thus defined, may include some or all of
the cost of establishing and developing the business. It would
be unwise to lay down an inflexible rule that the entire cost of
establishing and developing the business should be included in
the rate-base because any such rule would result in placing a
premium upon inefficient management. The aim should be to
include a reasonable allowance for this item which in one case
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