Valuation and Rate-Making. Robert L. Hale
Journal of Political Economy
One is the distinction between valuation as a record of fact and valuation as an attempt to solve the question of policy or of fairness and decide what value should reasonably be allowed to the owners of public-service properties. A second is the distinction between fair policy with reference to the past, in the light of past uncertainties in court decisions and the absence of an announced program on the part of government, and policy for the future in case some definite theory can be adopted
... ry can be adopted and a program announced. Paralleling this runs the dis? tinction between the incentive theory of control, which might justly be adopted for the future, and the theory of equality of treatment between regulated and unregulated businesses, which plays a large part in con? sidering the question of fairness to the present owners of property invested in the past. The author finds the rationale underlying many cases of the cost-ofreproduction type of valuation in the attempt to record a fact, namely, the "exchange value of the physical property" as distinct from the property as a whole. The value of the property as a whole, being based on earnings, cannot be used as a standard on which to determine what fair earnings are. The market value of the physical property, on the other hand, is taken to be what the company possessing the rights to operate would pay to an owner not in possession of those rights. This could not be more than the total earnings-value of the property as a going concern, nor more than what it would cost to produce a substitute plant "which, from the point of view of revenue production, would be equally efficient." Not all cases under the cost-of-reproduction theory could be squared with this principle. Indeed the idea of cost of repro? duction under original conditions, the author holds, does not belong in spirit with the cost-of-reproduction theory at all, but is rather a method of getting at the original cost of the existing property, as far as that was reasonably and properly incurred. 71 This content downloaded from 080.082.