VALUE

FOR

RATE-MAKING

VALUE

FOR

RATE-MAKING

BY

HENRY FLOY, A. B., M. A., M. E.

CONSULTING ENGINEER, FELLOW AMERICAN INSTITUTE OF ELECTRICAL ENGINEERS,
MEMBER AMERICAN INSTITUTE OF CONSULTING ENGINEERS, AMERICAN SOCIETY
OF CIVIL ENGINEERS, AMERICAN GAS INSTITUTE, ILLUMINATING ENGI-

NEERING SOCIETY, AMERICAN WATER WORKS ASSOCIATION, NEW
YORK ELECTRICAL SOCIETY, AUTHOR OF "VALUATION

MCGRAW-HILL BOOK COMPANY, INC.
239 WEST 39TH STREET, NEW YORK

6 BOUVERIE STREET, LONDON, E. C.

F65

COPYRIGHT, 1916, BY THE
MCGRAW-HILL BOOK COMPANY, INC.

THE MAPLE PRESS. YORK.PA

PREFACE

At the present time, probably the majority of valuations of public utility property are being made in connection with a consideration of rates. But different authorities still hold various and conflicting views as to the principles involved in determining the basis of value for rate-making.

With the hope of helping define methods used and standardizing practice in valuation procedure, the author brought out, four years ago, the first book that had appeared relating to the general subject, "The Valuation of Public Utility Properties." Since that time, several other books have been published, many papers written and much discussion elicited, due to the development of a rapidly increasing general interest in the subject of valuation of utility properties, for the purposes of purchase or sale, ratemaking, taxation or capitalization. Despite this activity, it is a disappointment to observe that terms are still used inexactly and opinions are almost as diverse and numerous as there are writers.

The purpose of this book is an attempt to further emphasize at least three principles that seem to the author to be essential in determining the fair value for use in fixing rates.

First. To conform to the rulings of the courts the basis for rate-making should be the fair present value of the property used, regardless of the amount of the original investment in utilities established previous to the present public regulation régime.

Second.-Present value for rate-making is obtained by making deduction for absolute depreciation only; ignoring theoretical depreciation. Absolute depreciation being that deterioration which is in evidence, existing and determined by inspection. Theoretical depreciation being estimates only, based on assumptions and computations.

Third.-Practically every utility property includes certain intangible non-physical elements, which should be evaluated and allowed in addition to the material, sensible elements. The value of the non-physical parts may vary from a few per cent.

33804