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of the proposal to a real-world firm of a present size
of, say, $800 million of total assets, in the first
ten years?

Slide 21

Since the model, for convenience in computation, started at the base period with the relatively small stock of vintaged assets with a value of $79,569 and since the model assumes equally applicable relationships for firms of any size, the schedule in the exhibit converts revenues and sources and uses of funds for ten years, to that which would be applicable to a firm with base period assets of $100 million. It is then easily possible to again convert this schedule, for the $100 million asset firm, to one applicable to any size firm by applying an appropriate scale factor.

If we then assu me than an $800 million asset firm were permitted to apply one of the suggested proposals and that all other conditions and assumptions were in order, the significant changes with respect to revenues and sources and uses of funds, occuring over the first ten years, would be as shown on the exhibit.

Slide22

As Exhibit III indicates, a firm of $800 million of assets, under the conditions and assumptions given, which converted to the price-level (taxable) depreciation policy would collect an additional $242 million of revenue during the first ten years. This is a 4.63 percent increase over

the amount that would have been collected under the con

ventional procedure.

Of greater interest is the fact that some $350 million of additional cash-flows would be provided by the excess

1 Funds provided by the excess reserve properly exceed the increase in gross revenue because of a series of rather complex interactions in the model involving lesser required return on smaller rate base, plus and minus various tax effects arising from the differences in: return on rate base, inclusion of the price-level depreciation increment, and difference in interest.

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reserve, arising from the additional depreciation increment during this period. These funds would be offset, partially by a decrease of $37 million in contribution from retained earnings, but more importantly by lesser new debt requirements of $210 million and lesser new stock requirements of $103 million during the decade. This would appear to go far toward eliminating the problems which utilities have faced during recent periods in selling new issues. Slide 23

It should also be kept in mind that, as previously shown by Exhibit I (the tables) and Exhibit II (the graphs) the increased revenue under the price-level (taxable) program begins declining sharply after ten years and diminishes to practically nothing after 20 years. Also, that while the ratio of the excess reserve to total assets levels out at about the same time, the absolute amount of the excess reserve continues to grow and provides additional financing for the firm, even when customers' rates are no higher than they would have been under the historical cost system.

The key to the desirability of the proposed system is the self-perpetuating nature of the financing mechanism, once the objection to initially higher customer rates has been overcome.

When extended from one firm to the entire industry, the impact of this curtailment of financing problems is enormous.

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Slide 23

QUOTES FROM THE TEXT:

"It should be kept in mind that...

the increased revenue under the price-level (taxable) program begins declining sharply after ten years and diminishes to practically nothing after 20 years,

...

also, that while the ratio of the excess reserve to total assets levels out at about the same time, the absolute amount of the excess reserve continues to grow,

the key to the desirability of the proposed system is the self-perpetuating nature of the financing mechanism, once the objection to the initially higher customer rates has been overcome

...

when extended from one firm to the entire industry, the impact of this curtailment of financing problems is enormous.

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