Berkson, Pincus M.

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Public Utility Valuation for Purposes of Rate Control (Book Review)

St. John's University School of Law

St. John's Law Review Volume 10 Number 1 Volume 10, December 1935, Number 1 Article 40 May 2014 Public Utility Valuation for Purposes of Rate Control (Book Review) Pincus M. Berkson Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Berkson, Pincus M. (1935) "Public Utility Valuation for Purposes of Rate Control (Book Review)," St. John's Law Review: Vol. 10 : No. 1 , Article 40. Available at: https://scholarship.law.stjohns.edu/lawreview/vol10/iss1/40 This Book Review is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact selbyc@stjohns.edu. BOOK REVIEWSwould seem to be the approach which should lead to the formulation of such anew technique, based upon non-interference by the courts with legitimate tradeunion organization, activity and collective bargaining.MATTHEW M. LEvY.New York City.PUBLIC UTILITY VALUATION FOR PuRPosEs OF RATE CONTROL. By John Bauerand Nathaniel Gold. New York: The Macmillan Company, 1934, pp.xxii, 477.There are two methods open to the law writer who would make anyworthwhile contribution to any branch of law: one is by compiling, arrangingand analyzing in convenient form the controlling cases relating to that branchof law; the other is by presenting the subject matter from a critical standpointin order to reform the law in some particulars by pointing out the errors intowhich it has fallen and making constructive suggestions by way of substitution.The latter kind of book is the more valuable contribution. Such is the bookunder review. It deals with the subject of valuation, the most vital phase ofrate control. Its aim is not only to state what the law is, but what it oughtto be. It examines the adjudicated cases, presents the historical developmentof the principles of law evolved by the Supreme Court, shows how theirapplication to administrative action has rendered rate regulation ineffective,and finally presents a plan of revision designed to remedy existing defects.Part I sets forth how the "fair value" concept evolved. The division ofits historical development into three periods is both novel and helpful. Eachperiod is set off against the background of economic and social forces thatimpelled the legislative or administrative action that came up for judicialreview. The judicial determinations assume added significance when read inthe light of the conflicting public and private interests which the courts aimedto satisfy and safeguard. The historical background also helps to explain theinability of the courts, in the absence of direct legislative sanction, to evolve asystematic method of valuation for purposes of rate control.This latter phase, however, is overemphasized by the authors at theexpense of a comprehensive analysis of adjudicated cases. In this respect, thebook shares the failing of a great deal of the literature dealing with rate basevaluation. So much is usually said about the shortcoming of the conventionalmethod of valuation that not enough is said of the law itself. As an exampleof what the reviewer has in mind, mention may be made of the basic judicialconcept that underlies most, if not all, the decisions involving valuation pro-cedure and determinations, i. e., that the courts will not sanction "any rule orformula which changed conditions might upset" but will require that all deter-minations of "fair value" be a matter of sound judgment, involving factdata.' The authors fail to analyze or trace the development of this often' Los Angeles Gas & Electric Corp. v. Railroad Commission of California,289 U. S. 287, 53 Sup. Ct. 637 (1933).1935 ]ST. JOHN'S LAW REVIEWapplied judicial criterion of validity of method or result. Yet a clear under-standing of it is not only essential to a proper knowledge of the law relatingto valuation, but is a helpful guide in formulating new methods of propertyvaluation or to test the validity of any proposed plan or the determination ofany rate proceeding. As one reads the recent decision in the case of West v.Chesapeake & Philadelphia Telephone Company" the question comes to mindwhether the action of the Maryland Commission would not have been more inharmony with established law and the court's decision would not have beendifferent if the Commission had adopted price trend indices as an exercise ofjudgment rather than as a mathematical rule of thumb that seems to haveexcluded independent judgment.The foregoing strictures, however, do not apply to Part II of the book,which is procedural in scope. The collaboration of the authors, one an econo-mist and the other a lawyer, each an expert in the utility field, and bothexperienced in rate-making procedure, shows to best advantage. The problemsof accountancy, engineering and business economics that dog every step invaluation procedure, are clearly and tersely presented. The treatment of thecontroversial subject of depreciation is an illustration in point. The reviewerknows of no single treatment of this subject that gives a more concise yetcomprehensive and clear analysis of the technical problems of structural andfunctional factors of depreciation or of the significance of the accountingprocedure involved in allocating accruing and accrued depreciation than thatfound in the chapter on depreciation.This admirable treatment is also carried over to the legal phases ofdepreciation. The analytical digest of decisions relating to depreciation thoughbrief is clear and adequate. However, one very vital phase of depreciation isoverlooked. It was presented but not passed upon in the case of Lindheiner v.Illinois Bell Telephone Company.3 It involves the harmonizing of judicialconcepts with accounting practice. One of these concepts requires that autility earn a fair return on the present value of the property at the time ofits use; the other, the "value of service" concept, requires that the ratepayer becharged only the present worth-no more and no less-of the service receivedat the time it is rendered.' Under the straight-line method of accounting,depreciation reserves are accumulated not on the basis of replacing the propor-tion of property actually consumed during any particular rate-making periodbut in anticipation of the ultimate retirement and replacement of the unit ofproperty. Query. What should be done with the excess reserves accumulatedby the straight-line method of accounting? Should the future consumer orthe investor have the benefit of the excess which the accumulated reserves bearto the depreciation actually existing at the time of valuation of the rate baseupon which a fair return for the future is determined? The authors whollyignore this perplexing yet vital depreciation problem.Part III presents suggested changes designed to remedy the defects in thepresent system and to make rate control more effective and equitable. Brieflystated, the authors propose to have the legislature provide by statute for an255 Sup. Ct. 894 (1935).3292 U. S. 151, 54 Sup. Ct. 658 (1934).' Public Utility Commissioners v. New York Telephone Co., 271 U. S. 23,46 Sup. Ct. 363 (1926).I VOL. 101935] BOOK REVIEWS 197initial revaluation of properties by the conventional method of valuation andthereafter to permanently keep such valuation, subject, of course, to deprecia-tion charges, while new investments are to be entered and appraised in termsof definite agreements made between the company and the investors furnishingthe funds and approved by the regulatory commission. The property rate baseat any time would consist of the sum of the property account balances lessthe amount of depreciation reserve and would constitute a fixed rate base uponwhich a definite rate of return would remain fixed so long as the propertyremains in service.For administrative purposes, the proposed plan furnishes a formula thatis stable, definite and easy of application. But will it pass judicial muster?The authors believe that if the legislature clearly defines public policy in termsof the public need for effective administration rate regulation and then adoptsthe proposed plan to effectuate such public policy, the courts would uphold itsconstitutionality. Unfortunately, the authors did not have the advantage ofknowing the recent decision of the Supreme Court in the West case, supra.The court there held that the method of applying price trend indices as of1932 to a rate base fixed in 1923, as a substitute for such factors as historicalcost and reproduction cost was "inapt and improper, is not calculated to obtaina fair or accurate result and should not be employed in the valuation of utilityplants for rate making purposes." The case reaffirms what has been repeatedlyheld, i. e., that neither legislatures nor commissions may substitute for theexercise of sound judgment in determining present value of existing propertyany rule of thumb or mechanical formula which changed conditions mightupset. Does not the proposed plan come within the condemnation of the Westcase, stpra? Suppose, by way of illustration, that a period of inflation followsthe establishment of a fixed rate base as outlined by the authors, would not afixed rate of return on a fixed rate base, in the light of reduced purchasingpower of money, produce an unfair result and prove confiscatory?Any proposed revision of law in respect to the valuation of existing invest-ment, to be sound, must keep within the bounds of adjudicated cases. The valueof the proposed plan as to existing property would have been enhanced if theauthors developed it within the limits of settled law. The case of Lindheimerv. Illinois Bell Telephone Company, snpra, offers a new avenue of approach.It sets up the actual earning experience of the company as the dominant if notthe decisive factor in determining the reasonableness of rates. The newlyenacted statutory methods for fixing temporary rates on the basis of originalcost less accrued depreciation affords another device for attaining some of theobjectives which the authors deem desirable. Yet both the standard used inthe Lindheinter case and the new method for fixing temporary rates are whollyignored. Even as to the proposed plan, the authors do not cite any cases insupport of their position but content themselves with a discussion of generallegal principles.Yet, notwithstanding all the criticism that may be leveled against parts ofthe book, this fact remains: It marks a valuable contribution to thesolution of an increasingly pressing legal, economic and political problem.Perhaps no one author or group of authors can satisfactorily solve it, at one198 ST. JOHN'S LAW REVIEW [VOL. 10time. It will require the combined efforts of those responsible for making,administering and interpreting the law. This very instructive and highlystimulating book has much to offer to each group.PINCUS M. BERKSON.New York City.BOOKS RECEIVEDCASES AND MATERIALS ON THE LAW OF MUNICIPAL CORPORATIONS. By E.Blythe Stason. St. Paul: West Publishing Co., 1935, pp. xxix, 761.CASES ON FEDERAL JURISDICTION AND PROCEDURE. By Armistead M. Dobie.St. Paul: West Publishing Co., 1935, pp. xxxix, 803.CASES ON THE LAW OF TORTS. Second edition. By Charles M. Hepburn andArchibald H. Throckmorton. St. Paul: West Publishing Co., 1935, pp.xxxi, 1071.CONSTITUTIONAL GOVERNMENT IN THE SPOTLIGHT. By William H. Hirst. NewYork: Fleming H. Revell Co., 1935, pp. 200.CORPORATION LAW FOR OFFICERS AND DIRECTORS. By William J. Grange. NewYork: The Ronald Press Co., 1935, pp. xxx, 904.DOMINION OF CANADA, INCOME AND WAR TAX ACT. Chicago: CommerceClearing House, Inc., 1935, pp. 64.HIDDEN TAXES IN CORPORATE REORGANIZATIONS. By Arnold R. Baar andGeorge Maurice Morris. Chicago: The Foundation Press, Inc., 1935, pp.xv, 547.NEW DEAL DECISIONS. Chicago: Commerce Clearing House, Inc., 1935, pp.101.RESTATEMENT OF THE LAW OF TRUSTS. Two volumes. St. Paul: AmericanLaw Institute Publishers, 1935, pp. xxxii, 1-808; xxiv, 809-1496.RUSSIAN JUSTICE. By Mary Stevenson Callcott. New York: The MacmillanCo., 1935, pp. x, 265.THE EARLMST NORWEGIAN LAWS. By Laurence M. Larson. New York:Columbia University Press, 1935, pp. ix, 451.THE INTERNATIONAL PROTECTION OF LABOR. By Boutelle Ellsworth Lowe.New York: The Macmillan Co., 1935, pp. lxxiii, 594.

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Public Utility Valuation for Purposes of Rate Control (Book Review)

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