Admissible Rate Bases, Fair Rates of Return and the Structure of Regulation

A CENTRAL QUESTION in the theory of regulation is what constitutes a "fair" return on a utility's assets. The current legal answer is that provided by the Supreme Court in its Hope Natural Gas decision. A "fair" return should be "commensurate with returns on investment in other enterprises having corresponding risk" (the comparable return standard) and sufficient to "attract capital"l (the capital attraction standard). Unfortunately, in practice these guidelines are ambiguous and, as a result, are not uniformly applied. In one sense, they are definitional. There is an emerging consensus that a "fair" percentage rate of return should equal a utility's market determined "cost of capital."2 However, the Hope Decision did not specify how the value of a utility's assets, to which the "fair" percentage return could be applied, was to be calculated. This paper