Rate-base valuation methods and firm efficiency

The economic performance of public utilities under different rate-base valuation methods is examined in this paper. A unique procedure, involving Ordinary Least Squares regression analysis, examined data for all usable firms in states which have changed rate-base methods since World War II. The sample consists of 20 electric firms extending over 30 years of time-series data. Equations for individual firms were run to capture the effects of changes on rate-base methods on capital intensity and capacity utilization on each separate business. Contrary to expectations, there was no clear pattern indicating that firms in the sample increased the rate of capital intensity when their rate-base method was changed to fair value from original cost. Similarly, expected excess capacity was not found under fair-value regulation. The general conclusion is that there is no reason to believe that different rate-base valuation methods induce allocative inefficiency. Nevertheless, inefficiency may already exist in regulated monopolies in the form of X-inefficiency.