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Alternative Rate of Return Concepts and Their Implications for Utility Regulation

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  • Ezra Solomon

Abstract

The rate of return on invested capital is a widely used concept in both regulated and unregulated sectors of the economy. It provides a measure of actual performance as well as required or expected performance (the latter is often termed the "cost of capital"). In the utility field, regulatory agencies often focus on the rate of return as a major instrument for assessing and controlling the performance of firms under their jurisdictions. Unfortunately, two altogether distinct units are employed for measuring rate of return: (1) book rate units and (2) discounted cash flow units. Rarely will the two produce the same result, and the use of one measure as a surrogate for the other may prove highly misleading. This paper indicates the relationship between the two measures and shows the impact of some variations in depreciation and expensing procedures, growth rate, etc. The object is to point out the potential hazards associated with the use of measures of different things in a context that requires the use of measures of the same thing.

Suggested Citation

  • Ezra Solomon, 1970. "Alternative Rate of Return Concepts and Their Implications for Utility Regulation," Bell Journal of Economics, The RAND Corporation, vol. 1(1), pages 65-81, Spring.
    • Handle: RePEc:rje:bellje:v:1:y:1970:i:spring:p:65-81
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    1. repec:dgr:rugsom:00e42 is not listed on IDEAS
    2. Mirucki, Jean, 1980. "Vérification des conditions d'efficacité dans la production chez Bell Canada [Checking the conditions of efficient production in Bell Canada]," MPRA Paper 30147, University Library of Munich, Germany, revised Jun 1980.
    3. Mirucki, Jean, 1980. "Comportement de l'entreprise réglementée: étude de l'hypothèse Averch-Johnson [Behavior of the Regulated Firm: A Study of the Averch-Johnson Hypothesis]," MPRA Paper 27669, University Library of Munich, Germany, revised 1982.
    4. Feenstra, D.W. & Wang, H., 2000. "Economic and accounting rates of return," Research Report 00E42, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    5. Eskil Goldeng & Leo A. Grünfeld & Gabriel R. G. Benito, 2008. "The Performance Differential between Private and State Owned Enterprises: The Roles of Ownership, Management and Market Structure," Journal of Management Studies, Wiley Blackwell, vol. 45(7), pages 1244-1273, November.

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