THE FAIR RATE OF RETURN IN PUBLIC UTILITY REGULATION

By Nelson Lee Smith (Dartmouth 1921).Houghton, Mifflin Company, Boston,1931. pp. 334. Volume 51 in Hart, Schaffner if Marx Prize Essay Series.

The author had the uncommon courage and unusual vision to choose this difficult and very live topic for his "doctoral thesis." As such, it received a Hart, Schaffner & Marx prize in 1928. Enlarged and brought down to date, it is now published in book form.

The book is not one for the lay reader. In addition to the inherent and unavoidable complexities of the subject, it is written in the style and terminology of the professional economist, than which there is none more difficult for the way-faring man to grasp. No doubt it was intended primarily for the perusal of this group. If, however, one is undaunted by this obstacle and breaks through it, he will find the treatment of the subject vigorous, thoughtful and courageous; and backed up by a wealth of reference to statistics and decisions both of commissions and of courts.

Starting with the proposition that the "fair rate of return" has been unfairly overshadowed in the past by controversies about "fair valuation," the author proceeds to treat the "fair rate of return in a setting which gives prominence to the purposes and mechanisms of both public utility control and the industrial society as a whole."

That regulatory* control should be so aimed and exercised as to bring about, so far as may be, conditions of "ideal competition" is a motif which runs throughout the book. In order to effect this, the author contends that the work of regulatory commissions should cover a much wider range than is now the case, concern itself with a great deal of collateral economic data, be not so fond of "round numbers," and be prepared to revise its conclusions frequently as new economic data appear. One wonders whether this is not a counsel of perfection, and whether the results of such meticulous investigation would be worth their cost, either to the public or to the utility. There would seem to be the danger that this type of control would result in the over-regulation which the author is careful to say ought to be avoided, just because his ideal is that of "ideal competition."

With some of the specific conclusions it is difficult to agree completely. For example, that reward for increased technical efficiency (which I suppose includes scientific progress) should not form any part of the elements to be considered in determining a "fair return." Is it not the investment of large amounts of capital furnished by the stockholders which has made possible such strides in science as those which have been taken in the laboratories of such companies as the American Telephone and Telegraph Company? And does not such a policy per se entitle such a company to a higher rate of return than might be considered in dealing with such a company as, let us say, the Grafton County Electric Light and Power Company? The author's assertions to the contrary are unconvincing.

But it is not necessary to agree with every point made and every conclusion reached in order to recognize and acclaim this piece of work as an unusually fine and scholarly production. Indeed, the author's own conclusions are put forward without dogmatism, and in a very tentative and modest manner; and no doubt he would be the first to say that the book is to be regarded as a foundation on which later structures can be reared, rather than as a completed edifice.