Rate Base Selection and the Structure of Regulation

This article investigates the role played by rate base valuation rules in the context of rate of return regulation. It shows (1) that there is nothing inherently "fair" about any particular valuation rule, (2) that properly interpreted rate bases represent promises of future returns, (3) that valuation rules can be "fairly" selected from a very broad class, and (4) that, once this is recognized, rate of return regulation represents a highly effective and flexible means of avoiding the "dynamic consistency" problems associated with repeated regulatory reviews. In addition, the article investigates the nature of "optimal" rate base valuation rules.