Robert L. Hale

THE "PHYSICAL VALUE" FALLACY IN RATE CASES

Physical value is a term frequently used by the expert as a synonym for cost of reproduction less depreciation. To the unsophisticated, however, the term implies the rock-bottom sum on which a utility should be allowed to earn a fair return; it seems to denote a fundamental fact; a reduction of rates to the point where they yield a fair return on this quantity seems to squeeze out ruthlessly whatever water there may be in the property. To reduce them further is thought to be not only unconstitutional, but unthinkable-it is to fly in the face of some physical law as immutable as the law of gravitation (in pre-Einstein days). 1 Yet this sanctity and certainty of the physical value theory of rates, it is submitted, is the result of loose reasoning, and serves merely to divert the time, attention, and funds of regulating bodies out of their proper channels into one of the most unreal fields of speculation in which the minds of metaphysicians have disported themselves since the days of the medieval schoolmen. The reproduction cost theory is a survival from an earlier doctrine which turned out to involve an obvious logical fallacy. Whether or not the modified theory avoids the fallacy, it certainly avoids the reason which led to the adoption of its predecessor. It has been bolstered up after the fact, however, by a number of other arguments, each one of which, on close examination, turns out to possess merit rather for its faith in the courts than for its works in the realm of reason.