Cite as: 535 U. S. 467 (2002)
Opinion of the Court
popular method for calculating fair value under Smyth, see n. 5, supra, and the Federal Power Commission's rejection of "trended original cost" (apparently, a straight-line derivation from the cost of capital originally invested) in favor of "actual legitimate cost," Hope Natural Gas, supra, at 596. Still, over time, general agreement developed on a method that was primus inter pares, and it is essentially a modern gloss on that method that the incumbent carriers say the FCC should have used to set the rates at issue here.
The method worked out is not a simple calculation of rate base as the original cost of "prudently invested" capital that Justice Brandeis assumed, presumably by reference to the utility's balance sheet at the time of the rate proceeding. Southwestern Bell Telephone Co., 262 U. S., at 304-306. Rather, "cost" came to mean "cost of service," that is, the cost of prudently invested capital used to provide the service. Bonbright 173; P. Garfield & W. Lovejoy, Public Utility Economics 56 (1964). This was calculated subject to deductions for accrued depreciation and allowances for working capital,7 see Phillips 282-283 (table 8-1) ("a typical electric utility rate base"), naturally leading utilities to minimize depreciation by using very slow depreciation rates (on the assumption of long useful lives),8 and to maximize working capital claimed as a distinct rate-base constituent.
7 Operating cash, inventory, and accounts receivable constitute typical current assets. Current liabilities consist of accounts payable, such as taxes, wages, rents, interest payable, and short-term debt. Because, for example, accounts receivable may not be collected until after liabilities come due, working capital is capital needed to pay current liabilities in the interim. Z. Bodie & R. Merton, Finance 427 (prelim. ed. 1998).
8 For example, in 1997, regulated incumbent local-exchange carriers had an average depreciation cycle of 14.4 years for their assets (an average depreciation cost of $127 per line as against gross plant investment of $1,836 per line), roughly twice as long as the average cycle of 7.4 years for unregulated competitive carriers like Worldcom. Weingarten & Stuck, Rethinking Depreciation, 28 Business Communications Review 63 (Oct. 1998).
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