Efficient Income Measures and the Partially Regulated Firm

  • Shimon Awerbuch
Part of the Topics in Regulatory Economics and Policy book series (TREP, volume 3)


Utility company managers (and most business people) are often surprised to learn that accounting income and rate-of-return measures have little economic significance and do not offer much insight into the profitability of a venture or firm. Why the serious shortcomings of the accounting earnings measure are not more widely recognized is quite puzzling in view of the fact that the academic literature has been dealing with this problem for at least 25 years.1 So significant are the errors associated with the accounting rate of return (ARR), according to some researchers, that it “provide[s] almost no information about the [true] economic rates of return” of American corporations (Fisher and McGowan 1983, 82). Nonetheless, the ARR continues to be widely followed, and, in the regulatory context, forms the basis for ratemaking, a role for which it was certainly never intended and for which it is poorly suited (Awerbuch 1986, 20–21).


Public Utility Financial Account Standard Board Market Entrant Present Value Capital Recovery 
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© Kluwer Academic Publishers 1989

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  • Shimon Awerbuch

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