Equity flotation cost adjustments in utilities' cost of service

Recovery of the unavoidable costs of issuing new shares of stock is generally agreed to be appropriate in determining utility revenue requirements. This article suggests that the methods by which that is usually accomplished are of questionable accuracy. The conventional practice of adjusting the allowed rate of return on common equity is examined, and an improved adjustment formulation is presented. Acknowledging that application of the formula remains subject to considerable error, however, the authors propose yet another solution. Capitalization of flotation costs as intangible assets is suggested as a way of more accurately factoring such expenses into tariff determinations. 6 references.