A utility company is allowed to charge prices high enough to cover all costs, including its cost…
A utility company is allowed to charge prices high enough to cover all costs, including its cost of capital. Public service commissions are supposed to take actions that stimulate companies to operate as efficiently as possible in order to keep costs, and hence prices, as low as possible. Some time ago, AT&T’s debt ratio was about 33%. Some individuals (Myron J. Gordon, in particular) argued that a higher debt ratio would lower AT&T’s cost of capital and permit it to charge lower rates for telephone service. Gordon thought an optimal debt ratio for AT&T was about 50%. Do the theories presented in the chapter support or refute Gordon’s position?
