Regulation: Rate of Return
ENCYCLOPEDIA OF ENERGY ENGINEERING AND TECHNOLOGY, Vol. 3, ed., Barney Capehart, pp. 1252-1257. New York: CRC Press, Taylor and Francis, 2007
Posted: 30 Jun 2008 Last revised: 20 Dec 2008
Rate of return regulation adjusts overall price levels according to the operator's accounting costs and cost of capital. In most cases, the regulator reviews the operator's overall price level in response to a claim by the operator that the rate of return that it is receiving is less than its cost of capital, or in response to a suspicion of the regulator or claim by a consumer group that the actual rate of return is greater than the cost of capital. Critical issues for the regulator include how to value the base, whether to add investments to the rate base as they are made or when the facilities go into service, the amount of depreciation, and whether expenditures have been prudently made and whether they relate to items that are used and useful for providing the utility service.
Keywords: rate of return, asset, rate base, earnings, cost, revenue, prudent, used and useful
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