Rate of Return Regulation Calculation

R= (B x r) + E + d + T

R=Revenue Requirement: The amount of revenue the regulated-monopoly requires in order to cover its costs in their entirety

B=Rate Base: The amount of capital and assets the regulated-monopoly utilizes in order to provide its services

r=Government Permitted Rate of Return: The cost the regulated-monopoly incurs to finance its rate base including debt and equity

E=Operating Expenses: The cost of supplies including capital and labor used on a short-term basis (usually one year) in order to provide services (does not include initial investments included in base rate such as cost of supplies to build plant)

d=Depreciation Expense: The annual amount the regulated-monopoly spends on accounting for depreciation of its capital

T=Taxes: Those taxes not included in operating expenses and not charged directly to customers

Government regulators use this formula in order to ascertain the proper rate of return regulated firms should be permitted to have.

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