Rate Base (energy)
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Rate base is the value of property on which a
public utility A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and r ...
is permitted to earn a specified
rate of return In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment, such as interest payments, coupons, ca ...
, in accordance with rules set by a
regulatory agency A regulatory agency (regulatory body, regulator) or independent agency (independent regulatory agency) is a government authority that is responsible for exercising autonomous dominion over some area of human activity in a licensing and regulatin ...
. In general, the rate base consists of the value of property as used by the utility in providing service. It may be calculated by any one or a combination of accounting methods, such as
fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated wi ...
, prudent investment, reproduction cost, or original cost. The rate base can include: cash,
working capital Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...
, materials and supplies, deductions for accumulated provisions for
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...
, contributions in aid of construction, customer advances for construction, accumulated deferred
income taxes An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
, and accumulated deferred
investment tax credit A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or a form of state "disc ...
s, all dependent on the method that is used in the calculation. An emerging question facing utility regulators in some states is whether
cloud computing Cloud computing is the on-demand availability of computer system resources, especially data storage ( cloud storage) and computing power, without direct active management by the user. Large clouds often have functions distributed over mul ...
software should be included in rate bases. Conventional
software Software is a set of computer programs and associated documentation and data. This is in contrast to hardware, from which the system is built and which actually performs the work. At the lowest programming level, executable code consists ...
, in which a company purchases and installs the program on hardware that it own, generally is included, but most regulators do not allow a rate of return on cloud software.


Depreciation

In a period of static costs or no inflation, an original cost valuation may be sufficient. With a period of inflation, a rate base which values plant and equipment at original cost substantially undervalues the plant. In these circumstances, utilities argue in favor of reproduction-cost valuations. In either case, depreciation on plant and equipment is subtracted from the rate base and carried as an operating expense. The theory behind including depreciation as an expense is that capital may be accumulated for further expansion and growth. The utility's
rate of return In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment, such as interest payments, coupons, ca ...
(a ratio of net
operating income In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses. Operating income and op ...
earned) is calculated as a percentage of its rate base.


References

{{Reflist, 2 Public utilities of the United States Real estate valuation