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 ...
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 ...
, 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 regulat ...
. 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 ...
, 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