ABSTRACT
Rate-of-Return Regulation Rate-of-return regulation (RoR) was, until fairly recently, the dominant form of regulation for utilities like gas and electric as well as telecommunications services (see section 4.2). RoR is a cost-plus method of regulation in which the service provider is allowed to set its service prices at a level high enough to recover its expenses of providing service and to generate a profit adequate to pay its debts and to attract investors. The company’s expenses plus profit are known as its revenue requirement. Service prices are targeted to recover this revenue requirement. The RoR formula in which the revenue requirement is calculated is as follows:
Revenue Requirement = (Rate Base Accumulated Depreciation) × Allowed Return + Allowed Expenses
The RoR formula may appear to be simple and straightforward; its implementation, however, has tended to be contentious, with regulators, telephone companies, and various interest groups arguing over each element in the formula. In the RoR process, the burden is on the regulator to balance the interests of the subscriber-adequate service at just and reasonable prices-with the interests of the shareholder-adequate return to cover expenses, pay debt, and attract investors.
