Question

Following the method outlined in the Jamison reading, calculate the revenue requirement for a utility company with a rate base of $50 million, a cost of equity of 20%, an equity financing proportion of 35%, and a tax rate of 37%. Assume that the values for expenses (E) and depreciation (d) are identical to the example in the Jamison reading.

Answer 1

The basic formula for determining a revenue requirement

R ≡ B • r + E + d + T

where: R = revenue requirement,

B = rate base, which is the amount of capital or assets the utility dedicates to providing its regulated services,

r = allowed rate of return, which is the cost the utility incurs to finance its rate base, including both debt and equity,

E = operating expenses, which are the costs of items such as supplies, labor (not used for plant construction), and items for resale that are consumed by the business in a short period of time (less than one year),

d = annual depreciation expense, which is the annual accounting charge for wear, tear, and obsolescence of plant, and

T = all taxes not counted as operating expenses and not directly charged to customers.