Advantages of Rate-of-Return Regulation
Rate-of-Return regulation was mainly used due to its ability to be sustainable in the long-term and resistant to changes in the company's conditions as well as its popularity among investors. While regulation of this type prevents monopolies with the potential to make large profits from doing so, such as electricity companies, it provides stability. Investors will not make as large dividends off of regulated utility companies; however, they will be able to make fairly constant, substantial returns despite fluctuations in the economy or firm composure. Investor risk is minimized since the regulator's prudence in price setting is constrained by the method used to set the regulation rate. Therefore, investors can depend on consistency, which can be an attractive offer, especially in a volatile world market.
Furthermore, regulation of this sort protects the firm from negative public opinion while providing the consumer with ease of mind. Throughout history, due to their large profits, public opinion has turned against monopolies, which eventually resulted in severe anti-trust laws in the early 20th Century. Unregulated monopolies such as Standard Oil that pulled vast profits quickly became the subjects of negative public opinion, the original source of regulation of monopolies. With rate-of-return regulation, consumers can rely on the government to ensure that they are paying fair prices for their electricity and other regulated services, and not feeding into a business of trusts and greed.
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