Method of Regulation
Rate-of-return regulation was used most regularly to determine reasonable prices for goods supplied by utility companies. This regulation is considered fair due to the fact that they give the company the opportunity to recover costs incurred by providing consumers with their goods or services while simultaneously protecting consumers from paying exuberant prices that would provide these companies with monopolistic profits. Under this method of regulation, government regulators examine the firm's base rate, cost of capital, operating expenses, and overall depreciation in order to estimate the total revenue needed for the firm to fully cover its expenses.
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