Rate-of-Return Regulation

Rate-of-return regulation is a method used to control the prices charged by utilities, like electricity or water companies. Under this system, regulators allow these companies to earn a reasonable return on their investments, while ensuring they don’t charge customers excessively. The company’s pricing is based on its costs plus a set profit margin. This approach aims to encourage efficiency and investment, balancing the need for fair prices for consumers and adequate returns for investors, ensuring reliable services without monopolistic practices.