Rate base

What does Rate base mean?

The rate base is the value of the network and plant (net of depreciation) that a regulated utility, such as an electricity grid or water company, has invested in and on which its regulator allows a return. The regulator sets allowed revenue roughly as operating costs + depreciation + taxes + rate base x allowed rate of return. Example: with a rate base of 10 billion, an allowed return of 7 percent (700 million), operating costs of 1.2 billion and depreciation of 0.5 billion, and ignoring taxes, allowed revenue is 2.4 billion. The utility grows profit mainly by growing its rate base through approved investment, so grid spending plans are central to its value. The United Kingdom uses a similar idea called the regulatory asset value (RAV).