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Rate base

The rate base is the amount of assets a utility is allowed to include in the calculation of the rates charged to users. Rate increases must be approved by a state utility board. The approved rate is normally based on a target return on the allowed rate base.

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The idea that part of the assets be excluded from the rate base came about in the era of the WHOOPS debacle. The industry set out to overbuild nuclear power plants some of which were not completed. By excluding some investments, the utility must charge the asset in question or the expense to its shareholders. Usually the expense comes out of shareholders equity.

Rate base becomes a critical issue as the approval time for power plant installations increases and are sometimes challenged in court on environmental grounds. The state utility board becomes an important player in investment decisons.

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