Energy and natural resources
Rate base
The value of a regulated utility's assets on which the regulator lets it earn a return.
Facts checked against sources onWhat 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).
Where does it come up in case interview prep?
- How the power system works, and who makes money in itLesson in Power, utilities and renewables
- Power economics and operations: levelized cost, the merit order, storage and the gridLesson in Power, utilities and renewables
- How water and waste services work, and who pays for themLesson in Water, waste and utilities
- Water and waste economics: regulated returns, tariffs, desalination and routesLesson in Water, waste and utilities
- Water and waste players, trends 2024 to 2026, and how to crack the casesLesson in Water, waste and utilities
- How transport infrastructure works: owners, operators and who paysLesson in Transport infrastructure: airports, seaports, toll roads and rail
- Transport infrastructure economics: regulated returns, traffic risk and concessionsLesson in Transport infrastructure: airports, seaports, toll roads and rail
- Who owns what: transport infrastructure region by regionLesson in Transport infrastructure: airports, seaports, toll roads and rail
Related terms
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
- Capex (capital expenditure)Spending on long-lived assets such as machines and buildings.
- Depreciation and amortizationSpreading the cost of a long-lived asset over its useful life.
- Barriers to entryWhat makes it hard for new competitors to enter a market.
- Barrel of oil equivalent (boe)A unit that converts gas into barrels of oil by energy content, so oil and gas can be added together.
- Lifting costThe cost of producing oil or gas from wells that already exist, per barrel.
- Full-cycle breakevenThe oil price a project needs to cover all its costs, including building it, and earn its required return.
- Fiscal breakeven oil priceThe oil price a government needs to balance its budget.
Learn it in context
See Rate base at work in a lesson from Power, utilities and renewables, with checks as you go.
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