). The difference between rate of return for a public utility and the rate base is that the rate base is the after-tax earnings while the rate of return is the rate allowed by the regulatory body ().
The argument for maintaining regulation of utilities came from the fact that demand for electricity is relatively inelastic, meaning that there is a considerable amount of variance which can occur in the price before there is an appreciable change in the quantity demanded by consumers. In addition, the price elasticity of demand is larger in the long-run than in the short-run, and this holds true for all types of consumers, including residential consumers as well as industrial and commercial consumers. Price elasticity tends to be greater for industrial demand over residential demand (Howe and Rasmussen 34).
Because of this inelasticity of demand, regulators came to view themselves as working to protect the public interest against the predatory pricing techniques of the utility industry. If there were not regulation, electric companies would charge exorbitant prices in order to maximize their own profits. In addition, the
...